UOBKayhian on 15 Sep 2015
FY15F PE (x): 9.3
FY16F PE (x): 8.5
Wilmar’s share is oversold on the concern of losing its net interest income advantage as
interest cost normalises. The narrowing interest rate spread is well within expectation
and Wilmar has reduced this exposure. Core business has been performing well with
improving refining and crushing margins, while consumer pack has exhibited volume
growth, and sugar is back to profit. Short selling volume hit 50% of total traded volume
while the aggressive buyback was done at 0.8x P/B only. Maintain BUY. Target price:
S$3.60.
Wilmar’s share price has weakened over the last three weeks by 12% on the concern of
lower interest income due to interest cost normalisation. In the past two years, Wilmar
has taken the advantage of lower cost of USD borrowing and placed US dollar
denominated deposits in the China onshore market to enjoy the positive interest rate
spread.
We maintain our forecasts, which assumes net profit growth of 9.5% 3-year CAGR
(2014-2017). We are expecting the growth to be driven by its downstream operations in
Palm and Soybean. Maintain BUY. We maintain our SOTP-based target price of
S$3.60. Our key assumptions for the SOTP include 15x PE for its palm upstream,
consumer pack and sugar divisions and 13x for its palm refining and soybean crushing
and 10x for the rest of operations. The SOTP target price translates into a blended PE
of 12x and 11x 2015F and 2016F PE respectively.
Thursday, 17 September 2015
Singapore Airlines
UOBKayhian on 16 Sept 2015
FY15 PE (x): 35.2
FY16F PE (x): 39.7
SIA’s load factors improved in major markets Europe and US amidst fierce competition. SilkAir’s improved load factors for July and August should lead to higher profitability for 2QFY16. Cargo traffic surprised on the upside but loads remained weak. While SIA has expressed concern on yields, we believe that the market has priced in the risk at current levels. Upgrade to HOLD. Suggested entry price is S$9.60. Target price: S$10.70. SIA’s load factors improved for two consecutive months. The 2.5ppt increase in August’s pax load factor was mainly due to a 2.1% capacity reduction. More encouraging was the fact that load factors improved for key long-haul sectors Europe (+1.6ppt) and the US (+0.6ppt). SIA attributed the improved load factors to “healthy summer travel demand and promotional activities”. SilkAir’s August load was the highest for the year. The 4.7ppt increase came on the back of strong loads in East and West Asia. SilkAir also benefitted from strong loads in the Pacific, likely boosted by the new route to Cairns Upgrade to HOLD; maintain target price of S$10.70. We upgrade SIA to HOLD as we believe that the market has priced in the weaker yields for 2QFY16. At current levels, SIA is trading close to -1SD to the long-term mean or 0.73x FY16F book, ex-SIAEC. Excash assets, this equates to just 0.55x book. A stronger US dollar would provide upside risk to our earnings estimates, which remain below consensus. Suggested entry price is S$9.60.
FY15 PE (x): 35.2
FY16F PE (x): 39.7
SIA’s load factors improved in major markets Europe and US amidst fierce competition. SilkAir’s improved load factors for July and August should lead to higher profitability for 2QFY16. Cargo traffic surprised on the upside but loads remained weak. While SIA has expressed concern on yields, we believe that the market has priced in the risk at current levels. Upgrade to HOLD. Suggested entry price is S$9.60. Target price: S$10.70. SIA’s load factors improved for two consecutive months. The 2.5ppt increase in August’s pax load factor was mainly due to a 2.1% capacity reduction. More encouraging was the fact that load factors improved for key long-haul sectors Europe (+1.6ppt) and the US (+0.6ppt). SIA attributed the improved load factors to “healthy summer travel demand and promotional activities”. SilkAir’s August load was the highest for the year. The 4.7ppt increase came on the back of strong loads in East and West Asia. SilkAir also benefitted from strong loads in the Pacific, likely boosted by the new route to Cairns Upgrade to HOLD; maintain target price of S$10.70. We upgrade SIA to HOLD as we believe that the market has priced in the weaker yields for 2QFY16. At current levels, SIA is trading close to -1SD to the long-term mean or 0.73x FY16F book, ex-SIAEC. Excash assets, this equates to just 0.55x book. A stronger US dollar would provide upside risk to our earnings estimates, which remain below consensus. Suggested entry price is S$9.60.
SIA Engineering Company Limited
OCBC on 17 Sep 2015
Since our downgrade in Nov 14, the share price of SIA Engineering Company Limited (SIAEC) has fallen ~16% and we believe the share price correction has largely priced-in the muted outlook. The headwinds SIAEC is facing are structural in nature as its heavy maintenance business segment has been negatively impacted by longer maintenance cycles driven by more efficient and reliable aircraft and engines. Over the longer-term, growth drivers include capacity expansion at Changi Airport, larger SIA fleet with delivery of A350s and the take-off of its JV with Boeing to provide MRO services to Boeing’s customers based in this region. Hence, at this current price level and supported by a decent FY16F dividend yield of 4.2%, we upgrade SIAEC to HOLD with an unchanged FV of S$3.45 (20x FY16F PER). Note that we still maintain our view that its near-to-medium-term operational performances are likely to remain weak on the abovementioned headwinds.
Negatives mostly priced-in
Since our downgrade in Nov 14, the share price of SIA Engineering Company Limited (SIAEC) has fallen ~16%. SIAEC’s recent weakness is mainly due to the combination of poorer performances from its core business as well as lower contributions from associated companies and joint ventures (JVs). With a set of lacklustre operating statistics of Changi Airport between Jan 15 and Jul 15, we expect weaker revenue from its line maintenance (LM) segment in the near-term. That said, we believe the share price correction has largely priced-in the muted outlook.
Persistent structural headwinds
The headwinds SIAEC is facing are structural in nature. While the number of aircraft globally is increasing, its heavy maintenance business segment has been negatively impacted by longer maintenance cycles as newer aircraft and engines are designed with increasing reliability and better cost efficiency. At the same time, one of its JVs in the business of aircraft engines’ maintenance is phasing out older engine models without any immediate replacement, resulting in lower revenue going forward. In the near-term, we expect SIAEC’s fleet management programme (FMP) and overseas LM segments to help mitigate the revenue weakness. Over the longer-term, we believe there are three key growth drivers: 1) LM segment to grow as capacity is set to double at Changi Airport through the addition of Terminal 4 and 5, 2) with SIA likely to take delivery of its first of 63 ordered A350s in 2016, the increased fleet should help smoothen earnings despite the longer maintenance cycles, and 3) JV with Boeing to perform maintenance, repair and overhaul works for Boeing’s customers based in this region should help drive earnings ahead.
Upgrade to HOLD
At this current price level and supported by a decent FY16F dividend yield of 4.2%, we upgrade SIAEC to HOLD with an unchanged FV of S$3.45 (20x FY16F PER). Note that we still maintain our view that its near-to-medium-term operational performances are likely to remain weak on the abovementioned headwinds.
Since our downgrade in Nov 14, the share price of SIA Engineering Company Limited (SIAEC) has fallen ~16%. SIAEC’s recent weakness is mainly due to the combination of poorer performances from its core business as well as lower contributions from associated companies and joint ventures (JVs). With a set of lacklustre operating statistics of Changi Airport between Jan 15 and Jul 15, we expect weaker revenue from its line maintenance (LM) segment in the near-term. That said, we believe the share price correction has largely priced-in the muted outlook.
Persistent structural headwinds
The headwinds SIAEC is facing are structural in nature. While the number of aircraft globally is increasing, its heavy maintenance business segment has been negatively impacted by longer maintenance cycles as newer aircraft and engines are designed with increasing reliability and better cost efficiency. At the same time, one of its JVs in the business of aircraft engines’ maintenance is phasing out older engine models without any immediate replacement, resulting in lower revenue going forward. In the near-term, we expect SIAEC’s fleet management programme (FMP) and overseas LM segments to help mitigate the revenue weakness. Over the longer-term, we believe there are three key growth drivers: 1) LM segment to grow as capacity is set to double at Changi Airport through the addition of Terminal 4 and 5, 2) with SIA likely to take delivery of its first of 63 ordered A350s in 2016, the increased fleet should help smoothen earnings despite the longer maintenance cycles, and 3) JV with Boeing to perform maintenance, repair and overhaul works for Boeing’s customers based in this region should help drive earnings ahead.
Upgrade to HOLD
At this current price level and supported by a decent FY16F dividend yield of 4.2%, we upgrade SIAEC to HOLD with an unchanged FV of S$3.45 (20x FY16F PER). Note that we still maintain our view that its near-to-medium-term operational performances are likely to remain weak on the abovementioned headwinds.
Hyflux
OCBC on 16 Sep 2015
Hyflux Ltd announced yesterday that it, together with partner Mitsubishi Heavy Industries (MHI), has been picked as the the preferred bidder by the National Environmental Agency (NEA) to develop a WTE (waste-to-energy) plant in Tuas. Hyflux will construct the S$750m project by 2019; Hyflux, with a 75% stake, will undertake EPC works worth S$636m, while MHI (25% stake) will provide the technology; both will jointly manage, operate and maintain the WTE plant over the concession period. While Hyflux says it does not expect the project to have a material impact on FY15 financials, the project will replenish its dwindling EPC order book (last reported at S$1b as of end of 2Q15; but includes the long-delayed Dahej project). After its recent 29% tumble, we are upgrading our call from Sell to HOLD on valuation ground, albeit with a lower S$0.72 DCF-based fair value (versus S$0.75 previously).
