Neptune Orient Lines

OCBC on 10 Oct 2014

We recently met up with Neptune Orient Lines (NOL) and noted that operational efficiency continues to be the key focus going forward for its liner segment, mainly through its fleet renewal programme. Overall, we expect fleet capacity to shrink by ~5% after the planned retirement of 34 chartered vessels are completed by FY15. With a leaner and more efficient fleet, we believe cost savings are likely derived from: 1) lower bunker costs, 2) network reconfiguration, and 3) leveraging on its G6 alliance for top-line growth. We also believe supply growth will continue to exceed forecasted demand growth putting downward pressure on freight rates. However, we expect the effects of operational efficiency and capacity discipline to partly offset the effects of lower profitability from depressed freight rates in its liner segment. Hence, we reduce FY14F and FY15F losses by a slight 3.7% to US$268.7m and 2.4% to US$238.2m, respectively, and with the recent slide in its share price since our last update in Aug-14, we upgrade NOL to HOLD on valuation grounds with an unchanged fair value estimate of S$0.90 (still based on 0.97x FY14F P/B).

Cost savings arising from operational efficiency
We recently met up with Neptune Orient Lines (NOL) and noted that operational efficiency continues to be the key focus going forward for its liner segment, mainly through its fleet renewal programme. The 34 fuel-efficient new-build vessels acquired through the programme were all received by end 2QFY14. Overall, we expect fleet capacity to shrink by ~5% after the planned retirement of 34 chartered vessels are completed by FY15, with no plans to purchase any vessels within the next few years. With a leaner and more efficient fleet, we believe cost savings are likely derived from: 1) lower bunker costs which makes up ~20-25% of total costs to operate a vessel, 2) network reconfiguration (e.g. calling on more ports with the same larger vessel), and 3) leveraging on its G6 alliance for top-line growth (i.e. buying slots from its partners on routes its does not operate in) without increasing its fleet capacity. We expect to see similar level of cost savings for 2HFY14 as compared to 1HFY14 of US$195.0m.

Depressed freight rates likely to continue
IMF recently cut its global GDP growth forecast on 7-Oct to 3.3% for 2014 and 3.8% for 2015, against its Jul-14 forecasts of 3.4% for 2014 and 4.0% for 2015. The demand growth driver for the industry is dependent on the world GDP growth and we expect demand to soften on weaker outlook. Based on order book as at Sep-14, market watcher Alphaliner forecasted that the supply of cellular fleet will grow 5.8% in 2014 and 8.0% in 2015. Hence, with supply growth exceeding forecasted demand growth, we think downward pressure on freight rates is likely to sustain for at least until end-2015 as we expect overcapacity to continue to plague the industry.

Upgrade to HOLD on valuation grounds
We expect the effects of operational efficiency and capacity discipline to partly offset the effects of lower profitability from depressed freight rates in its liner segment. Hence, we reduce FY14F and FY15F losses by a slight 3.7% to US$268.7m and 2.4% to US$238.2m, respectively, and with the recent slide in its share price since our last update in Aug-14, we upgrade NOL to HOLD on valuation grounds with an unchanged fair value of S$0.90 (still based on 0.97x FY14F P/B).

Singapore Press Holdings

Kim Eng on 16 Oct 2014

• 4QFY8/14 results disappointed on high staff costs. Revenue down 3.9% YoY. Core operating income up 1.8%. Outlook remains unexciting.
• Core media business to languish from tepid economy and property-market weakness. Risks of DPS cuts in FY8/15E.
• Maintain HOLD & SOTP TP of SGD4.10. Weak earnings outlook compensated by decent yields of 4.8%.

Results disappointed
4QFY8/14 results missed our expectation by 7% on high staff costs. Revenue was SGD304.5m, down 3.9% YoY, on a 7.9% decline in media revenue. Property was the only bright spark, with revenue up 3.8%. Rental income grew for Paragon and Clementi Mall. A third mall, Seletar Mall, will open next month.

The revenue weakness was partly saved by a 5.7% YoY decline in operating costs on lower newsprint costs and factory overheads. As a result, core operating profit — profit before investment income and JVs — rose 1.8% YoY to SGD80.2m. Bottom line was further enhanced by higher investment gains and fair-value gains frominvestment properties. A full-year DPS of 21 SGD cts was lower than last year’s 22 SGD cts (excluding an 18 SGD ct special dividend) but higher than our 20 SGD cts.

Maintain HOLD & SOTP TP
SPH’s core media business is likely to languish further amid a modest economic outlook and weak property market. EPS CAGR is an unexciting 3.0% forecast for FY8/14-17E. Though 4.8% yields are decent, there are risks that SPH may cut dividends in FY8/15E, as its FY8/14 payout has exceeded 100%. We keep EPS largely unchanged. Maintain HOLD and TP of SGD4.10.

VARD Holdings

Kim Eng on 16 Oct 2014

• Downgrade to HOLD from BUY following deteriorating company & industry outlook.
• Promar’s teething problems could last longer than expected.
• Cut EPS on lower margins & contract wins. TP cut to SGD0.73 from SGD1.15, now on trough 1.0x FY15E P/BV from 1.4x.

New plus old problems
Vard guided for a marginal 3Q14 EBITDA loss. While we initially saw a slower ramp-up at its Promar yard, its EBITDA-loss warning was still a shocker. A negative 3Q14 EBITDA margin would be even worse than its worst quarter’s 4.1% in 2Q13, when Niteroi cost overruns first surfaced. 3Q14’s EBITDA loss was blamed on:
• Slower-than-expected throughput and productivity gains during
Promar’s ramp-up in Brazil.
• Additional costs incurred for two LPG vessels in Promar’s order
book.
• Cost overruns for some European projects.

Vard, however, does not see a need to take provisions for the NOK200m tax claim from the Brazilian authorities — a silver lining.

Cut to HOLD
This is its second shocker after its 2Q13 profit warning following cost overruns at Niteroi. Vard’s recovery is now questionable, compounded by recent oil-price and deepwater weakness, which  could affect its order intake. Execution would be closely  scrutinised, near term. For now, we cut FY15E-16E new orders to  NOK9.1b pa from NOK12.8b. We cut EBITDA margins to 4.1-6.2% from 6.7-10.4%. Consequently, our FY14E-16E EPS are down 41- 58%. Our TP drops to SGD0.73 from SGD1.15, now at its trough 1.0x  P/BV, from 1.4x (-1SD of 4-year mean). With increased execution  uncertainties, we downgrade it to HOLD from BUY. While more concrete signs of a recovery are needed to restore investors’ confidence, we believe its recent selldown has priced in most of its negatives.

Valuetronics

Kim Eng on 14 Oct 2014

• Initiate with SELL, TP SGD0.25 (4.4x FY16E P/E). Earnings forecast to decline in next two years.
• Major customer spinning off LED lighting business, given fierce Chinese competition, price wars and falling margins.
• Stock unlikely to perform until uncertainties blow over. We would be buyers only at SGD0.25 or below.

Facing uncertain future
Valuetronics faces an uncertain future as its largest customer – a  Dutch lighting, consumer electronics and healthcare conglomerate  - has decided to split its lighting business from the rest of its
businesses, in order to focus on higher-margin, less-challenging  segments. Lighting, in particular LED lighting, accounts for 40% of  Valuetronics’s revenue and 30% of its gross profit.

Lighting business dimming
Premium LED lighting brands are being undercut by cheaper  Chinese products. Valuetronics’s customer has had to cut its prices  as it repositions its brand in the consumer mass market. Valuetronics’s margins in 1QFY15E were affected by the price cuts.  Despite its customer’s split, the worst still lies ahead, in our view. We expect Valuetronics’s profits to decline in the next two years.

Industrial not yet ready to compensate
With the slump in lighting, Valuetronics’s Industrial business will  have to shoulder the burden of growth. However, we do not think  Industrial’s growth will be enough to offset the decline in the lighting-heavy Consumer Electronics division. Some 60% of  Valuetronics’s revenue comes from lighting products for its Dutch  customer.

SELL with SGD0.25 TP (4.4x FY16E P/E)
Valuetronics trades at 7.0x FY16E P/E vs a sector average of 9.9x.  However, with major uncertainties ahead, we believe it is likely to  underperform. Our TP assigns zero value to its lighting business  and 6-4x P/E to its Industrial and non-lighting businesses, or 60- 40% of its peer averages. Overall, we value the group at 4.4x P/E.