Secures WTE project in Singapore
Hyflux Ltd announced yesterday that it, together with partner Mitsubishi Heavy Industries (MHI), has been picked as the the preferred bidder by the National Environmental Agency (NEA) to develop a WTE (waste-to-energy) plant in Tuas under a DBOO (design, build, own, operate) scheme and to provide waste treatment services exclusively to NEA for a period of 25 years. Hyflux will construct the S$750m project by 2019; Hyflux, with a 75% stake, will undertake EPC works worth S$636m, while MHI (with 25% stake) will provide the technology. Both partners will jointly manage, operate and maintain the WTE plant over the concession period.
No material impact on FY15 financials
However, Hyflux says it does not expect the project to have a material impact on FY15 financials; we believe that the start date would likely be sometime in mid to late 2016. Still, we do see several positives. For one, the WTE plant will be located on a 4.8-hectare site next to the Tuaspring Integrated Water and Power Project; it will also be able to process 3,600 tonnes of waste per day and generate 120 MW of clean and renewable electricity, which should yield some operational synergies and also increase Hyflux’s overall energy generation capacity. Secondly, the project will replenish its dwindling EPC order book (last reported at S$1b as of end of 2Q15; but includes the long-delayed Dahej project).
Price corrected 29% since our downgrade on 11 Aug
After reporting a pretty “dismal” set of 2Q15 results, we opted to downgrade our call from Hold to Sell with new S$0.75 fair value; and since then, the stock price fell by some 29% to a new 52-week low of S$0.60 on 2 Sep. While we see the need to further pare our DCF-based fair value from S$0.75 to S$0.72 to reflect rising interest rate concerns, we believe that the recent sell-down may have been overdone. And with most of the bad news likely factored in, we upgrade our call from Sell to HOLD.
Hyflux Ltd announced yesterday that it, together with partner Mitsubishi Heavy Industries (MHI), has been picked as the the preferred bidder by the National Environmental Agency (NEA) to develop a WTE (waste-to-energy) plant in Tuas under a DBOO (design, build, own, operate) scheme and to provide waste treatment services exclusively to NEA for a period of 25 years. Hyflux will construct the S$750m project by 2019; Hyflux, with a 75% stake, will undertake EPC works worth S$636m, while MHI (with 25% stake) will provide the technology. Both partners will jointly manage, operate and maintain the WTE plant over the concession period.
No material impact on FY15 financials
However, Hyflux says it does not expect the project to have a material impact on FY15 financials; we believe that the start date would likely be sometime in mid to late 2016. Still, we do see several positives. For one, the WTE plant will be located on a 4.8-hectare site next to the Tuaspring Integrated Water and Power Project; it will also be able to process 3,600 tonnes of waste per day and generate 120 MW of clean and renewable electricity, which should yield some operational synergies and also increase Hyflux’s overall energy generation capacity. Secondly, the project will replenish its dwindling EPC order book (last reported at S$1b as of end of 2Q15; but includes the long-delayed Dahej project).
Price corrected 29% since our downgrade on 11 Aug
After reporting a pretty “dismal” set of 2Q15 results, we opted to downgrade our call from Hold to Sell with new S$0.75 fair value; and since then, the stock price fell by some 29% to a new 52-week low of S$0.60 on 2 Sep. While we see the need to further pare our DCF-based fair value from S$0.75 to S$0.72 to reflect rising interest rate concerns, we believe that the recent sell-down may have been overdone. And with most of the bad news likely factored in, we upgrade our call from Sell to HOLD.
CapitaLand Mall Trust
OCBC on 15 Sep 2015
We believe value has emerged for CapitaLand Mall Trust (CMT), following its recent sharp share price correction. Although we are lowering our FY16 and FY17 DPU projections by 3.1% and 4.4%, respectively, CMT’s FY16F distribution yield of 6.1% is two standard deviations above its 5-year average forward yield. In addition, we believe management’s strong track record and CMT’s focus on necessity spending will allow it to better weather the challenges. Although rental reversions for 1H15 moderated to 4.6%, versus the 6.1% registered in 1Q15 and FY14, we believe the softer outlook has been priced in by the market. We henceforth upgrade CMT from Hold to BUY, albeit with a reduced fair value estimate of S$2.10 (previously S$2.21).
Share price has corrected sharply; value has emerged
CapitaLand Mall Trust’s (CMT) share price has dipped 17.6% from its YTD peak price of S$2.27. We believe this was largely driven by the broad market weakness and concerns over an impending Fed lift-off. Given the vagaries surrounding the global economy, headwinds facing Singapore’s retail sector and CMT’s tenant repositioning exercise at some of its malls, we see the need to fine-tune our assumptions by lowering our FY16 and FY17 DPU projections by 3.1% and 4.4%, respectively, even after factoring in the proposed Bedok Mall acquisition in our model. Our FY15 DPU estimate is kept intact. Notwithstanding our forecast cut for FY16, CMT still trades at a distribution yield of 5.9% for FY15F and 6.1% for FY16F. We find current valuations attractive, as the latter is two standard deviations above CMT’s 5-year average forward yield of 5.4%. FY16F P/B ratio of 1.05x is also close to 1.5 standard deviations below the 5-year average mean of 1.17x. We upgrade CMT from Hold to BUY, albeit with a reduced fair value estimate of S$2.10 (previously S$2.21), as we believe value has emerged following its sharp share price correction.
Operational trends still resilient
Besides positives from CMT’s current valuation, we believe management’s strong track record and CMT’s focus on necessity spending will allow it to better weather the challenges. Approximately 74.5% of its existing portfolio (by gross revenue) is derived from non-discretionary spending. Once CMT completes the acquisition of Bedok Mall, this figure would be increased to 76.2%. CMT also managed to deliver positive shopper traffic and tenants’ sales growth of 3.4% and 2.9% YoY in 1H15, respectively, reflecting its resilience. Although rental reversions for 1H15 moderated to 4.6%, versus the 6.1% registered in 1Q15 and FY14, we believe the softer outlook has been priced in by the market.
Bedok Mall acquisition to boost CMT’s scale
CMT has obtained unitholders’ approval at its EGM on 10 Sep for the proposed acquisition of all the units in Brilliance Mall Trust which holds Bedok Mall and the issuance of 72m new units as partial payment consideration. CMT expects to complete the acquisition in 4Q15.
CapitaLand Mall Trust’s (CMT) share price has dipped 17.6% from its YTD peak price of S$2.27. We believe this was largely driven by the broad market weakness and concerns over an impending Fed lift-off. Given the vagaries surrounding the global economy, headwinds facing Singapore’s retail sector and CMT’s tenant repositioning exercise at some of its malls, we see the need to fine-tune our assumptions by lowering our FY16 and FY17 DPU projections by 3.1% and 4.4%, respectively, even after factoring in the proposed Bedok Mall acquisition in our model. Our FY15 DPU estimate is kept intact. Notwithstanding our forecast cut for FY16, CMT still trades at a distribution yield of 5.9% for FY15F and 6.1% for FY16F. We find current valuations attractive, as the latter is two standard deviations above CMT’s 5-year average forward yield of 5.4%. FY16F P/B ratio of 1.05x is also close to 1.5 standard deviations below the 5-year average mean of 1.17x. We upgrade CMT from Hold to BUY, albeit with a reduced fair value estimate of S$2.10 (previously S$2.21), as we believe value has emerged following its sharp share price correction.
Operational trends still resilient
Besides positives from CMT’s current valuation, we believe management’s strong track record and CMT’s focus on necessity spending will allow it to better weather the challenges. Approximately 74.5% of its existing portfolio (by gross revenue) is derived from non-discretionary spending. Once CMT completes the acquisition of Bedok Mall, this figure would be increased to 76.2%. CMT also managed to deliver positive shopper traffic and tenants’ sales growth of 3.4% and 2.9% YoY in 1H15, respectively, reflecting its resilience. Although rental reversions for 1H15 moderated to 4.6%, versus the 6.1% registered in 1Q15 and FY14, we believe the softer outlook has been priced in by the market.
Bedok Mall acquisition to boost CMT’s scale
CMT has obtained unitholders’ approval at its EGM on 10 Sep for the proposed acquisition of all the units in Brilliance Mall Trust which holds Bedok Mall and the issuance of 72m new units as partial payment consideration. CMT expects to complete the acquisition in 4Q15.
Sembcop Marine
OCBC on 10 Sept 2015
While short term oil prices have increasingly been under the mercy of traders, longer term prices are still tied to the physical market. Over the longer term, we expect oil prices to recover, but this may be a long-drawn journey. For Sembcorp Marine, the group still has a S$10.9b net order book, but about half of this relates to Sete Brasil orders. We have previously incorporated a six-month delay for the Sete rigs, and should the last two units be axed, our FY15 -16 estimates will not be impacted. With a lower oil price environment, the outlook for the industry is now dimmer, and we lower our P/E for the O&M segment ex-Cosco in our SOTP valuation from 12x to 10x, such that our fair value estimate drops from S$2.62 to S$2.20. With operating margin assumptions of 11.5-11.9% for FY15-16, we think our earnings estimates are relatively conservative for now. Maintain HOLD.
Short term crude oil prices under the mercy of traders
Crude oil prices have been volatile of late, with the WTI falling ~35% from end Jun to hit a low of US$38 in the last week of Aug, and recovering about 20% to the current level of about US$45/bbl, as we saw a significant covering of short positions by oil traders after oil tanked to a six-year low. While short term oil prices have increasingly been under the mercy of traders, longer term prices are still tied to the physical market.
A question of timing
Over the longer term, we expect oil prices to recover, and by extension the offshore sector as well. The question, however, is when. Considering the supply of oil is likely to remain elevated with OPEC’s market share strategy, and demand is likely to remain weak due to lacklustre growth by major economies, oil prices may indeed remain lower for longer.
Incorporated delay for Sete rigs
For Sembcorp Marine, the group still has a S$10.9b net order book, but about half of this relates to Sete Brasil orders. There is still a lack of clarity when Sete would resume its payments, and there is increasing concern over the viability of the last few rigs. We have previously incorporated a six-month delay for the Sete rigs, and should the last two units be axed, our FY15 -16 estimates will not be impacted.
Lower fair value to S$2.20
OCBC Treasury Research and Strategy recently lowered its forecasts for oil prices (WTI: US$45-50 for end 2015 and US$60 for 2016; Brent: US$50-55 for end 2015 and US$70 for 2016), and we lower our P/E for the O&M segment ex-Cosco in our SOTP valuation from 12x to 10x (1 s.d below historical average), such that our fair value estimate drops from S$2.62 to S$2.20. With operating margin assumptions of 11.5-11.9% for FY15-16, we think our earnings estimates are relatively conservative for now. Maintain HOLD.
Crude oil prices have been volatile of late, with the WTI falling ~35% from end Jun to hit a low of US$38 in the last week of Aug, and recovering about 20% to the current level of about US$45/bbl, as we saw a significant covering of short positions by oil traders after oil tanked to a six-year low. While short term oil prices have increasingly been under the mercy of traders, longer term prices are still tied to the physical market.
A question of timing
Over the longer term, we expect oil prices to recover, and by extension the offshore sector as well. The question, however, is when. Considering the supply of oil is likely to remain elevated with OPEC’s market share strategy, and demand is likely to remain weak due to lacklustre growth by major economies, oil prices may indeed remain lower for longer.
Incorporated delay for Sete rigs
For Sembcorp Marine, the group still has a S$10.9b net order book, but about half of this relates to Sete Brasil orders. There is still a lack of clarity when Sete would resume its payments, and there is increasing concern over the viability of the last few rigs. We have previously incorporated a six-month delay for the Sete rigs, and should the last two units be axed, our FY15 -16 estimates will not be impacted.
Lower fair value to S$2.20
OCBC Treasury Research and Strategy recently lowered its forecasts for oil prices (WTI: US$45-50 for end 2015 and US$60 for 2016; Brent: US$50-55 for end 2015 and US$70 for 2016), and we lower our P/E for the O&M segment ex-Cosco in our SOTP valuation from 12x to 10x (1 s.d below historical average), such that our fair value estimate drops from S$2.62 to S$2.20. With operating margin assumptions of 11.5-11.9% for FY15-16, we think our earnings estimates are relatively conservative for now. Maintain HOLD.
Keppel Corp
OCBC on 10 Sept 2015
Keppel Corp recently hosted a lunch briefing for analysts in which the group touched on its overall strategy going forward, and provided updates on its business segments. The group is still busy with rig repairs and sees orders from non-drilling products, but considering that the group will be delivering 15 rigs this year, eight in 2016 and six in 2017, we think core earnings momentum may start turning soon. For the property segment, the group remains positive on the longer term outlook of its major markets. As for infrastructure, Keppel is pursuing BOT and BOO projects which the group may unlock value through KIT and Keppel DC REIT. OCBC Treasury Research and Strategy recently lowered its forecasts for oil prices and we refine our estimates as well. We also trim our new order assumption to S$2.5b for 2016 and lower our P/E for the O&M segment from 13x to 10x. After updating the market values of the group’s listed entities, our fair value estimate drops from S$8.41 to S$6.95. Maintain HOLD.
Update from management
Keppel Corp recently hosted a lunch briefing for analysts in which the group touched on its overall strategy going forward, and provided updates on its business segments.
Offshore – tough outlook; yards busy till 2016
Keppel is still busy with rig repairs and sees orders from non-drilling products, but considering that the group will be delivering 15 rigs this year, eight in 2016 and six in 2017, we think core earnings momentum may start turning downwards soon, justifying the stock’s current depressed valuations. Keppel also reiterated that it is still working with Sete on how to best finance the fifth and sixth semi-submersible rigs.
Property – focus more on returns
With the privatization of Keppel Land, the property business can now focus more on returns rather than churning assets to generate profits, a pressure it faced previously as a listed entity. Though the emerging markets of China and Indonesia could encounter speed bumps along the way, the group is positive on the longer term outlook of its major markets.
Infrastructure – BOT, BOO projects
The group is pursuing build-operate-transfer (BOT) and build-own-operate (BOO) projects; though this may be more capital intensive, they generate more recurring income over the longer term. With Keppel Infrastructure Trust and Keppel DC REIT, the group is able to unlock value in assets once they stabilize.
Lower FV to S$6.95 on lower oil projections and O&M valuation
OCBC Treasury Research and Strategy recently lowered its forecasts for oil prices (WTI: US$45-50 for end 2015 and US$60 for 2016; Brent: US$50-55 for end 2015 and US$70 for 2016). With this, we refine our estimates, and also trim our new order assumption for 2016 from S$3b to S$2.5b, such that our earnings estimates are lowered by 3-6% for FY15-16. We also lower our P/E for the O&M segment from 13x to 10x to be in line with peer. After updating the market values of the group’s listed entities, our fair value estimate drops from S$8.41 to S$6.95. Maintain HOLD.
Keppel Corp recently hosted a lunch briefing for analysts in which the group touched on its overall strategy going forward, and provided updates on its business segments.
Offshore – tough outlook; yards busy till 2016
Keppel is still busy with rig repairs and sees orders from non-drilling products, but considering that the group will be delivering 15 rigs this year, eight in 2016 and six in 2017, we think core earnings momentum may start turning downwards soon, justifying the stock’s current depressed valuations. Keppel also reiterated that it is still working with Sete on how to best finance the fifth and sixth semi-submersible rigs.
Property – focus more on returns
With the privatization of Keppel Land, the property business can now focus more on returns rather than churning assets to generate profits, a pressure it faced previously as a listed entity. Though the emerging markets of China and Indonesia could encounter speed bumps along the way, the group is positive on the longer term outlook of its major markets.
Infrastructure – BOT, BOO projects
The group is pursuing build-operate-transfer (BOT) and build-own-operate (BOO) projects; though this may be more capital intensive, they generate more recurring income over the longer term. With Keppel Infrastructure Trust and Keppel DC REIT, the group is able to unlock value in assets once they stabilize.
Lower FV to S$6.95 on lower oil projections and O&M valuation
OCBC Treasury Research and Strategy recently lowered its forecasts for oil prices (WTI: US$45-50 for end 2015 and US$60 for 2016; Brent: US$50-55 for end 2015 and US$70 for 2016). With this, we refine our estimates, and also trim our new order assumption for 2016 from S$3b to S$2.5b, such that our earnings estimates are lowered by 3-6% for FY15-16. We also lower our P/E for the O&M segment from 13x to 10x to be in line with peer. After updating the market values of the group’s listed entities, our fair value estimate drops from S$8.41 to S$6.95. Maintain HOLD.
Raffles Medical Group
OCBC on 9 Sept 2015
Raffles Medical Group has recently announced moves to grow its presence and brand overseas. The group made its first foray into Japan by opening a 5,400 square feet medical centre in Osaka City. In addition, they had recently acquired International SOS (MC Holdings) Pte Ltd, which operates 10 clinics in China, Vietnam and Cambodia, for US$24.5m (~S$34.3m). One to two more medical centres could be introduced in Shanghai in the next two years before the completion of its Shanghai Hospital to establish a client base. While these clinics may not contribute substantially to earnings, given the risk of waning medical tourism in Singapore, the move to diversify its presence bodes well for the future. We are keeping our HOLD rating, with fair value estimate of S$4.59. Noting that the share price has corrected from a 52-week high of S$4.99, longer-term investors can look out for buying opportunities at S$4.36 or lower.
First medical centre in Japan
Raffles Medical Group has made its first foray into operating clinical facilities in Japan by opening a 5,400 square feet medical centre at Herbis Osaka, Kita-ku in Osaka City. Herbis Osaka, which is in the prime CBD area, has retail, office and hotel components, with the Ritz Carlton Osaka located in the same building. "RafflesMedical Osaka" will be operated by the group's subsidiary Raffles Japanese Clinic, along with its JV Japanese partner Socion Healthcare Management Ltd. Targeting at both local patients and tourists, there would be Japanese and foreign physicians, as well as professionals who can provide multi-lingual support for foreign patients.