Triyards Holdings

UOBKayhian on 14 Oct 2014

FY14F PE (x): 5.8
FY15F PE (x): 5.1

Potential M&A in the offing. Triyards is currently in advanced stages of discussion for
the acquisition of an existing yard facility in the region, which will increase its yard
capacity by 50-60%. Although its existing yard space in Vietnam is currently underutilised
(~55%), management expects yard space to fill up quickly once the contracts
under negotiations materialise. Besides increased capacity, the acquisition is also
expected to help Triyards add new product segments and strengthen its positioning in
its existing product offerings. The acquisition will be fully funded by the recent placement
proceeds (~S$20m) and internal cash, and is expected to be earnings-accretive.
Our preferred OSV small-cap pick with a target price of S$1.10, based on 8x FY15F PE,
or a 15% premium to peers’ long-term mean of 7x, as we see strong earnings growth
potential from growing liftboat demand. The premium is justified, considering Triyards
being one of the very few Asian yards with an excellent track record of building and
delivering liftboats. The stock is currently trading at a cheap 5x FY15F PE relative to
peers’ average of 8x, providing huge upside potential.

SINO GRANDNESS FOOD

UOBKayhian on 14 Oct 2014

WHAT’S NEW

• We were invited to a trade show in Chongqing recently and during the visit, we managed to catch up with Sino Grandness Food’s (SGF) CEO, Mr Huang, on the company’s outlook, pending Garden Fresh (GF) listing and strategic collaboration with the Thai conglomerate, PM Group.
• In addition, SGF announced that the maturity date for 80.5% of the Rmb100m convertible bond (CB1) has been extended to 30 Jun 15 and the company has successfully repurchased the remaining 19.5% at Rmb37.9m.

INVESTMENT HIGHLIGHTS

• SGF booked strong pre-sales during the Chongqing trade show and managed to expand its distribution network. We also tasted several products such as loquat mango and aloe vera juice from the beverage segment, as well as bottled fruit such as grapes, lychee and Chinese bayberry.
• Chances of GF’s IPO listing by 2014 are getting slimmer by the day, but management remains unflustered as the CEO believes in GF’s long-term fundamentals. The main objective of the listing is to unlock GF’s value and raise funds for expansion. However, with the money potentially raised from the recent placement to the PM Group, it has alleviated short-term concerns on CB1 redemption and, at the same time, can continue to invest in production facilities and marketing efforts for GF.
• According to Mr Huang, the PM Group is investing into SGF due to its business strategy for GF and its impressive earnings CAGR over the last 3 years. After intense negotiations, Mr Prayudh Mahagitsiri, Honorary Chairman of TTA and the Founder and Chairman of the PM Group, shall be appointed Honorary Chairman of SGF and TTA agrees and undertakes that it will not sell or transfer the shares within a 10-year period. SGF will also formulate an official policy of paying 10% of its net profits as dividends.

VALUATION/RECOMMENDATION

•  We view that the recent corporate actions have been beneficial to shareholders despite the share price weakness. New funding from the PM Group will alleviate capex needs, 80.5% of the bond holders have exercised the maturity date until Jun 15 and investors have been assured of a formal dividend policy as compared to none currently. The PM Group can also boost GF’s growth within Southeast Asia and/or enter into product development in the longer term.
• Maintain BUY with a higher target price of S$0.95 due to a lower dilution of GF’s listing as 19.5% of CB1 has been redeemed

United Envirotech

Kim Eng on 13 Oct 2014

• 49:51 JV with Chengdu Xingrong, A-share listed water SOE. First block of capacity expansion/upgrading projects is about 1m tonnes/day, worth over SGD300m.
• Right way to expand, in our view.
• Maintain HOLD & SGD1.44 TP (27x FY3/15E P/E). Still prefer HanKore and SIIC.

JV with Chengdu Xingrong
United Envirotech has signed a framework agreement with Chengdu Xingrong to set up a 49:51 JV. Xingrong is a water SOE listed in China’s A-share market. It has a market cap of SGD3.5b and owns c.5m tonnes/day of water-treatment capacity. The JV will provide EPC services using UENV’s membrane technology and products. It will also invest in water-treatment projects in Western China.

Its first block of projects will involve the expansion and upgrading of wastewater treatment plants and recycling of treated wastewater with a combined capacity of 1m tonnes/day. Valued at more than CNY1.5b (SGD300m), the jobs will commence immediately and are expected to be completed by end-2015.

Right way to expand, in our view
We believe strategic partnerships with local players are the right way to expand for UENV. Xingrong is one of the largest water companies with a stronghold in Western China. UENV can leverage its local presence to penetrate new markets. Still, in view of a lack of immediate catalysts, maintain HOLD and SGD1.44 TP, at 27x FY3/15E P/E, 10% discount to peers due to its smaller recurring income base. Valuations are rich at 30.3x FY3/15E P/E. We still prefer HanKore and SIIC in the sector.

Singapore Airlines

Kim Eng on 13 Oct 2014

• Maintain BUY & SGD12 TP (1.05x FY3/16E P/BV), after rollover to FY3/16.
• Major beneficiary of falling oil prices. Recent USD strength inconsequential.
• FY3/15E-17E EPS raised by 18-42% for cheaper fuel partially offset by larger losses from Tigerair.

Raising EPS on cheaper oil
We raise FY3/15E-17E EPS by 18-42% on lower fuel-price assumptions. Oil prices have corrected to their lowest level since Jun 2012, on oversupply anxieties. According to press reports, Saudi Arabia has cut its official crude selling prices, suggesting that the price downtrend could be sustainable. Jet fuel prices have declined 18% YTD to USD105/bbl. With fuel at c.40% of its expense, SIA should be a major winner, in our view.

By how much will it benefit?
Our sensitivity analysis suggests that every USD5/bbl decline in jet fuel prices could add SGD0.17 or 22% to our FY3/16E EPS, ceteris paribus. About 52% of SIA’s FY3/15E jet-fuel need has been hedged at c.USD116/bbl. SIA can hedge up to eight quarters ahead.

Reiterate BUY, TP unchanged at SGD12
Our estimates are substantially above consensus. We believe the Street has yet to model in the sharp oil-price decline. A positive earnings-revision cycle could be on the way, we reckon. While regional overcapacity remains a threat, we believe the market has not given SIA enough credit for its proactive capacity cutbacks (FY3/15E: only +1% YoY for parent airline). Loads remain high in spite of the industry’s surplus. And despite its strongest balance sheet of SGD3.60 net cash per share, SIA trades at a 12% P/BV discount to full-service carriers in Asia. Reiterate BUY with catalysts from potential EPS upgrades. SGD12 TP unchanged after our rollover to 1.05x FY3/16E P/BV, 0.5 SD below its 10-year mean.

Sino Grandness

Kim Eng on 9 Oct 2014

• Maintain HOLD & SGD0.73 TP (average of two scenarios).
• 80.5% of first CBs extended to end-Jun 2015. Balance redeemed. Eases short-term liquidity pressure.
• But biggest test lies ahead. Has until end-Jun 2015 to list Garden Fresh. Otherwise, has to fork out CNY700m for bonds and penalties.

What’s New
Sino Grandness has announced that bondholders, holding 80.5% of the principal amount of its first tranche of convertible bonds (CNY100m in principal) issued to Sun Hung Kai Investments, intend to exercise their rights to extend the CBs’ maturity date from 19 Oct 2014 to 30 Jun 2015. Sino Grandness has redeemed the remaining 19.5%. Their principal and interest, totalling CNY37.9m,was paid on 6 Oct 2014. The redeemed CBs will be cancelled, reducing the outstanding principal from CNY100m to CNY80.5m.

What’s Our View
This is only a minor victory for Sino Grandness, in our view. It eases the market's concern over liquidity risks arising from bond  redemptions. With the settlement of the first tranche and recently-raised funds of SGD52m from a share placement to Thai investors, its next liquidity risk “due date” has been pushed to end-Jun 2015.

However, its biggest catalyst remains Garden Fresh’s IPO. If this cannot be completed before Jul 2015, a much bigger liquidity risk will arise in nine months’ time. This is when Sino will need to fork out CNY700m to redeem its CBs: 80.5% of the first + 100% of second tranches and penalties for not listing Garden Fresh. Maintain HOLD. No change to our EPS or TP of SGD0.73, based on average of the two scenarios, with and without IPO.

Venture Corporation

Kim Eng on 7 Oct 2014

• Maintain BUY and SGD9.50 TP, based on 16x FY15E P/E based on peer average.
• HP splitting into two: Enterprise and Printers & PCs. Now minimal 5-6% of Venture’s revenue. Only orders business, not consumer, printers.
• Split could be a long-term positive. Allows HP’s printer/PC business to be more nimble, keep cash for own expansion. 

HP announces split
Hewlett Packard (HP) will be splitting into two publicly traded companies: HP Enterprise, focusing on cloud computing, servers, networking, business software and other tools for business; and HP Inc for printers and PCs. In Singapore, Venture supplies HP with enterprise printers (eg high-speed laserjet colour and black & white printers) that are sold to large corporations and SMEs. It does not make any more consumer printers for HP.

Minimal to positive impact
Venture’s printing & imaging business has shrunk over the years to just 11% of its revenue, after its exit from the consumer-printer market years before. We think any adverse impact from this split will be minimal. HP accounts for only 5-6% of Venture’s revenue. Venture has other printer customers such as Intermec, which makes products with better growth potential. These include transaction printers for credit-card receipts and labels.