Acquired an operator of 10 clinics
The group had also recently acquired International SOS (MC Holdings) Pte Ltd, which operates 10 clinics in China, Vietnam and Cambodia. This was done via the group’s subsidiary Raffles SurgiCentre Pte Ltd acquiring 375k ordinary shares of MC Holdings at a consideration of US$24.5m (~S$34.3m), and would be fully satisfied in cash from internal resources. As at 30 Jun 2015, the group was in a net cash position of S$112.5m.
Building for the future
While these clinics may not contribute substantially to earnings, the clinics will facilitate the group in gaining a foothold in new growth areas. We previously noted the risk of waning medical tourism to Singapore, and hospital services were being driven more by local demand during 2Q15. Thus the move to diversify its presence overseas bodes well in diversifying the group’s earnings profile for the future.
Pipeline of projects to sustain growth
We can look forward to the completion of Raffles Holland V, slated for completion by 1Q16. Further ahead, Raffles Hospital extension is expected to be ready by 2Q17 and to establish a client base, 1-2 more medical centres in Shanghai could be introduced before the completion of its Shanghai Hospital in 2018. We are keeping our HOLD rating, with fair value estimate of S$4.59. Noting that the share price has corrected from a 52-week high of S$4.99, longer-term investors can look out for buying opportunities at S$4.36 or lower.
Raffles Medical Group has made its first foray into operating clinical facilities in Japan by opening a 5,400 square feet medical centre at Herbis Osaka, Kita-ku in Osaka City. Herbis Osaka, which is in the prime CBD area, has retail, office and hotel components, with the Ritz Carlton Osaka located in the same building. "RafflesMedical Osaka" will be operated by the group's subsidiary Raffles Japanese Clinic, along with its JV Japanese partner Socion Healthcare Management Ltd. Targeting at both local patients and tourists, there would be Japanese and foreign physicians, as well as professionals who can provide multi-lingual support for foreign patients.
Acquired an operator of 10 clinics
The group had also recently acquired International SOS (MC Holdings) Pte Ltd, which operates 10 clinics in China, Vietnam and Cambodia. This was done via the group’s subsidiary Raffles SurgiCentre Pte Ltd acquiring 375k ordinary shares of MC Holdings at a consideration of US$24.5m (~S$34.3m), and would be fully satisfied in cash from internal resources. As at 30 Jun 2015, the group was in a net cash position of S$112.5m.
Building for the future
While these clinics may not contribute substantially to earnings, the clinics will facilitate the group in gaining a foothold in new growth areas. We previously noted the risk of waning medical tourism to Singapore, and hospital services were being driven more by local demand during 2Q15. Thus the move to diversify its presence overseas bodes well in diversifying the group’s earnings profile for the future.
Pipeline of projects to sustain growth
We can look forward to the completion of Raffles Holland V, slated for completion by 1Q16. Further ahead, Raffles Hospital extension is expected to be ready by 2Q17 and to establish a client base, 1-2 more medical centres in Shanghai could be introduced before the completion of its Shanghai Hospital in 2018. We are keeping our HOLD rating, with fair value estimate of S$4.59. Noting that the share price has corrected from a 52-week high of S$4.99, longer-term investors can look out for buying opportunities at S$4.36 or lower.
StarHub
OCBC on 8 Spet 2015
Despite reporting an improved set of 2Q15 results in Aug, StarHub Ltd has seen its share price tumble by more than 18% since mid-May. We suspect that the recent sell-down was also due to concerns over rising interest rates, as well as the emergence of a fourth telco in Singapore. However, we believe that both concerns are likely overdone. Hence, we continue to keep our BUY on StarHub with an unchanged S$3.96 fair value.
Stock down 18% since mid-May
Despite reporting an improved set of 2Q15 results in Aug, StarHub Ltd has seen its share price tumble by more than 18% since mid-May. We suspect that the recent sell-down was due to several factors including concerns over rising interest rates and the emergence of a fourth telco in Singapore.
Rate hike possible but sustained hikes unlikely
On the first concern, the US Federal Reserve looks intent on raising rates. However, the question is not when, but also whether if it is going to be a sustained spate of hikes. Earlier, the market was calling for a possible hike in Sep; but the mixed jobs report for Aug seems to have turned that call on its head – the market is now divided if it would be delayed until Dec. Meanwhile, some market watchers now believe that there may be little need for the Fed to continue raising rates, especially in the wake of the slowing economy in China, the recent yuan devaluation, as well as still benign inflation in the US. Back to Singapore, the current yield curve does not seem to be pricing a sharp jump in local interest rates either.
Emergence of a fourth telco
The IDA is said to be considering the proposals for a fourth telco, with many expecting MyRepublic (MR) to be a key contender. In fact, MR has recently launched a call for volunteers to test its Jurong East Mobility Trial (due to start this Oct 2015). However, we think that it will still be a pretty arduous road ahead for any new entrant, given the pretty strict roll-out requirements. Hence, any near-term impact is going to be pretty limited; and at best, it may garner about 5% of market share in the post-paid segment in the medium term. And given the current stickiness offered by StarHub’s “Hubbing Strategy”, we believe it is probably less at risk of losing market share than peer M1 Ltd.
Maintain BUY and S$3.96 fair value
Lastly, we note that StarHub’s dividend yield has also risen to a pretty attractive 5.6%. Maintain BUY.
Despite reporting an improved set of 2Q15 results in Aug, StarHub Ltd has seen its share price tumble by more than 18% since mid-May. We suspect that the recent sell-down was due to several factors including concerns over rising interest rates and the emergence of a fourth telco in Singapore.
Rate hike possible but sustained hikes unlikely
On the first concern, the US Federal Reserve looks intent on raising rates. However, the question is not when, but also whether if it is going to be a sustained spate of hikes. Earlier, the market was calling for a possible hike in Sep; but the mixed jobs report for Aug seems to have turned that call on its head – the market is now divided if it would be delayed until Dec. Meanwhile, some market watchers now believe that there may be little need for the Fed to continue raising rates, especially in the wake of the slowing economy in China, the recent yuan devaluation, as well as still benign inflation in the US. Back to Singapore, the current yield curve does not seem to be pricing a sharp jump in local interest rates either.
Emergence of a fourth telco
The IDA is said to be considering the proposals for a fourth telco, with many expecting MyRepublic (MR) to be a key contender. In fact, MR has recently launched a call for volunteers to test its Jurong East Mobility Trial (due to start this Oct 2015). However, we think that it will still be a pretty arduous road ahead for any new entrant, given the pretty strict roll-out requirements. Hence, any near-term impact is going to be pretty limited; and at best, it may garner about 5% of market share in the post-paid segment in the medium term. And given the current stickiness offered by StarHub’s “Hubbing Strategy”, we believe it is probably less at risk of losing market share than peer M1 Ltd.
Maintain BUY and S$3.96 fair value
Lastly, we note that StarHub’s dividend yield has also risen to a pretty attractive 5.6%. Maintain BUY.
ComfortDelgro
OCBC on 7 Sept 2015
Singapore’s Transport Minister announced on 3 Aug a potential reduction in bus and train fares by up to 1.9% effective end-FY15 for a one-year period to reflect the lower energy costs. Certainly, the fare cut will have negative impact on ComfortDelGro’s (CDG) near-term growth, at least in FY16, mainly through its ~75% exposure in SBS Transit (i.e. bus operations in Singapore) and as the operator for Downtown Line (DTL) in Singapore. However, the potential fare cut will have marginal impact on CDG as a group due to its diversified revenue generated across multiple geographical locations. Without any further concrete details, we prefer to conservatively incorporate worst-case scenario assumptions (i.e. 1.9% fare cut) and reduce our FY16F PATMI forecast by 2%. Consequently, our DDM-derived FV drops from S$3.07 to S$2.99. Maintain HOLD as we still like CDG for its stability and diversified revenue stream.
Potential fare cut in Singapore effective end-FY15
Singapore’s Transport Minister announced on 3 Aug a potential reduction in bus and train fares by up to 1.9% effective end-FY15 for a one-year period to reflect the lower energy costs. We highlight that this announcement of fare reduction by year-end came as a surprise to us, especially when the most recent fare hike of 2.8% only came into effect Apr 15. Certainly, the fare cut will have negative impact on ComfortDelGro’s (CDG) near-term growth, at least in FY16, mainly through its ~75% exposure in SBS Transit (i.e. bus operations in Singapore) and as the operator for Downtown Line (DTL) in Singapore. With the transition to the new bus government contracting model (GCM) to commence 2H16, any fare adjustment thereafter will not impact revenue contribution from Singapore bus operations since revenue risk will be passed on to LTA.
Minimal impact given diversified revenue base
In our view, the potential fare cut will have marginal impact on CDG as a group due to its diversified revenue generated across multiple geographical locations. Based on FY14 financials, CDG derived ~59% of its total revenue from Singapore. However, we estimate revenue contributions from rail and bus operations in Singapore only made up ~5% and 15-20% of CDG’s total revenue in FY14 respectively. Furthermore, with GCM to commence from 2H16, the fare cut will have no impact to CDG’s bus revenue contribution since LTA keeps all bus revenue collected while paying CDG a negotiated annual fee for operating public buses. With DTL phase 2 (DTL) slated to commence operations by year-end, a 1.9% fare reduction in FY16 will certainly be negative but unlikely to be significant for CDG.