In fact, the split may be good for HP, and by extension, Venture, as it could potentially improve HP’s nimbleness. Printer cartridges generate a lot of cash. Historically, this cash was used by HP for acquisitions unrelated to its printer/PC business. The new standalone company should be able to keep this cash for acquisitions to benefit its printer/PC business directly, which still has room for growth in emerging markets. HP's printer/PC revenue actually grew by 2% in the last 12 months, in contrast to a 4% drop by its enterprise business. No change to our EPS or TP for Venture for now.

Genting Singapore

Kim Eng on 3 Oct 2014

• VIP volumes may worsen before recovering. Mass-market GGR may ease on sliding property prices. Cut EBITDA by 1- 16%.
• Maintain HOLD. TP down 9% to SGD1.13, now on 9x FY15 EV/EBITDA (from 10x), in view of slower earnings growth.
• Still, valuations not demanding against peers. May also venture into Japan soon.

Headwinds may linger
Over the last two weeks, we spoke to many parties on GENS’s prospects. 2H14 VIP volumes are likely to fall markedly YoY, no thanks to tight credit conditions in China. However, we believe volumes will recover in 2015 as the Chinese government has begun to ease credit conditions. What we are a tad worried about is the continuous slide in Singapore’s property prices. This could hurt mass-market gross gaming revenue (GGR) in the next two years.

What’s Our View
We cut FY14E-16E EBITDA by 1%/13%/16% which leads to a larger 2%/22%/26% reduction in earnings, due to negative operating leverage from depreciation and perpetual securities distribution. We believe EBITDA is a better gauge of the FCF required to finance new ventures and hence, a better valuation metric for GENS. We lower TP from SGD1.24 on 10x FY14E EV/EBITDA to SGD1.13 on 9x  FY15E EV/EBITDA, in view of its slower earnings growth.

Still, maintain HOLD on its prospective entry into new gaming jurisdictions. Japan may open its casino industry to its locals while South Korea may open more casinos to its own before year-end. Recall that GENS is keen to venture into Japan and is already exposed to South Korea via 50%-owned Resorts World Jeju (RWJ). RWJ is awaiting construction permits.

Golden Agri-Resources

OCBC on 9 Oct 2014

Golden Agri-Resources (GAR) has drifted down to our previous fair value of S$0.50 (based on 13.5x blended FY14/FY15F EPS) after posting a worse-than-expected set of 2Q14 earnings; but at current levels, some of the negative news appears to be priced in. For one, soy prices – the main reason for the drag on CPO prices – appear to be bottoming. Secondly, plantation owners may get a modest boost from the absence of export taxes on CPO in Sep and Oct. Having said that, we still see the need to reduce our FY14 CPO price assumption to US$760/ton (FY15 to US$800/ton), down around 3-5% as we see reduced risk of a impactful El Nino effect on production in 2014 (probably a bit more in 2015). This in turn reduces our FY14 revenue and earnings estimates by around 3%; also drops our fair value to S$0.48 (still based on same 13.5x blended EPS). But from a valuation perspective, we upgrade our call to HOLD.

Fallen to our fair value
Golden Agri-Resources (GAR) has drifted down to our previous fair value of S$0.50 (based on 13.5x blended FY14/FY15F EPS) after posting a worse-than-expected set of 2Q14 earnings, such that its 1H14 core net profit only met 39% of our then full-year forecast. We have since pared our FY14F earnings estimate by 17% and also downgraded our call from Hold to Sell on 15 Aug. But at current levels, some of the negative news appears to be priced in. 

Soy prices appear to be bottoming
For one, soy prices – the main reason for the drag on CPO prices – appear to be bottoming. Since crashing to a four-year low in Sep, soy futures are finally making a modest rebound of 3% since then. Similarly, CPO prices have staged a rather robust recovery of some 15% from a low of MYR1914 to around MYR2195; this also aided by stronger-than-expected demand from the European Union (net imports +5% to a record 3.48m tons in 1H14, according to Oil World ).

No export taxes in Sep, Oct
Secondly, plantation owners may get a modest boost from the absence of export taxes on CPO – this after Malaysia scrapped the tax for both Sep and Oct, while Indonesia removed it for Oct in an attempt to help boost exports. However, some market watchers warn that the move may not be enough, given renewed signs of rising inventories . Nevertheless, others are hopeful that the onset of the drier weather in Malaysia and Indonesia could reduce production, thus helping to limit supply and keep CPO prices up.

Need to lower CPO price assumptions
Having said that, we still see the need to reduce our FY14 CPO price assumption to US$760/ton (FY15 to US$800/ton), down around 3-5% as we see reduced risk of a impactful El Nino effect on production in 2014 (probably a bit more in 2015). This in turn reduces our FY14 revenue and earnings estimates by around 3%; also drops our fair value to S$0.48 (still based on same 13.5x blended EPS). But from a valuation perspective, we upgrade our call to HOLD.

Sembcorp Marine

OCBC on 9 Oct 2014

Sembcorp Marine’s (SMM) share price has fallen by about 10% since early Sep, with about half of this drop in the last five trading days. We believe that this is partly due to weaker oil prices of late, as well as company-specific factors such as worries over execution risks for its new drillship. According to our checks, the first drillship has finally left for Brazil, and SMM has reiterated that the unit is still on track for Jun 2015 delivery. We had been forecasting operating margins of 11.7% for FY14 and 12.6% for FY15 (1H14: 11.3%). To be more conservative, we lower our FY15 margin assumption to 11.9%. With this, we see limited downside risks to margins. Though our fair value estimate is correspondingly lowered from S$4.36 to S$4.18, we see a 20.5% upside (this includes a ~4% dividend yield) on the stock, which is attractive. Upgrade to BUY on SMM, as the recent sell-down seems to be overdone.

Aggressive selling in recent days
Sembcorp Marine’s (SMM) share price has fallen by about 10% since early Sep, with about half of this drop in the last five trading days. This compares to the STI’s ~3% fall since early Sep. We believe that this is partly due to weaker oil prices of late, as well as company-specific factors such as worries over execution risks for its new drillship.

Drillship has left for Brazil; on track for Jun 2015 delivery
According to news reports online , the Dockwise heavy-lift vessel Black Marlin has been seen ballasting down last Friday to load SMM’s first drillship, the Arpoador. A call with SMM also confirmed that the unit has left Singapore for Brazil, and SMM reiterated that the unit is on track for delivery in June next year, despite its departure date from Singapore being delayed for more than six months from its original schedule. 

Execution risk has been lowered with more construction done in SG
The market has been worried that SMM would fail to deliver its first drillship on time, especially with the yard in Brazil being new and inexperienced. While acknowledging these risks, we point out that execution risk of this unit may actually be lower now with a greater percentage of the construction work being done in Singapore instead of the new Brazil yard – at least 70% of the unit has been completed. We also would not be surprised if SMM has built in a buffer or a grace period, since this is a new product for the group. 

Significant upside despite lowering margins
We had been forecasting operating margins of 11.7% for FY14 and 12.6% for FY15 (1H14: 11.3%). To be more conservative, we lower our FY15 margin assumption to 11.9%. With this, we see limited downside risks to margins. Though our fair value estimate is correspondingly lowered from S$4.36 to S$4.18, we see a 20.5% upside (this includes a ~4% dividend yield) on the stock, which is attractive. Upgrade to BUY on SMM, as the recent sell-down seems to be overdone.

Mapletree Greater China Commercial Trust

OCBC on 3 Oct 2014

Mapletree Greater China Commercial Trust (MGCCT) is a Singapore REIT which owns two high-quality assets valued at S$4.7b (as at end FY14) and strategically located in prime commercial districts in Hong Kong and China. MGCCT has performed well financially for its first full fiscal period after its IPO, with FY14 revenue and DPU exceeding its projections. We see continued organic growth from MGCCT’s resilient portfolio, underpinned by further positive rental reversions. We value MGCCT using the dividend discount model (DDM), and derive a fair value estimate of S$1.00. Coupled with an attractive FY15F distribution yield of 7.0%, this translates into total potential returns of 18.1%. MGCCT is also trading at an undemanding FY15F P/B of 0.87x, which we believe is undervalued given its high quality and resilient portfolio. With a cheaper P/B ratio and a higher prospective distribution yield than its S-REITs peers, we initiate coverage on MGCCT with a BUY rating.

Best-in-class commercial assets in Hong Kong and China
Mapletree Greater China Commercial Trust (MGCCT) is a Singapore REIT which owns two high-quality assets strategically located in prime commercial districts. The first asset is Festival Walk, a landmark territorial retail mall (with an office component) ranked as one of the top 10 retail malls by GFA in Hong Kong. The second is Gateway Plaza, a premier Grade A office building consisting of two 25-storey towers connected by a three-storey atrium in Beijing, China. The combined market valuation of MGCCT’s portfolio was S$4.7b as at end FY14, an increase of 9.5% from its valuation at 7 Mar 2013 (IPO date).

Strong first year financial performance since IPO
MGCCT has performed well financially for its first full fiscal period after its IPO. Revenue, distributable income and DPU of S$267.6m, S$168.2m and 6.265 S cents for FY14 exceeded the REIT manager’s projections by 7.4%, 13.3% and 13.1%, respectively, highlighting its strong execution capabilities. We see continued organic growth ahead from MGCCT’s resilient portfolio, with built-in rental escalation for some leases and opportunities for further positive rental reversions. This would be underpinned by stable domestic demand in Hong Kong’s retail market, and robust demand and supply dynamics in Beijing’s office sector. Overall, we expect MGCCT’s revenue, distributable income and DPU to increase at a steady CAGR of 3.1%, 2.9% and 1.6% from FY14-FY17F, respectively.

Initiate coverage with BUY
We value MGCCT using the dividend discount model (DDM) as it is expected to pay out stable rental income (net of expenses) generated from its assets at regular intervals. We derive a fair value estimate of S$1.00 for MGCCT after inputting our financial forecasts and CAPM assumptions (cost of equity: 8.2%; terminal growth rate: 2.0%) in our model. Coupled with an attractive FY15F distribution yield of 7.0%, this translates into total potential returns of 18.1%. MGCCT is also trading at an undemanding FY15F P/B of 0.87x, which we believe is undervalued given its high quality and resilient portfolio. With a cheaper P/B ratio and a higher prospective distribution yield than its S-REITs peers, we initiate coverage on MGCCT with a BUY rating.

Swiber Holdings

OCBC on 2 Oct 2014

Since our previous report on 14 Aug, the share price of Swiber Holdings has dropped 13% compared to the STI’s flattish performance. We believe that this could be related to its relatively slow new order flow, as well as sliding oil prices of late. There has also been news of Indonesia’s Pertamina cancelling its West Madura tender (in which Swiber was a contender). Against the current backdrop, we believe players with high overheads and operating on thin margins like Swiber are more susceptible to any downturn in sentiment. Looking ahead, the upcoming 3Q results may continue to be lacklustre. We lower our valuation from 0.45x to 0.4x FY14F P/NTA, but may look to lift it should the group be able to reduce its accounts receivables in the coming quarters. As such, our fair value estimate slips from S$0.57 to S$0.49. Maintain HOLD.

Weak share price performance
Since our previous report on 14 Aug, the share price of Swiber Holdings has dropped 13% compared to the STI’s flattish performance. We believe that this could be related to the relatively slow new order flow – the last announced order win was in Jun, and YTD new orders total US$315m vs last year’s US$588m. In addition, oil prices have been sliding of late, and should this trend continue, more exploration and development projects may be put on hold. 

West Madura tender cancelled, but hope from ONGC
According to Upstream, Indonesia’s Pertamina has also cancelled its tender for the EPIC contract for the central processing facility and two well-head platforms for its West Madura project. Swiber was one of the contenders. A re-tender may be issued, but this also means a delay in the award of contracts. On a more positive note, there is talk that India’s ONGC may return to the market next month and revive the US$500m tender for the Bassein process platform. 

Potential disposal gains in the future?
Recall that Swiber booked a significant disposal gain from Kreuz earlier this year. Its current stake in Vallianz is not as high (24.3%), and with Vallianz’s market capitalisation of S$315m, this translates to S$77m for Swiber’s stake. It is likely that Swiber may want to see Vallianz continue its growth path before considering any disposal, unless it is in need of cash.

Susceptible to downturns
As of Aug 2014, Swiber has an order book of about US$610m, which is about 60% of FY13’s total revenue. With falling oil prices and the slow order win momentum, we believe players like Swiber with high overheads and operating on thin margins are more susceptible to any downturn in sentiment. Looking ahead, the upcoming 3Q results may continue to be lacklustre. We lower our valuation from 0.45x to 0.4x FY14F P/NTA, but may look to lift it should the group be able to reduce its accounts receivables in the coming quarters. As such, our fair value estimate slips from S$0.57 to S$0.49. Maintain HOLD.

Nobel

OCBC on 1 Oct 2014

Noble Group (Noble) noted that China Investment Corp (CIC), through its subsidiary Best Investment Limited, has pared its stake from 13.8% to 9.4% by selling 300m shares at S$1.32 each. It said it will release the notification of the change in CIC’s interest as soon as it receives the same from CIC. The share sale sent Noble’s share price tumbling some 9.3% to S$1.27, before recovering slightly to close at S$1.30. Noble says the move is due to CIC’s overall portfolio rebalancing and CIC continues to support Noble’s business strategy. Nevertheless, we maintain our HOLD rating and S$1.31 fair value (based on 13.5x FY14/FY15F EPS) as we believe that Noble’s core business is stabilizing, although near-term catalyst may still be lacking as China’s economic growth remains splotchy.

Completes Agri business 51% stake sale
Noble Group (Noble) has completed the sale of its Agri business to COFCO on 30 Sep 2014; this at a price of 1.15x of 51% stake of the audited book value (FY13), or an initial payment of US$1.5b, which was also in line with the original announcement made in Apr, subject to final adjustments after the deferred settlement date (14 Oct 2014). Recall that the deal will also create a JV that will become 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.

CIC pares stake with 300m share sale
Separately, China Investment Corp (CIC), through its subsidiary Best Investment Limited, has pared its stake from 13.8% to 9.4% by selling 300m shares at S$1.32 each (lower end of an indicative S$1.32-1.35 range). Noble said it will release the notification of the change in CIC’s interest as soon as it receives the same from CIC. 

Portfolio rebalancing exercise
The share sale sent Noble’s share price tumbling some 9.3% to S$1.27, before recovering slightly to close at S$1.30. Noble says it understands that the placement is part of CIC’s overall portfolio rebalancing exercise, and CIC will continue to support Noble’s business strategy. However, CIC is likely to have made a slight loss on the move – this as it paid S$2.11 for its stake back then in 2009 (or S$1.37, adjusted for the 6-for-11 bonus issue). 

Maintain HOLD with unchanged S$1.31 fair value
We also opine that the stake sale could be due to the Agri JV with COFCO; this probably reduces the need for CIC to own such a large stake in Noble anymore. Nevertheless, we maintain our HOLD rating and S$1.31 fair value (based on 13.5x FY14/FY15F EPS) as we believe that Noble’s core business is stabilizing, although near-term catalyst may still be lacking as China’s economic growth remains splotchy.

Tuan Sing Holdings

OCBC on 30 Sept 2014

Last Friday evening, it was reported that Mr Koh Wee Meng, Chairman and CEO of the Fragrance Group, brought his shareholdings of Tuan Sing from 4.46% to 5.02% via share purchases in the open market, making him a substantial shareholder. Mr Koh had purchased, from the open market on 25 Sep 2014, 6.5m shares at an average price of S$0.432 per share. Tuan Sing is a real estate developer with assets in Singapore, China and Australia, and the group also recently acquired the remaining 50% interests, that it did not already own, in two five-star hotels in Australia, namely Grand Hyatt Melbourne and Hyatt Regency Perth, for A$126m. The group is currently controlled by the Liem family, who owns at least 53.5% collectively, and we highlight that it remains speculative as to what Mr Koh’s intentions are. After this news, Tuan Sing shares soared to a 5-year high yesterday, closing at S$0.455 per share with 26m shares traded (~5.5% of float). This closing price represents a still-significant 30.1% discount to Tuan Sing’s book value of S$0.651 per share, which is broadly in line with comparable peers currently trading at an average discount of 27.7%. We currently have do not have a rating on Tuan Sing.

A significant shareholder emerges
Last Friday evening, it was reported that Mr Koh Wee Meng, Chairman and CEO of the Fragrance Group, brought his shareholdings of Tuan Sing from 4.46% to 5.02% via share purchases in the open market, making him a substantial shareholder. Mr Koh had purchased, from the open market on 25 Sep 2014, 6.5m shares at an average price of S$0.432 per share. After this news, Tuan Sing shares soared to a 5-year high yesterday, closing at S$0.455 per share with 26m shares traded (~5.5% of float). While this closing price represents a still-significant 30.1% discount to Tuan Sing’s book value of S$0.651 per share, we also note this is broadly in line with comparable peers currently trading at an average discount of 27.7%

Recently acquired remaining interests in two 5-star AZ hotels
Tuan Sing is a real estate developer with assets in Singapore, Australia and China. Its residential developments in Singapore include projects such as Sennett Residences (91% sold as at end 2Q14), Cluny Park Residences (33% sold) and Seletar Park Residence (95% sold). Commercial projects include Robinson Tower (currently under redevelopment), Robinson Point and also Century Warehouse. In Sep 2014, Tuan Sing also recently acquired the remaining 50% interests, that it did not already own, in two five-star hotels in Australia, namely Grand Hyatt Melbourne and Hyatt Regency Perth, for A$126m.