Slightly lower FV; maintain HOLD
Without any further concrete details, we prefer to conservatively incorporate worst-case scenario assumptions (i.e. 1.9% fare cut) and reduce our FY16F PATMI forecast by 2%. Consequently, our DDM-derived FV drops slightly from S$3.07 to S$2.99. Maintain HOLD as we still like CDG for its stability and diversified revenue stream.
Singapore’s Transport Minister announced on 3 Aug a potential reduction in bus and train fares by up to 1.9% effective end-FY15 for a one-year period to reflect the lower energy costs. We highlight that this announcement of fare reduction by year-end came as a surprise to us, especially when the most recent fare hike of 2.8% only came into effect Apr 15. Certainly, the fare cut will have negative impact on ComfortDelGro’s (CDG) near-term growth, at least in FY16, mainly through its ~75% exposure in SBS Transit (i.e. bus operations in Singapore) and as the operator for Downtown Line (DTL) in Singapore. With the transition to the new bus government contracting model (GCM) to commence 2H16, any fare adjustment thereafter will not impact revenue contribution from Singapore bus operations since revenue risk will be passed on to LTA.
Minimal impact given diversified revenue base
In our view, the potential fare cut will have marginal impact on CDG as a group due to its diversified revenue generated across multiple geographical locations. Based on FY14 financials, CDG derived ~59% of its total revenue from Singapore. However, we estimate revenue contributions from rail and bus operations in Singapore only made up ~5% and 15-20% of CDG’s total revenue in FY14 respectively. Furthermore, with GCM to commence from 2H16, the fare cut will have no impact to CDG’s bus revenue contribution since LTA keeps all bus revenue collected while paying CDG a negotiated annual fee for operating public buses. With DTL phase 2 (DTL) slated to commence operations by year-end, a 1.9% fare reduction in FY16 will certainly be negative but unlikely to be significant for CDG.
Slightly lower FV; maintain HOLD
Without any further concrete details, we prefer to conservatively incorporate worst-case scenario assumptions (i.e. 1.9% fare cut) and reduce our FY16F PATMI forecast by 2%. Consequently, our DDM-derived FV drops slightly from S$3.07 to S$2.99. Maintain HOLD as we still like CDG for its stability and diversified revenue stream.
Friday, 4 September 2015
Cache Logistics Trust
OCBC on 4 Sept 2015
We believe the operating landscape will remain challenging for Cache Logistics Trust (CACHE) over the next 6-12 months. While management has done a commendable job by bringing the total remaining NLA for renewal in FY15 to just 2%, earnings visibility remains cloudy, in our view, as 16% of its leases (by gross rental income) is expiring in FY16. A silver lining for CACHE would come from the maiden contribution of its built-to-suit DHL Supply Chain Advanced Regional Centre (DSC ARC) from Jan next year (TOP in Jul 2015). Nevertheless, we are lowering our FY15 and FY16 DPU forecasts by 5.5 and 10.0%, respectively, to account for lower revenue and NPI margin assumptions ahead. Consequently our fair value estimate is lowered from S$1.17 to S$1.00. Maintain HOLD on fair valuations.
Leasing risks remain
We believe the operating landscape will remain challenging for Cache Logistics Trust (CACHE) over the next 6-12 months. While management has done a commendable job by bringing the total remaining NLA for renewal in FY15 to just 2%, earnings visibility remains cloudy, in our view, as 16% of its leases (by gross rental income) is expiring in FY16. Of this, the bulk of it is made up by two properties acquired during IPO under master leases – Schenker Megahub and Hi-Speed Logistics Centre. The two tenants have yet to decide on whether they will be renewing their master leases upon expiry. In the event of a non-renewal, CACHE would face leasing risks, while additional costs would be incurred for the conversion of the assets into multi-tenanted buildings. During CACHE’s recent 2Q15 results, it recorded a sharp 8.3 ppt YoY dip in its NPI margin to 85.9% due partly to conversions of some master leases to multi-tenanted leases. We are lowering our FY15 and FY16 DPU forecasts by 5.5 and 10.0%, respectively, to account for lower revenue and NPI margin assumptions ahead.
DHL Supply Chain ARC contribution to provide some buffer
A silver lining for CACHE would come from the maiden contribution of its built-to-suit DHL Supply Chain Advanced Regional Centre (DSC ARC) from Jan next year (TOP in Jul 2015). This property located at Tampines LogisPark has a NLA of 928,100 sq ft and is meant to meet DHL’s customers demand in the aerospace, healthcare and technology sectors. DHL will occupy 77% of the space initially, and CACHE is negotiating with prospective tenants to fill up the remaining space.
Lower FV and maintain HOLD
Given our reduced DPU forecasts as highlighted earlier, we consequently lower our fair value estimate from S$1.17 to S$1.00. Despite CACHE offering an estimated FY15 and FY16 distribution yield of 8.3% and 9.1%, respectively, we believe the stock is fairly priced, and hence maintain HOLD on CACHE.
We believe the operating landscape will remain challenging for Cache Logistics Trust (CACHE) over the next 6-12 months. While management has done a commendable job by bringing the total remaining NLA for renewal in FY15 to just 2%, earnings visibility remains cloudy, in our view, as 16% of its leases (by gross rental income) is expiring in FY16. Of this, the bulk of it is made up by two properties acquired during IPO under master leases – Schenker Megahub and Hi-Speed Logistics Centre. The two tenants have yet to decide on whether they will be renewing their master leases upon expiry. In the event of a non-renewal, CACHE would face leasing risks, while additional costs would be incurred for the conversion of the assets into multi-tenanted buildings. During CACHE’s recent 2Q15 results, it recorded a sharp 8.3 ppt YoY dip in its NPI margin to 85.9% due partly to conversions of some master leases to multi-tenanted leases. We are lowering our FY15 and FY16 DPU forecasts by 5.5 and 10.0%, respectively, to account for lower revenue and NPI margin assumptions ahead.
DHL Supply Chain ARC contribution to provide some buffer
A silver lining for CACHE would come from the maiden contribution of its built-to-suit DHL Supply Chain Advanced Regional Centre (DSC ARC) from Jan next year (TOP in Jul 2015). This property located at Tampines LogisPark has a NLA of 928,100 sq ft and is meant to meet DHL’s customers demand in the aerospace, healthcare and technology sectors. DHL will occupy 77% of the space initially, and CACHE is negotiating with prospective tenants to fill up the remaining space.
Lower FV and maintain HOLD
Given our reduced DPU forecasts as highlighted earlier, we consequently lower our fair value estimate from S$1.17 to S$1.00. Despite CACHE offering an estimated FY15 and FY16 distribution yield of 8.3% and 9.1%, respectively, we believe the stock is fairly priced, and hence maintain HOLD on CACHE.
CapitaLand
OCBC on 3 Sep 2015
CapitaLand’s serviced residence business unit, The Ascott Ltd, has recently secured new contracts to manage over 850 units in four cities in Asia. In addition to Binh Duong (Vietnam) and Seoul (South Korea), the group will manage serviced residences for the first time in Yogyakarta (Indonesia) and Miri (Malaysia). We are overall positive that Ascott continues to show good growth in its portfolio. Management now plans for Ascott’s portfolio to grow to over 80k units globally by 2020 and, to accelerate operational growth and enhance ROE, we expect the group to leverage on its fund management platform and work alongside blue-chip capital partners. To recap, the group had earlier this year established with Qatar Investment Authority (QIA) a 50-50 JV to set up a US$600m serviced residence fund with an initial focus on Asia Pacific and Europe. This was Ascott’s largest private equity fund to date and we understand that CAPL targets to launch six new funds with total AUM of up to S$10b by 2020. Maintain BUY with an unchanged fair value estimate of S$4.07.
Ascott secures four serviced residence contracts
CapitaLand (CAPL) announced that its serviced residence business unit, The Ascott Ltd, has recently secured new contracts to manage over 850 units in four cities in Asia. In addition to Binh Duong (Vietnam) and Seoul (South Korea), the group will manage serviced residences for the first time in Yogyakarta (Indonesia) and Miri (Malaysia). We are overall positive that Ascott continues to show good growth in its portfolio; the group is now the world’s largest global serviced residence owner and operator with over 42k units in 94 cities across 26 countries and had achieved its global target of 40k serviced residence units well before end-2015 as scheduled.
Will leverage on fund management to accelerate growth
Management now plans for Ascott’s portfolio to grow to over 80k units globally by 2020 and, to accelerate operational growth and enhance ROE, we expect the group to leverage on its fund management platform and work alongside blue-chip capital partners who will provide additional financial backing. To recap, the group had earlier this year established with Qatar Investment Authority (QIA) a 50-50 JV to set up a US$600m serviced residence fund with an initial focus on Asia Pacific and Europe. This was Ascott’s largest private equity fund to date and we understand that CAPL targets to launch six new funds with total AUM of up to S$10b by 2020.