Australian assets could be particularly attractive
Tuan Sing is currently controlled by the Liem family, who owns at least 53.5% collectively, and we highlight that it remains speculative as to what Mr Koh’s intentions are. That said, we note that Mr Koh, a seasoned real estate developer, has publicly indicated his plans for expansion in Australia following the slowdown in the Singapore residential market, and his company Fragrance Group has also recently proposed plans to spin-off its property business in Australia on the Catalist board. As such, in addition to Tuan Sing’s attractive valuation, its two prime hotels in Melbourne and Perth could be of special interest to Mr Koh. We currently do not have a rating on Tuan Sing.

ComfortDelgro

OCBC on 30 Sep 2014

Singapore Transport Minister Lui Tuck Yew announced on 29-Sep that the Downtown Line 2 (DTL 2) will be opened in 1Q16, a few months ahead of schedule. The original schedule was delayed from end-2015 to mid-2016 after one of its main contractors went into insolvency last year. We estimate CDG to breakeven on its start-up costs between phase 2 and phase 3 of the whole DTL project and we believe the shortened delay would also logically allow CDG to breakeven earlier as well. In addition, we expect ridership to improve considerably when DTL 2 opens with 12 stations, including four interchange stations, which improves connectivity significantly. Furthermore, we expect the higher margins advertisement and rental business segment to boost revenue and profitability as well. With the impact of DTL already factored in our financial model previously, we retain our forecasts and maintain BUY with an unchanged fair value estimate of S$2.92.

Good news on DTL 2’s schedule
Singapore Transport Minister Lui Tuck Yew announced on 29-Sep that the Downtown Line 2 (DTL 2) mass rapid transit (MRT) line will be opened in 1Q16, a few months ahead of schedule. The original schedule was delayed from end-2015 to mid-2016 after one of its main contractors, Alpine Bau, went into insolvency last year. He added that additional manpower as well as innovative work processes helped accelerate the project and all the contractors will continue to do so in a bid to try to bring forward the opening to even earlier than 1Q16.

Expect DTL project to breakeven earlier
As at 2QFY14, CDG recorded loss of S$6.2m from its Downtown Line 1 (DTL 1) operations but we estimate CDG to breakeven on its start-up costs in the period between phase 2 and phase 3 of the whole DTL project. With the opening of DTL 2 brought forward by a few months and possibly even earlier, we believe this is good for CDG as this would also logically allow it to breakeven earlier as well. Beyond its breakeven point, we expect CDG to be able to cover the licensing fee charged by LTA through revenue generated from DTL and hence see meaningful income contribution. Furthermore, we believe ridership will improve significantly given that the DTL 2 comprises 12 stations and one depot, including four interchange stations, where we expect traffic flow to increase considerably. We also believe the advertisement and rental business segments, which offer higher margins, to further boost revenue and profitability.

Maintain BUY
With the impact of DTL already factored in our financial model previously, we retain our forecasts since the opening of DTL 2 continues to be in FY16. Although the estimated total licensing fee of ~S$1.6b over the 19-year operating lease should have started in 2013 when DTL 1 commenced, we expect to see significant increase only upon opening of the full DTL in 2017 since the variable component of the fee depends on ridership. With the slight retreat in share price since our last update in Aug-14, we maintain BUY with an unchanged fair value estimate of S$2.92.

OUE

OCBC on 29 Sep 2014

OUE announced that it agreed to invest US$200.0m (S$254.2m) in Nuvest Real Return Fund, a Cayman Islands-domiciled exempted mutual fund. The Fund, launched in 2012 with seed capital from GIC, seeks to achieve stable annual returns above inflation through diversification across a range of investment classes and active management styles. Management sees this investment as part of its treasury operations and believes this will allow optimal returns on funds held in the current low interest rate environment through leveraging the expertise of the Fund. As at end 2Q14, we note that the group has significant net cash and equivalents of S$449.3m. Overall, we are neutral on this move and prefer management to return excess capital not earmarked for allocation into the group’s core businesses over the medium to long term. That said, taking into account the investment size and terms, this investment appears fairly liquid. Maintain BUY with an unchanged fair value estimate of S$2.69 (20% discount to RNAV).

Investing US$200m in Nuvest Real Return Fund
OUE announced that it agreed to invest US$200.0m (S$254.2m) in Nuvest Real Return Fund (“the Fund”), a Cayman Islands-domiciled exempted mutual fund. The Fund, launched in 2012 with seed capital from GIC, seeks to achieve stable annual returns above inflation through diversification across a range of investment classes and active management styles. The principal of the Fund Manager is Mr Aje Kumar Saigal, who has previously held senior leadership roles at GIC. 

“Most favored nation” treatment for OUE’s participating shares 
OUE will be subscribing for Tranche X participating shares, which is made available only to key cornerstone investors. The fee structure include a 1% management fee of NAV and a 10% performance fee equal to the appreciation in NAV during each performance period, subject to a high water mark and adjusted by the hurdle rate. The shares are redeemable on the first business day of every calendar month, with a minimum notice of 45 days days, and OUE is also entitled to a “most-favored nation” treatment with regards to any rights or benefits that may be enjoyed by any future shareholders in the fund (save for those included solely as a requirement of law in the shareholder’s jurisdiction).

Optimizing returns on funds in a low rate environment
Management sees this investment as part of its treasury operations and believes this will allow optimal returns on funds held in the current low interest rate environment through leveraging the expertise of the Fund. As at end 2Q14, we note that the group has significant net cash and equivalents of S$449.3m. Overall, we are neutral on this move and prefer management to return excess capital not earmarked for allocation into the group’s core businesses over the medium to long term. That said, taking into account the investment size and terms, this investment appears fairly liquid, which can yield cash should acquisition opportunities arises ahead. Maintain BUY with an unchanged fair value estimate of S$2.69 (20% discount to RNAV).

Singapore Airlines

OCBC on 25 Sep 2014

Changi Airport Group (CAG) recently expanded incentive programme to include 50% rebate on landing fees for all non-stop long-haul passenger flights from Sep-14 to Mar-16. We expect SIA to be a large beneficiary of the landing fee rebate as majority of its flights is more than nine hours. Past two months’ operating statistics were also encouraging, especially for SIA’s mainline. Passenger load factor increased 0.9ppt YoY to 81.7% and 0.7ppt to 83.1% for Jul-14 and Aug-14, respectively. With Air New Zealand-SIA alliance commencing sales of codeshare flights from Sep-14 and actual flights to start in Jan-15, we expect to see further improvement to SIA’s PLF from 4QFY15 onwards. We continue to believe the overcapacity issue in the region and competition from Middle-Eastern airlines will continue to cause pricing pressure and thus, supressing the yields of SIA, at least for the next few quarters. Factoring CAG’s programme and recent developments in TS alliance as well as NZ-SIA alliance, we increase our PATMI forecast by 26.3% to S$201.1m for FY15 and 36.1% to S$346.5m for FY16. Hence, we increase our fair value estimate from S$9.97 to S$10.05 and maintain HOLD rating on SIA.

CAG incentives and rebates to benefit SIA
Changi Airport Group (CAG) recently expanded their growth and assistance incentive (GAIN) programme in Sep-14 to include 50% rebate on landing fees for all non-stop long-haul (more than nine hours) passenger flights from Sep-14 to Mar-16. We expect Singapore Airlines (SIA) to be a large beneficiary of the landing fee rebate as majority of its flights is more than nine hours. CAG is also offering S$10 incentive for every incremental departing transit/transfer passenger handled for the same period. Although it is capped at S$3m per airline, we think it helps the Tiger Airways-Scoot (TS) alliance to coordinate their routes and pricing more competitively and we expect improved performance from Scoot from 1HFY16 onwards.

Improving load factor amid uncertain yield outlook
While passenger traffic (RPK) for SIA mainline was flat YoY for Jul-14 and grew 0.3% for Aug-14, it recorded 1.0% and 0.5% YoY decline in capacity in Jul-14 and Aug-14, respectively. As a result, passenger load factor (PLF) increased 0.9ppt YoY to 81.7% and 0.7ppt to 83.1% for Jul-14 and Aug-14, respectively. With Air New Zealand-SIA (NZ-SIA) alliance commencing sales of codeshare flights from Sep-14 and actual flights to start in Jan-15, we expect to see further improvement to SIA’s PLF from 4QFY15 onwards given that it continues to maintain capacity discipline. SIA Cargo (SIAC) reported improvements to Cargo Load Factor (CLF) in Jul-14 and Aug-14 while SilkAir reported mixed statistics as it slows down expansion. Although overall load factor of SIA improved over the past two months, we believe the overcapacity issue in the region and competition from Middle-Eastern airlines will continue to cause pricing pressure and thus, suppressing the yields of SIA at least for the next few quarters.

Increase FV estimate; maintain HOLD
Factoring CAG’s GAIN programme and recent developments in TS alliance as well as NZ-SIA alliance, we increase our PATMI forecast by 26.3% to S$201.1m for FY15 and 36.1% to S$346.5m for FY16. Hence, we increase our fair value estimate from S$9.97 to S$10.05 and maintain HOLD rating on SIA.

Yangzijiang Shipbuilding

OCBC on 24 Sept 2014

Having weathered the recent shipbuilding slowdown well, Yangzijiang Shipbuilding (YZJ) has amassed a cash pile of RMB7.6b, in addition to its held-to-maturity (HTM) assets of RMB13b as at 2Q14. At the same time, the group also has borrowings of about RMB11.4b. It may take some time before the group is able to unwind most of its HTM assets, during which the risks from its financing business will still be present. We update our CNY/SGD exchange rate assumptions, and our fair value estimate is tweaked from S$1.21 to S$1.24. Meanwhile, YZJ’s share price has appreciated by about 11% since we upgraded the stock to Buy on 6 Aug, compared to the STI’s flattish performance over the same period. As we now see limited upside potential after its good price performance, we downgrade our rating to HOLD.

Earning from entrusted loans
Having weathered the recent shipbuilding slowdown well, Yangzijiang Shipbuilding (YZJ) has amassed a cash pile of RMB7.6b, in addition to its held-to-maturity (HTM) assets of RMB13b as at 2Q14. At the same time, the group also has borrowings of about RMB11.4b. From our understanding, a significant portion of Yangzijiang’s held-to-maturity assets are entrusted loans, in which an agent bank (trustee) arranges a loan between two commercial enterprises. In addition to allowing companies with idle funds to earn higher rates of interest, it may also allow stronger borrowers to borrow from banks at lower rates and lend out to weaker companies at higher rates, thereby pocketing a spread. 

Valuing the HTM assets
Looking ahead, we expect YZJ to pare its RMB13b HTM assets down to about RMB12b by the end of this year. It may take some time before the group is able to unwind most of its HTM assets, and we value them on 0.55x book, at a discount to Chinese banks which are trading at an average of 0.74x P/B. We believe a lower multiple is justified given YZJ’s relatively short track record in the financing business and its likely less developed system of credit control compared to Chinese banks.

Lower asymmetries of information?
Huang Yukon, a senior associate at the Carnegie Endowment and former World Bank director for China, mentioned that the risks of entrusted loans may be lower compared to other forms of shadow banking due to lower asymmetries of information . For YZJ, we note that 38% of borrowers in its HTM assets (as at 2Q14) were in real estate, 30% were in manufacturing and 25% in “others”. It is hard to determine how deep an understanding YZJ, a shipbuilder so far, has in real estate and other unrelated industries.

Limited upside now
We update our CNY/SGD exchange rate assumptions, and our fair value estimate is tweaked from S$1.21 to S$1.24. Meanwhile, YZJ’s share price has appreciated by about 11% since we upgraded the stock to Buy on 6 Aug, compared to the STI’s flattish performance over the same period. As we now see limited upside potential after its good price performance, we downgrade our rating to HOLD.

Vard Holdings

OCBC on 23 Sep 2014

Vard Holdings Limited’s (VARD) share price has fallen 19.0% since it announced on 5 Aug 2014 that it has received an additional tax claim of ~NOK200m (including penalties and accrued interest) from the tax authorities in Brazil. VARD will file an appeal against the ruling. We believe another reason for VARD’s poor share price performance has been triggered by the sharp dip in oil prices. Given the uncertainties over the tax claims by the Brazilian authorities on VARD, volatility in the North Sea market and recent de-rating in the industry, we opt to lower our PER valuation peg from 10x to 9x. We also cut our FY14 and FY15 PATMI forecasts by 4.8% and 7.5%, respectively, to account for cost pressures in Brazil. Correspondingly, our fair value estimate dips from S$1.12 to S$0.94, still based on blended FY14/15F EPS. Maintain HOLD.

Weak share price performance
Vard Holdings Limited’s (VARD) share price has fallen 19.0% since it announced on 5 Aug 2014 that it has received an additional tax claim of ~NOK200m (including penalties and accrued interest) from the tax authorities in Brazil. This is with regards to transfer pricing of design and equipment packages delivered from its Norwegian entities to its Brazilian yard Vard Niteroi in FY10. According to VARD, the diverging assessment originated from conflicting Brazilian transfer pricing rules, which were only aligned as from FY13. VARD will file an appeal against the ruling. It does not expect to make any payments until a final conclusion is reached, and this may take several years. However, it is evaluating the need for provisions for the aforementioned tax cost (will likely hit its FY14 financials if any provisions are made), although there would not be an immediate cash outflow. We are also concerned of the possibility that new tax claims for FY11 and FY12 may arise (but FY10 has the largest exposure).

Mixed industry data points
We believe another reason for VARD’s poor share price performance has been triggered by the sharp dip in oil prices. Brent crude oil prices have taken a 15% tumble to S$97.7/bbl from the YTD peak of S$115.1/bbl, driven by a stronger USD and easing geopolitical tensions. On a positive note, average AHTS spot rates in North Sea have rebounded strongly YoY in Aug due to the peak summer period. However, average PSV rates in the North Sea have deteriorated. Similarly, utilisation rates have increased for AHTS (YoY basis for Aug) but declined for PSVs, highlighting a possible oversupply situation for the latter.

Lower FV and reiterate HOLD
Given the uncertainties over the tax claims by the Brazilian authorities on VARD, volatility in the North Sea market and recent de-rating in the industry, we opt to lower our PER valuation peg from 10x to 9x. We also cut our FY14 and FY15 PATMI forecasts by 4.8% and 7.5%, respectively, to account for cost pressures in Brazil. Correspondingly, our fair value estimate dips from S$1.12 to S$0.94, still based on blended FY14/15F EPS. Maintain HOLD.

Keppel Land

OCBC on 19 Sep 2014

KPLD announced yesterday that it has entered into a conditional agreement to sell its one-third stake in MBFC T3 at a valuation of S$1,248m or S$2,790 psf, including a five-year rental support of up to a total of S$49.2m. The purchase consideration will comprise S$710.1m which consists of a part cash payment of S$525.1m and issue of new Keppel REIT units amounting to S$185m. KPLD expects net proceeds of S$658.9m and a net divestment gain of S$95.5m from this sale. Including the divestment of Equity Plaza earlier this year, the group would have gathered total net proceeds and net divestment gains of S$854m and S$155m, respectively. During the analyst briefing, management reiterated its policy of paying out about one-third of divestment gains, which translates to an estimated special dividend of ~3.5 S-cents per share from both sales. Maintain BUY with an unchanged fair value estimate of S$4.09 (30% discount to RNAV).

To divest 1/3 stake in MBFC T3 for S$2,790 psf
Keppel Land (KPLD) announced yesterday that it has entered into a conditional agreement to sell its one-third stake in Marina Bay Financial Centre Tower 3 (MBFC T3) at a valuation of S$1,248m or S$2,790 psf, including a five-year rental support of up to a total of S$49.2m. This is line with an independent valuation of S$1,245m by Colliers as at 28 Aug 2014 and is broadly within our and the market’s expectations. The purchase consideration will comprise S$710.1m which consists of a part cash payment of S$525.1m and issue of new Keppel REIT units amounting to S$185m. KPLD expects net proceeds of S$658.9m and a net divestment gain of S$95.5m when this transaction is completed. 

Continues active capital recycling strategy
Including the divestment of Equity Plaza earlier this year, the group would have gathered total net proceeds and net divestment gains of S$854m and S$155m, respectively. We expect KPLD’s net gearing ratio to fall from 44% as at end Jun 2014 to the mid-30% levels after both divestments are completed. Management continues to actively recycle capital as a core part of their strategy and has, on average from 2010 to 2013, divested ~S$700m p.a. terms of net proceeds and deployed more than S$1b p.a. into acquisitions and investments. Looking ahead, the group expects to expand its presence in overseas office and retail assets, particularly in China, Indonesia and Vietnam. 

Expecting special dividends from divestments
During the analyst briefing, management reiterated its policy of paying out about one-third of divestment gains, which translates to an estimated special dividend of ~3.5 S-cents per share from both sales. We continue to like KPLD for its diversified exposure across property segments and geographical markets and a strong balance sheet. Maintain BUY with an unchanged fair value estimate of S$4.09 (30% discount to RNAV).