Ascott Residence Trust an effective destination for mature assets
Ascott Residence Trust (ART) has been an effective destination for the group’s mature serviced residence assets and enables management to recycle capital expediently. In 2H15 so far, CAPL divested its interests in four serviced residences and three rental housing properties in Australia and Japan to ART for a total consideration of S$246.0m, and is expected to book a net divestment gain of S$27.7m from the sale. Maintain BUY with an unchanged fair value estimate of S$4.07.
CapitaLand (CAPL) announced that its serviced residence business unit, The Ascott Ltd, has recently secured new contracts to manage over 850 units in four cities in Asia. In addition to Binh Duong (Vietnam) and Seoul (South Korea), the group will manage serviced residences for the first time in Yogyakarta (Indonesia) and Miri (Malaysia). We are overall positive that Ascott continues to show good growth in its portfolio; the group is now the world’s largest global serviced residence owner and operator with over 42k units in 94 cities across 26 countries and had achieved its global target of 40k serviced residence units well before end-2015 as scheduled.
Will leverage on fund management to accelerate growth
Management now plans for Ascott’s portfolio to grow to over 80k units globally by 2020 and, to accelerate operational growth and enhance ROE, we expect the group to leverage on its fund management platform and work alongside blue-chip capital partners who will provide additional financial backing. To recap, the group had earlier this year established with Qatar Investment Authority (QIA) a 50-50 JV to set up a US$600m serviced residence fund with an initial focus on Asia Pacific and Europe. This was Ascott’s largest private equity fund to date and we understand that CAPL targets to launch six new funds with total AUM of up to S$10b by 2020.
Ascott Residence Trust an effective destination for mature assets
Ascott Residence Trust (ART) has been an effective destination for the group’s mature serviced residence assets and enables management to recycle capital expediently. In 2H15 so far, CAPL divested its interests in four serviced residences and three rental housing properties in Australia and Japan to ART for a total consideration of S$246.0m, and is expected to book a net divestment gain of S$27.7m from the sale. Maintain BUY with an unchanged fair value estimate of S$4.07.
Ezra Holdings
OCBC on 1 Sep
Ezra Holdings has signed an MOU with Chiyoda Corporation for the latter to invest in Ezra’s subsea services business, EMAS AMC, to form EMAS CHIYODA Subsea – a 50:50 JV. As mentioned in our 28 Aug 2015 note, we believed there would be a positive reaction to the share price upon lifting of the trading halt, as the proposed transaction implies an equity value of US$360m for EMAS AMC, and the sale proceeds is estimated to reduce Ezra’s net gearing from 1.0x (pro forma post-rights) to about 0.8x. However, as what both parties have at this stage is a binding MOU pending Ezra’s shareholders’ approval and a firm agreement with Chiyoda following the satisfaction of certain conditions, we maintain our 0.35x FY15/16F NTA valuation on the stock, such that our fair value estimate remains unchanged at S$0.16. Though there may be trading opportunities in the near term, we maintain our HOLD rating over a 12-month timeframe.
To divest 50% of subsea business
Ezra Holdings has signed an MOU with Chiyoda Corporation for the latter to invest in Ezra’s subsea services business, EMAS AMC, to form EMAS CHIYODA Subsea – a 50:50 joint venture. Chiyoda will pay Ezra US$150m in cash and subscribe for new shares in the JV for US$30m in cash, subject to any closing adjustments. Ezra will also convert part of its existing intercompany debt owed by EMAS AMC into equity.
To divest FPSO division to Perisai?
There has long been market talk that Ezra has been considering divesting part of its FPSO assets, and now according to Upstream’s sources , the FPSO division may be divested to Perisai Petroleum Teknologi. However, we note that Perisai may also find it hard to raise funds in this current environment. Recall that the FPSO division is under SGX-listed EMAS Offshore, Ezra’s 75%-owned subsidiary. Meanwhile the market is waiting to see if the group redeems its S$150m perpetual securities in Sep to avoid a step-up; following that, a S$95m note will mature in Mar 2016.
Potential trading buy short term, but HOLD over longer term
As mentioned in our earlier note on 28 Aug, we believed there would be a positive reaction to the share price upon lifting of the trading halt, as the proposed transaction implies an equity value of US$360m for EMAS AMC, and the sale proceeds is estimated to reduce Ezra’s net gearing from 1.0x (pro forma post-rights) to about 0.8x. However, as what both parties have at this stage is a binding MOU pending Ezra’s shareholders’ approval (EGM likely 3rd week Nov) and a firm agreement with Chiyoda following the satisfaction of certain conditions, we maintain our 0.35x FY15/16F NTA valuation on the stock, keeping our fair value estimate unchanged at S$0.16. Though there may be trading opportunities in the near term, we maintain our HOLD rating over a 12-month timeframe, given the dim industry and company outlook.
Ezra Holdings has signed an MOU with Chiyoda Corporation for the latter to invest in Ezra’s subsea services business, EMAS AMC, to form EMAS CHIYODA Subsea – a 50:50 joint venture. Chiyoda will pay Ezra US$150m in cash and subscribe for new shares in the JV for US$30m in cash, subject to any closing adjustments. Ezra will also convert part of its existing intercompany debt owed by EMAS AMC into equity.
To divest FPSO division to Perisai?
There has long been market talk that Ezra has been considering divesting part of its FPSO assets, and now according to Upstream’s sources , the FPSO division may be divested to Perisai Petroleum Teknologi. However, we note that Perisai may also find it hard to raise funds in this current environment. Recall that the FPSO division is under SGX-listed EMAS Offshore, Ezra’s 75%-owned subsidiary. Meanwhile the market is waiting to see if the group redeems its S$150m perpetual securities in Sep to avoid a step-up; following that, a S$95m note will mature in Mar 2016.
Potential trading buy short term, but HOLD over longer term
As mentioned in our earlier note on 28 Aug, we believed there would be a positive reaction to the share price upon lifting of the trading halt, as the proposed transaction implies an equity value of US$360m for EMAS AMC, and the sale proceeds is estimated to reduce Ezra’s net gearing from 1.0x (pro forma post-rights) to about 0.8x. However, as what both parties have at this stage is a binding MOU pending Ezra’s shareholders’ approval (EGM likely 3rd week Nov) and a firm agreement with Chiyoda following the satisfaction of certain conditions, we maintain our 0.35x FY15/16F NTA valuation on the stock, keeping our fair value estimate unchanged at S$0.16. Though there may be trading opportunities in the near term, we maintain our HOLD rating over a 12-month timeframe, given the dim industry and company outlook.
Tuesday, 1 September 2015
Offshore & Marine
UOBKayhian on 1 Sep 2015
We lower our oil price benchmark from US$70/bbl to US$60/bbl, as there have been several downgrades in consensus forecasts in August. We cut our stock target prices by 10-25%. We cut our stock target prices by 10-25%, as we lower our Brent crude oil price benchmark from US$70/bbl to US$60/bbl. Our Brent crude oil price estimates for 2015 and 2016 are based on the forecasts of 38 organisations. There were some downward revisions by consensus in August. Following an update of the latest consensus forecasts, the average Brent oil price forecast for 2016 is US$67/bbl, down from US$72/bbl as of end July. Thus, we lower the oil price benchmark for our stock target prices from US$70/bbl to US$60/bbl. No change in stock recommendations. Maintain MARKET WEIGHT. Despite our steep target price cuts, there is no change in our stock recommendations. With the current share prices at near cyclical trough valuations, many stocks are deep in value. The global O&G industry still faces poor earnings visibility as capex and operating costs are being cut. An austerity drive now permeates the entire industry among oil companies, service providers and shipyards. 4Q14 and 1Q15 saw a fall off the cliff. While activities are slowing returning, oilfield services companies are expected to post poor earnings performance in 2015. A meaningful recovery might be seen only in 2016. In the meantime, stock prices of mid- and small-cap oil service stocks have fallen close to cyclical trough valuations of 0.5x. Our top stock picks in the Singapore offshore & marine (O&M) sector remain Sembcorp Industries (SCI), Ezion and Triyards. We recently upgraded Ezra to BUY following its announcement that Chiyoda – a 33%- owned associate of Mitsubishi Corp - is taking a 50% stake in subsea unit EMAS AMC.
We lower our oil price benchmark from US$70/bbl to US$60/bbl, as there have been several downgrades in consensus forecasts in August. We cut our stock target prices by 10-25%. We cut our stock target prices by 10-25%, as we lower our Brent crude oil price benchmark from US$70/bbl to US$60/bbl. Our Brent crude oil price estimates for 2015 and 2016 are based on the forecasts of 38 organisations. There were some downward revisions by consensus in August. Following an update of the latest consensus forecasts, the average Brent oil price forecast for 2016 is US$67/bbl, down from US$72/bbl as of end July. Thus, we lower the oil price benchmark for our stock target prices from US$70/bbl to US$60/bbl. No change in stock recommendations. Maintain MARKET WEIGHT. Despite our steep target price cuts, there is no change in our stock recommendations. With the current share prices at near cyclical trough valuations, many stocks are deep in value. The global O&G industry still faces poor earnings visibility as capex and operating costs are being cut. An austerity drive now permeates the entire industry among oil companies, service providers and shipyards. 4Q14 and 1Q15 saw a fall off the cliff. While activities are slowing returning, oilfield services companies are expected to post poor earnings performance in 2015. A meaningful recovery might be seen only in 2016. In the meantime, stock prices of mid- and small-cap oil service stocks have fallen close to cyclical trough valuations of 0.5x. Our top stock picks in the Singapore offshore & marine (O&M) sector remain Sembcorp Industries (SCI), Ezion and Triyards. We recently upgraded Ezra to BUY following its announcement that Chiyoda – a 33%- owned associate of Mitsubishi Corp - is taking a 50% stake in subsea unit EMAS AMC.