Tiger Airways

OCBC on 18 Sep 2014

Tiger Airways Holdings (Tigerair) reported passenger load factor (PLF) improvements in the first two months of its 2QFY15 operating statistics. We think PLF is likely to stay above 80% for the rest of 2H14 as Tigerair continues to place focus on managing its load and increasing aircraft utilisation. However, we remain concerned about its 12 grounded aircrafts as they continue to incur lease expenses. On the positive side, with the approval of the anti-trust immunity (ATI) for Tigerair-Scoot alliance (TS), Tigerair will be able to capture interlining passengers flying from Scoot’s medium to long-haul destination, through Singapore, to other parts of Southeast Asia served by Tigerair. We expect the alliance to have meaningful contribution to Tigerair’s results only from 1HFY16 onwards. Hence, we decrease FY15F and FY16F estimated net loss by 4.8% and 69.1% to S$103.7m and S$16.1m, respectively. Consequently, we raise our FV estimate to S$0.35 (prev: S$0.30) while maintaining a SELL rating.

Improvements to PLF but much more needed to be done
Tiger Airways Holdings (Tigerair) reported passenger load factor (PLF) improvements in the first two months of its 2QFY15 operating statistics. Tigerair’s PLF for Jul-14 and Aug-14 increased 3.1ppt YoY to 82.6% and 4.6ppt to 83.1%, respectively. We think PLF is likely to stay above 80% for the rest of 2H14 as Tigerair focuses on capacity management to increase aircraft utilisation. However, we remain concerned about its 12 grounded aircrafts as they continue to incur lease expenses. We believe these aircrafts will continue to be a drag on Tigerair’s earnings until they are able to either sub-lease or novate leases of these grounded aircrafts to other parties. We also do not expect any fleet expansion until 2018, when Tigerair takes delivery for its order for A320neo aircrafts.

Tigerair-Scoot alliance to provide longer-term boost
The anti-trust immunity (ATI) granted to the Tigerair-Scoot alliance (TS) by the Competition Commission of Singapore last month provides both airlines with greater flexibility to coordinate schedules, routes, pricing as well as certain aspects of joint operations. Tigerair will be able to capture growth in interlining passengers flying from Scoot’s medium to long-haul destination, through Singapore, to other parts of Southeast Asia (SEA) served by Tigerair. Specifically, we believe more focus will be placed on coordination of routes between China and SEA. However, in order to capture this market, timing of connecting flights must be coordinated and changes to flight timings require approval from the relevant Singapore authority. Hence, we expect the alliance to have meaningful contribution to Tigerair’s results only from 1HFY16 onwards.

Raised FV estimate on TS boost; maintain SELL
Although the overcapacity issue in SEA is likely to continue to supress yields, we believe Tigerair’s focus on capacity management will alleviate the impact on its earnings. We have made conservative growth assumptions for TS’ FY16 contribution and this will remain so until further details are announced on the coordination of routes and schedules. Hence, we decrease FY15F and FY16F estimated net loss by 4.8% and 69.1% to S$103.7m and S$16.1m, respectively. Consequently, we raise our FV estimate to S$0.35 (prev: S$0.30) while maintaining a SELL rating

Singapore Market

OCBC on 17 Sep 2014

Despite yesterday’s correction for the STI, equities are still up for the year. We expect equities to remain in favor, despite higher interest rates concern ahead, backed by several positive factors including a recovering global economy, still-healthy corporate earnings, cash-rich US corporates which will fuel mergers and takeovers, and relatively low corporate debts. We are expecting several positive factors to drive interest in 1H15 and the quiet 4Q14 is an opportune time to undertake a stock pick strategy and establish positions for a 1H15 pick-up. We are overweight on the banks and continue to like DBS and UOB, with DBS as our top pick in the sector. Other stocks on our BUY list include CapitaLand, Ezion, FCT, Hotel Properties, Keppel Corp, Keppel Land and Wheelock.

Singapore: A long-term outperformer!
While the Singapore market is generally perceived as being stable (and defensive), an analysis of the 5-year trend showed that the STI has been on a general uptrend since Sep 2009 or a CAGR of 16% from 2009’s low to now. The Oil & Gas sector topped the list and delivered a CAGR of 31% for the same period – a strong double-digit gain! The Real Estate sector has also done well. The S-REIT index garnered gains of 21% over the same period, while the Real Estate Developers’ Index rose 20%. Local banks have also transformed and moved actively into the region and were rewarded with a 19% CAGR over the same period. Other performing sectors included the Small-cap index (CAGR of 17%), Telecommunications (14%) and Technology (10%). 

5-yr CAGR return of 16%...
A comparison of the key equity indices showed that the STI has returned a CAGR of 12.5% from 2009 to 2013. This is even higher at 15.7% if dividends were included. This bucked the conventional view that the Singapore market is defensive (low returns) and boring (5-year index range was 37%, as the STI traded from a low of 2521 to a high of 3464, resulting in ample short-to-medium term trading opportunities).

Stock pick strategy; buy blue chips on price weakness 
The quiet 4Q is an opportune time to accumulate quality stocks. We expect M&As, IPOs and key corporate activities to be pushed back into 1H2015 as we are near the traditionally quieter final quarter of the year. As Singapore celebrates its 50th year, we also expect a bountiful year of goodies, mainly in the form of better dividend payouts, led by key government-linked listed entities. We are overweight on the banks and continue to like DBS and UOB, with DBS as our top pick in the sector. Other stocks on our BUY list include CapitaLand, Ezion, FCT, Hotel Properties, Keppel Corp, Keppel Land andWheelock.

Frasers Commercial Trust

OCBC on 17 Sep 2014

Frasers Commercial Trust (FCOT) announced earlier this week that it has entered into agreements with a club of banks for transferable term loan facilities to refinance its entire existing borrowings. We view this as a major positive move given that all the new facilities will be unsecured and that the debt maturity profile will be significantly enhanced. For the year ahead, we remain positive on FCOT’s performance. Apart from benefitting from the recovery in the Singapore office market, we note that the master lease at Alexandra Technopark has expired last month and that FCOT is poised for strong rental uplift with the direct management of the property. Maintain BUY with an unchanged fair value of S$1.48 on FCOT.

Refinancing of all loan facilities
Frasers Commercial Trust (FCOT) announced earlier this week that it has entered into agreements with a club of banks for transferable term loan facilities of S$545m and A$135m to refinance its entire existing borrowings. While the interest rates are likely to be comparable, we view this as a major positive move given that all the new facilities will be unsecured and that the debt maturity profile will be significantly enhanced. Specifically, we expect FCOT’s unencumbered asset ratio to improve from c. 20% to 100% and its average debt duration to be extended to 4.3 years from c. 1.4 years as at 30 Jun following the drawdown of the new facilities (expected before 30 Sep).

Expecting robust rental growth
For the year ahead, we remain positive on FCOT’s performance. Apart from benefitting from the recovery in the Singapore office market, we note that the master lease at Alexandra Technopark (ATC) has expired last month and that FCOT is poised for strong rental uplift with the direct management of the property. Based on our projections, there may be 24% gap between the underlying passing rent and master lease rent. As ATC contributed a significant 23.3% to FCOT’s 3QFY14 NPI, we believe the rental growth in FY15 is likely to be material. This, we note, is in addition to the improved performance at China Square Central, which enjoyed higher leasing demand after its asset enhancement initiatives and the opening of Telok Ayer MRT station.

Maintain BUY
FCOT is currently trading at 0.85x P/B, lower than the S-REITs sector average of 1.01x P/B. We believe FCOT is likely to see a net revaluation gain for its portfolio assets when it reports its FY14 results in Oct, thus making it more attractive relative to its listed peers. Forward yield is also compelling at 7.2% in our opinion. We maintain BUY with unchanged fair value of S$1.48 on FCOT.

Healthcare Sector

OCBC on 16 Sep 2014

SGX-listed healthcare companies which we track have largely reported improved financial performance during the recent 2QCY14 results season. Under our coverage, Raffles Medical Group’s (RMG) earnings met our expectations but Biosensors International Group fell short. Looking ahead, we believe secular trends such as an aging population and better health awareness will underpin demand for higher quality healthcare services and products. Healthcare companies have thus continued their expansion plans to leverage on this positive long-term outlook. Notwithstanding the robust secular fundamentals, we believe near-term risks exist. The FTSE ST Health Care Index is now trading at a blended forward PER of 21.9x, which is close to 1.3 standard deviations above its mean 5-year forward PER. We believe valuations are now rich. Hence, downgrade the healthcare sector to NEUTRAL. Our preferred pick within the sector is still RMG [HOLD; FV: S$3.90], but we believe a better entry point for the stock would be below S$3.60.

Growth largely intact
SGX-listed healthcare companies which we track have largely reported improved financial performance during the recent 2QCY14 results season (refer to Exhibit 1). Under our coverage, Raffles Medical Group’s (RMG) 8.5% YoY growth in its 2Q14 PATMI to S$15.6m met our expectations. On the contrary, Biosensors International Group continued its lacklustre earnings trend, posting a 18.4% YoY dip in its 1QFY15 core PATMI to US$9.9m. This was its weakest performance since 4QFY10 and was also below our expectations. Other notable performers include IHH Healthcare Berhad [NON-RATED] and Q&M Dental [NON-RATED]. The former saw a 20.2% YoY jump in its 2Q14 core earnings to MYR191.8m, driven by a broad-based increase in its inpatient admission volumes across its core markets (Singapore, Malaysia and Turkey). Q&M Dental’s 33.0% YoY increase in its PATMI to S$1.2m was contributed by its strong revenue growth of 27.3%.