Olam International
OCBC on 31 Aug 2015
Olam announced last Friday that Mitsubishi Corp (MIT) has become a long-term strategic investor in the company after buying a 20% stake via a “competitive bidding” process; this by subscribing for 332.7m new shares at S$2.75 each (12% of enlarged capital base) as well as buying 222m existing shares from the founding Chanrai family (8%). Management believes that MIT will help expand Olam’s access and presence in Japan to extract full value from its portfolio. Olam also plans to build a platform for collaboration across geographies and products. While we are positive on the deal, we do not expect to see any immediate impact on the business, at least not in 2015; hence we opt to leave our forecasts unchanged for now. Maintain HOLD with an unchanged S$1.88 fair value (based on 10x blended FY15/FY16F EPS).
Mitsubishi takes 20% stake in Olam
Olam announced last Friday that Mitsubishi Corp (MIT) has become a long-term strategic investor in the company after buying a 20% stake via a “competitive bidding” process; this by subscribing for 332.7m new shares at S$2.75 each (12% of enlarged capital base) as well as buying 222m existing shares from the founding Chanrai family (8%). Olam will raise S$915m of gross proceeds, of which nearly S$914m will be used as capital to fund its growth and expand its businesses. Note the deal will dilute Temasek’s stake in Olam from 58% to 51.4%.
Strategic rationale
Management believes that MIT will help expand Olam’s access and presence in Japan to extract full value from its portfolio. For a start, the two parties will form a JV in Japan, where it will act as an importer and marketer of an agreed list of products (such as coffee, sesame, edible nuts, etc.) into Japan. Olam also plans to build a platform for collaboration across geographies and products; this includes leveraging common source and destination networks, exchanging of farming best practices, and leveraging Japanese technology and best practices to improve efficiencies across Olam’s midstream assets. Last but not least, Olam stressed that its original strategic initiative to free up cashflow remains intact.
S$2.75 values Olam at 18x FY14 core EPS
The issue price of S$2.75/share is about 29% above the 12-month VWAP (also nearly 50% above 26 Aug’s VWAP – stock gained 13.4% on 27 Aug before being halted). We note that this prices Olam at 18x FY14 core EPS (pre-dilution), which in our view is quite pricey, given the still-muted outlook for the commodity market in general. And at this point, we do not expect MIT to increase its stake further, hence the share price is unlikely to close the gap.
Maintain HOLD with S$1.88 fair value
While we are positive on the deal, we do not expect to see any immediate impact on the business, at least not in 2015; hence we opt to leave our forecasts unchanged for now. Maintain HOLD with an unchanged S$1.88 fair value (based on 10x blended FY15/FY16F EPS).
Olam announced last Friday that Mitsubishi Corp (MIT) has become a long-term strategic investor in the company after buying a 20% stake via a “competitive bidding” process; this by subscribing for 332.7m new shares at S$2.75 each (12% of enlarged capital base) as well as buying 222m existing shares from the founding Chanrai family (8%). Olam will raise S$915m of gross proceeds, of which nearly S$914m will be used as capital to fund its growth and expand its businesses. Note the deal will dilute Temasek’s stake in Olam from 58% to 51.4%.
Strategic rationale
Management believes that MIT will help expand Olam’s access and presence in Japan to extract full value from its portfolio. For a start, the two parties will form a JV in Japan, where it will act as an importer and marketer of an agreed list of products (such as coffee, sesame, edible nuts, etc.) into Japan. Olam also plans to build a platform for collaboration across geographies and products; this includes leveraging common source and destination networks, exchanging of farming best practices, and leveraging Japanese technology and best practices to improve efficiencies across Olam’s midstream assets. Last but not least, Olam stressed that its original strategic initiative to free up cashflow remains intact.
S$2.75 values Olam at 18x FY14 core EPS
The issue price of S$2.75/share is about 29% above the 12-month VWAP (also nearly 50% above 26 Aug’s VWAP – stock gained 13.4% on 27 Aug before being halted). We note that this prices Olam at 18x FY14 core EPS (pre-dilution), which in our view is quite pricey, given the still-muted outlook for the commodity market in general. And at this point, we do not expect MIT to increase its stake further, hence the share price is unlikely to close the gap.
Maintain HOLD with S$1.88 fair value
While we are positive on the deal, we do not expect to see any immediate impact on the business, at least not in 2015; hence we opt to leave our forecasts unchanged for now. Maintain HOLD with an unchanged S$1.88 fair value (based on 10x blended FY15/FY16F EPS).
Monday, 31 August 2015
IHH Healthcare
UOBKayhian on 27 Aug 2015
FY15F PE (x): 47.6
FY16F PE (x): 38.2
2Q15 net profits were within our expectations, representing 23% of our full-year estimates. Inpatient admissions update. In Singapore, the 5.5% yoy inpatient increase was attributed mainly to local patients as well as medical travellers from non-traditional markets such as the Middle East. In Turkey, inpatient admissions declined by 1.1% yoy to 32,636 due to the start of the Ramadan period in mid-Jun 15 as compared with the start of Ramadan period at end-June in 2014. In Malaysia, hospitals saw a marginal 0.5% yoy decrease in inpatient admissions mainly due to a general slowdown in consumption following the implementation of GST in Apr 15. Upgrade to HOLD but maintain target price at S$1.77. We note that post a 15.6% decline in share price from its high in May 15, IHH is currently trading at 38.2x 2016F PE, slightly higher than the industry’s 31.5x but at a cheaper valuation based on its 2016F PEG ratio of 1.56x vs peers’ 2.2x.
FY15F PE (x): 47.6
FY16F PE (x): 38.2
2Q15 net profits were within our expectations, representing 23% of our full-year estimates. Inpatient admissions update. In Singapore, the 5.5% yoy inpatient increase was attributed mainly to local patients as well as medical travellers from non-traditional markets such as the Middle East. In Turkey, inpatient admissions declined by 1.1% yoy to 32,636 due to the start of the Ramadan period in mid-Jun 15 as compared with the start of Ramadan period at end-June in 2014. In Malaysia, hospitals saw a marginal 0.5% yoy decrease in inpatient admissions mainly due to a general slowdown in consumption following the implementation of GST in Apr 15. Upgrade to HOLD but maintain target price at S$1.77. We note that post a 15.6% decline in share price from its high in May 15, IHH is currently trading at 38.2x 2016F PE, slightly higher than the industry’s 31.5x but at a cheaper valuation based on its 2016F PEG ratio of 1.56x vs peers’ 2.2x.
Singapore Telecommunications
UOBKayhian on 27 Aug 2015
FY15F PE (x): 16.5
FY16F PE (x): 15.3
Differentiating with data sharing targeted at families. Optus’ new My Plan Plus allows families to pool separate mobile plans under one bill to share the combined data allowance, and this plan was launched in Apr 15. Typically, 68% of customers use less than 50% of their monthly allowance. Demand for data is asymmetric. Those aged 18- 20 use 2.7 times more data compared with those above 45 years old. Thus, many parents would find My Plan Plus attractive as they can share their unused data with their children. Contribution from Optus hampered by weak Australian dollar. The Australia Consumer business registered growth of 12.8% yoy for operating revenue and 8% yoy for EBITDA in 1QFY16. Unfortunately, contribution from Optus was affected by the 10.6% yoy depreciation of the Australian dollar against the Singapore dollar. Our target price is S$4.72 based on DCF (required rate of return: 5.45%, terminal growth: 1.0%).
FY15F PE (x): 16.5
FY16F PE (x): 15.3
Differentiating with data sharing targeted at families. Optus’ new My Plan Plus allows families to pool separate mobile plans under one bill to share the combined data allowance, and this plan was launched in Apr 15. Typically, 68% of customers use less than 50% of their monthly allowance. Demand for data is asymmetric. Those aged 18- 20 use 2.7 times more data compared with those above 45 years old. Thus, many parents would find My Plan Plus attractive as they can share their unused data with their children. Contribution from Optus hampered by weak Australian dollar. The Australia Consumer business registered growth of 12.8% yoy for operating revenue and 8% yoy for EBITDA in 1QFY16. Unfortunately, contribution from Optus was affected by the 10.6% yoy depreciation of the Australian dollar against the Singapore dollar. Our target price is S$4.72 based on DCF (required rate of return: 5.45%, terminal growth: 1.0%).