Secular trends still positive
Looking ahead, we believe secular trends such as an aging population and better health awareness will underpin demand for higher quality healthcare services and products. According to independent research firm Business Monitor International, Singapore’s health spending is forecasted to grow at a CAGR of 8.8% from S$17.8b in 2013 to S$32.0b in 2020. Meanwhile, health spending per capita is projected to increase at a 4.3% CAGR from S$2,918 to S$3,926 during the same period. Healthcare companies have thus continued their expansion plans to leverage on this positive long-term outlook. IHH announced on 12 Sep 2014 that it had entered into a Sale and Purchase Agreement to acquire a 100% equity stake in Radlink-Asia from Fortis Healthcare Singapore for a sum of S$137m. Radlink-Asia is involved in the provision of outpatient diagnostic and molecular imaging services in Singapore. China’s recent decision to allow full foreign ownership of hospitals in seven cities would benefit RMG’s plans to expand further in China. Notwithstanding the robust secular fundamentals, we believe near-term risks to the sector include an outbreak of the Ebola pandemic, softening medical tourism receipts given the strong Singapore dollar and weaker economic growth in the region. 

Downgrade sector to NEUTRAL
Majority of the stocks within the healthcare sector have performed well YTD. The FTSE ST Health Care Index (FSTHC) is now trading at a blended forward PER of 21.9x, which is close to 1.3 standard deviations above its mean 5-year forward PER. The FSTHC is also trading at a 58% premium over the STI’s blended forward PER, as compared to the average 28% premium over the past five years. In light of the rich valuations, we downgrade the healthcare sector to NEUTRAL. Our preferred pick within the sector is still RMG [HOLD; FV: S$3.90], but we believe a better entry point for the stock would be below S$3.60.

Ezion Holdings

OCBC on 15 Sept 2014

We are seeing more activity in Ezion’s SGX-listed associates recently. 41.5%-owned Charisma Energy has announced several contracts recently, and there have been senior management changes in both Charisma and another associate, JK Tech. Currently, both companies are still at their early stages of development, and we have not factored Ezion’s stakes in these companies in our fair value estimate. In the longer term, however, there is potential growth if 1) Ezion continues to refer non-core energy-related business introduced by existing clients to these associates and 2) there is good execution by the management teams of the respective companies. Meanwhile, post Ezion’s bonus issue of shares, our fair value estimate drops from S$2.78 to S$2.31 (based on 12x blended FY14/15F earnings). Maintain BUY with 26% upside potential.

Associate Charisma Energy secures more contracts lately
We are seeing more activity in Ezion’s 41.5%-owned associate, Charisma Energy, lately. Recall that Ezion obtained a substantial stake in the company in 4Q12, following which there was relatively insignificant new business activity, save for a semi-sub rig lease contract (announced Sep 2013 but later terminated in Mar 2014) and a US$37m contract for hydro-electric power generation in 2013. This year, however, there seems to be a ramp up in activity: 1) a US$180m contract (15yr) for the leasing of hydro-electric power generation equipment was secured in Mar, 2) a US$276m contract (7-year) to provide a modular crude oil processing facility was announced in Aug, and 3) a US$72m contract (7-year) to provide five OSVs was announced in Sep. 

Senior management changes in associates
Another significant event is the series of management changes at the senior level – Mr. Woo (CEO) will be the Director of Special Projects at Ezion, while his deputy, Mr. Tan, will become the new CEO of Charisma. The current Financial Controller of Ezion, Mr. Goon, will be the new CFO of Charisma, while the ex-CEO of Triyards, Mr. Wong, will be the Executive Director of Charisma. These changes were announced in early Sep. Meanwhile, Ezion’s other SGX-listed associate, JK Tech, also saw a change in CFO and Chairman of the Board in early Sep as well. 

Looking at long-term growth
Currently, Charisma Energy and JK Tech are still at their early stages of development, and Ezion’s stakes in these companies have not been factored into our fair value estimate. There is, however, potential growth in the longer term if 1) Ezion continues to refer non-core energy related business introduced by existing clients to these associates and 2) there is good execution by the management teams of the respective companies. Meanwhile, post Ezion’s bonus issue of shares, our fair value estimate drops from S$2.78 to S$2.31 (based on 12x blended FY14/15F earnings). Maintain BUY with 26% upside potential.

Keppel Land

OCBC on 12 Sept 2014

KPLD is expected to begin sales this weekend at its 500-unit Highline Residences, located near Tiong Bahru MRT station. Pricing at launch is expected to be ~S$1.8k to S$1.9k psf after discounts, which is in line with our expectations. To recap, KPLD purchased the 99-year GLS site for S$550.3m (S$1,163 psf GFA) in April 2013. Due to site regulations and restrictions, construction costs are likely to be higher than usual and we estimate KPLD’s breakeven average prices at ~S$1.7k psf, which points to a high single-digit profit margin for the group. We continue to see value in KPLD shares at these levels and like the group for its diversified exposure across property segments and geographical regions, and firm balance sheet. Possible catalyst ahead could be the divestment of MBFC T3, which would likely lead to a potential bumper special dividend over FY14/15. Maintain BUY with an unchanged fair value estimate of S$4.09 (30% discount to RNAV).

Highline Residences expected to start sales this weekend
From our channel checks, Keppel Land (KPLD) is expected to begin sales this weekend at its 500-unit condominium project, Highline Residences, located near Tiong Bahru MRT station. Pricing at launch is expected to be ~S$1.8k to S$1.9k psf after discounts for the first registered group of buyers. This is in line with our expectations. We understand that about two-thirds of the project is likely to be launched for sales and the initial response from potential buyers for the single bedroom units has been firm.

Recent nearby launches achieving ASPs of ~S$1.7k psf
Nearby 469-unit project The Crest, located at Prince Charles Crescent and developed by a Wing Tai consortium, was launched earlier in June 2014 and saw only 35 units sold at a median price of ~S$1.7k psf over that month. The 429-unit Alex Residences, located near Redhill MRT station, was launched earlier in Nov 2013 with a more encouraging 203 units sold as at end 2Q14 at ~S$1.7k psf as well. 

Project profit margin estimated at high single digits
To recap, KPLD purchased this 99-year GLS site at Kim Tian Road for S$550.3m (S$1,163 psf GFA) in April 2013. The tender attracted 11 bidders and KPLD’s bid was 7.2% above the second highest. Due to site regulations and restrictions, including varying maximum building heights, construction costs are likely to be higher than usual and we estimate KPLD’s breakeven price at ~S$1.7k psf, which points to a high single-digit profit margin for the group. We continue to see value in KPLD shares at these levels and like the group for its diversified exposure across property segments and geographical regions, and firm balance sheet. Possible catalyst ahead could be the divestment of MBFC T3, which would likely lead to a potential bumper special dividend over FY14/15. Maintain BUY with an unchanged fair value estimate of S$4.09 (30% discount to RNAV).

Singapore Press Holdings

UOBkayhian on 12 Sep 2014

FY14F PE (x): 24.0
FY15F PE (x): 22.6

4QFY14’s adspend contraction mirrors 3QFY14’s. Our monthly page monitor of The Straits Times suggests advertising spending (adspend) remains weak, with a contraction of 9% yoy in 4QFY14 (June-Aug 14). This mirrors 3QFY14’s actual contraction of 9.1% yoy (2QFY14: -7.3%, 1QFY14: -2.9% yoy). Singapore Press Holdings (SPH) had earlier attributed 3QFY14’s large contraction to fewer property launches and car ads. We are maintaining our FY14 net profit forecast of S$335m, implying a net profit of S$75.2m vs a reported net profit of S$89.6m for 3QFY14.

Seasonally, the 4Q of any financial year is weaker than 3Q. Despite a large top-line contraction, operating profit has been maintained on cost cutting. Earlier SPH had reported a 7.5% yoy increase in recurrent EBIT despite a 4.9% yoy decline in group revenue. We expect a final DPS of 14 S cents (FY13 final DPS: 15 S cents). Flat share price but dividend yield is decent. SPH’s print revenue is expected to perform in tandem with Singapore’s muted GDP growth which is projected at 3.5% for 2014 and 3.8% for 2015. Traditionally, share price has had a good correlation with domestic economic growth. Share price is expected to be flat, but annual dividend yields of 4.4-4.6% for FY15-16 are decent amid a low interest-rate environment. Maintain HOLD. We maintain our target price of S$4.20 which is based on sum-of-theparts (SOTP) valuation. Our recommended entry price is S$4.00 and below.