Ezra Holdings
UOBKayhian on 28 Aug 2015
FY15F PE (x): 5.1
FY16F PE (x): 5.7
Ezra enters into a 50:50 JV with Chiyoda for US$180m cash consideration. Ezra announced that it has signed a binding MOU with Chiyoda Corporation (Chiyoda is a 33%-owned associate of Mitsubishi Corp) for a 50:50 JV in Ezra’s subsea business EMAS-AMC for a cash consideration of US$180m. EMAS-AMC will be renamed EMAS Chiyoda Subsea (ECS). Chiyoda is a leading Front End Engineering Design (FEED) and Engineering Procurement and Construction (EPC) company in the oil and gas industry. Maintain target price at S$0.176, based on 0.3x FY16F P/B. The four global deepwater subsea peers are currently trading at an average FY16F P/B of 1.3x, skewed by Oceaneering (2.5x). Subsea 7, the second largest subsea player globally, is trading at 0.4x 2016F P/B with an ROE of 3%. While the Ezra-Chiyoda deal is a binding MOU, it is pending a firm agreement. Thus, we keep our P/B valuation at 0.3x, which translates to a target price of S$0.176. Upgrade to BUY. Share price has collapsed 32% since July owing to recent upheavals in the stock markets. With a 54% upside to our target price, and the emergence of a strong JV partner behind the subsea business, we upgrade our call on Ezra from HOLD to a trading BUY.
FY15F PE (x): 5.1
FY16F PE (x): 5.7
Ezra enters into a 50:50 JV with Chiyoda for US$180m cash consideration. Ezra announced that it has signed a binding MOU with Chiyoda Corporation (Chiyoda is a 33%-owned associate of Mitsubishi Corp) for a 50:50 JV in Ezra’s subsea business EMAS-AMC for a cash consideration of US$180m. EMAS-AMC will be renamed EMAS Chiyoda Subsea (ECS). Chiyoda is a leading Front End Engineering Design (FEED) and Engineering Procurement and Construction (EPC) company in the oil and gas industry. Maintain target price at S$0.176, based on 0.3x FY16F P/B. The four global deepwater subsea peers are currently trading at an average FY16F P/B of 1.3x, skewed by Oceaneering (2.5x). Subsea 7, the second largest subsea player globally, is trading at 0.4x 2016F P/B with an ROE of 3%. While the Ezra-Chiyoda deal is a binding MOU, it is pending a firm agreement. Thus, we keep our P/B valuation at 0.3x, which translates to a target price of S$0.176. Upgrade to BUY. Share price has collapsed 32% since July owing to recent upheavals in the stock markets. With a 54% upside to our target price, and the emergence of a strong JV partner behind the subsea business, we upgrade our call on Ezra from HOLD to a trading BUY.
Olam International
UOBKayhian on 31 Aug 2015
FY15F PE (x): 17.4
FY16F PE (x): 15.9
Positive partnership. We are turning more positive on Olam with the entrance of Mitsubishi Corporation (MC) as its new strategic partner with a 20% stake at premium pricing. We are expecting medium-term value enhancement from this new partnership as: a) Olam ability to source and supply sustainable and certified ingredients for MC’s processed food division, and b) MC will be able to provide the processing capability and developed markets access for Olam. This is likely to lead to earnings enhancement and capex saving. Potential synergy. Both parties have different areas of strength in terms of capability and market accesses which both can leverage on in order to create cost and revenue synergies. For example: a) Olam will be able to penetrate into more developed markets with minimum capex by leveraging on MC’s existing processing plants, b) MC owns the world’s largest coffee plantation in Brazil while Olam is one of the top coffee traders, and c) Olam will be able to leverage on MC’s North America edible oil processing plants for its palm oil from Gabon. Management is not ready to share the value of the synergies yet, as they are pending the finalisation of the JV agreement within the next 120 days. Upgrade to BUY, with a higher target price of S$2.30 (previous: S$1.95), which is based on higher PE of 16.2x (10-year mean) on 2016F fully diluted EPS (up from 11.2x PE based on -1SD from mean PE). We like the stock’s medium-term prospects because: a) return of investor confidence with two reputable strategic shareholders, b) volume growth in medium term should be boosted by leveraging on MC’s strengths, and c) the business structuring that has been taking place since two years ago is showing positive results in terms of margins improvement.
FY15F PE (x): 17.4
FY16F PE (x): 15.9
Positive partnership. We are turning more positive on Olam with the entrance of Mitsubishi Corporation (MC) as its new strategic partner with a 20% stake at premium pricing. We are expecting medium-term value enhancement from this new partnership as: a) Olam ability to source and supply sustainable and certified ingredients for MC’s processed food division, and b) MC will be able to provide the processing capability and developed markets access for Olam. This is likely to lead to earnings enhancement and capex saving. Potential synergy. Both parties have different areas of strength in terms of capability and market accesses which both can leverage on in order to create cost and revenue synergies. For example: a) Olam will be able to penetrate into more developed markets with minimum capex by leveraging on MC’s existing processing plants, b) MC owns the world’s largest coffee plantation in Brazil while Olam is one of the top coffee traders, and c) Olam will be able to leverage on MC’s North America edible oil processing plants for its palm oil from Gabon. Management is not ready to share the value of the synergies yet, as they are pending the finalisation of the JV agreement within the next 120 days. Upgrade to BUY, with a higher target price of S$2.30 (previous: S$1.95), which is based on higher PE of 16.2x (10-year mean) on 2016F fully diluted EPS (up from 11.2x PE based on -1SD from mean PE). We like the stock’s medium-term prospects because: a) return of investor confidence with two reputable strategic shareholders, b) volume growth in medium term should be boosted by leveraging on MC’s strengths, and c) the business structuring that has been taking place since two years ago is showing positive results in terms of margins improvement.
Singapore Telcos
OCBC on 28 Aug 2015
For the Jun quarter, the three telcos reported results that were mostly in line with our expectations; they have also kept their previous guidance for the year, supported by the growing data usage. Recently, we have seen the prices of the telcos correcting quite sharply, spooked by concerns of rising interest rates; however, we believe that the sell-down may be overdone, and yields have improved considerably. As we had also recently upgraded StarHub from Hold to BUY, we now have BUY calls on all three telcos; hence, we upgrade our sector recommendation to OVERWEIGHT.
2Q15 earnings mostly in line
For the Jun quarter, the three telcos reported results that were mostly in line with our expectations. Although StarHub’s 2Q15 earnings were also in line, it had a weaker-than-expected 1Q15; but with margins likely to hold up, we think it should do better in 2H15. And as expected, the three telcos have kept their guidance unchanged for the year.
Defensive business in uncertainty economic time
Overall mobile market continues to remain stable, with post-paid subscribers inching up another 0.8% QoQ; monthly post-paid ARPUs were also steady. And with 4G subscribers now making up 68% of all mobile subscribers here, it comes as no surprise that the three telcos are optimistic about rising data usage and further improvements in ARPUs. Hence even in an increasingly uncertainty economic environment, we believe that the main mobile business should do relatively well; although we could see a drop in roaming income.
Interest rate concerns likely overdone
Recently, we have seen the prices of the telcos correcting quite sharply, spooked by concerns of rising interest rates. However, with the recent global market turmoil, coupled with the devaluation of the CNY against the USD, the odds for a rate hike in Sep seem to have dropped; some market watchers also believe that the quantum of hike has also been reduced. As such, we believe that the current yields have reached pretty attractive levels.
Upgrade to OVERWEIGHT
As we had also recently upgraded StarHub from Hold to BUY, we now have BUY calls on all three telcos; hence, we upgrade our sector recommendation to OVERWEIGHT. Key risks include an unexpected spike in interest rates and further depreciation in the regional currencies against the SGD, but this affects mainly Singtel. While there could still be a new entrant coming into the Singapore market, we think that any impact is likely muted and would probably be felt from 2018 onwards.
For the Jun quarter, the three telcos reported results that were mostly in line with our expectations. Although StarHub’s 2Q15 earnings were also in line, it had a weaker-than-expected 1Q15; but with margins likely to hold up, we think it should do better in 2H15. And as expected, the three telcos have kept their guidance unchanged for the year.
Defensive business in uncertainty economic time
Overall mobile market continues to remain stable, with post-paid subscribers inching up another 0.8% QoQ; monthly post-paid ARPUs were also steady. And with 4G subscribers now making up 68% of all mobile subscribers here, it comes as no surprise that the three telcos are optimistic about rising data usage and further improvements in ARPUs. Hence even in an increasingly uncertainty economic environment, we believe that the main mobile business should do relatively well; although we could see a drop in roaming income.
Interest rate concerns likely overdone
Recently, we have seen the prices of the telcos correcting quite sharply, spooked by concerns of rising interest rates. However, with the recent global market turmoil, coupled with the devaluation of the CNY against the USD, the odds for a rate hike in Sep seem to have dropped; some market watchers also believe that the quantum of hike has also been reduced. As such, we believe that the current yields have reached pretty attractive levels.
Upgrade to OVERWEIGHT
As we had also recently upgraded StarHub from Hold to BUY, we now have BUY calls on all three telcos; hence, we upgrade our sector recommendation to OVERWEIGHT. Key risks include an unexpected spike in interest rates and further depreciation in the regional currencies against the SGD, but this affects mainly Singtel. While there could still be a new entrant coming into the Singapore market, we think that any impact is likely muted and would probably be felt from 2018 onwards.
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