Singapore Stock Summary – July 31
ALLCO REIT, dbs maintain BUY with target price $0.93($1.26)
BOUSTEAD, dbs maintain BUY with target price $2.82
CAMBRIDGE, daiwa maintain OUTPERFORM with target price $0.84
CAMBRIDGE INDUSTRIAL TRUST, ubs maintain BUY with target price $0.99($1.03)
CAPITARETAIL CHINA TRUST, gs maintain SELL with target price $1.22($1.46)
CAPITARETAIL CHINA TRUST, ml maintain UNDERPERFORM with target price $1.15
CAPITALAND, csfb maintain NEUTRAL with target price $6.75
CAPITALAND, jpm maintain OVERWEIGHT with target price $7
CHARTERED SEMICON, daiwa downgrade to HOLD with target price $0.65
COSCO, citi maintain BUY with target price $4.15
EPURE INTERNATIONAL, dbs maintain BUY with target price $1.07
FORTUNE REIT, mac maintain OUTPERFORM with target price HK$6.70
HONG KONG LAND, uob maintain HOLD with target price US$4.78
HYFLUX, dbs maintain BUY with target price $3.53
HYFLUX WATER TRUST, dbs maintain BUY with target price $0.9
LIPPO-MAPLETREE INDONESIA RETAIL TRUST, ocbc maintain BUY with target price $0.7
LIPPO-MAPLETREE, ubs maintain BUY with target price $1
PARKWAY LIFE REIT, uob maintain BUY with target price $1.54($1.52)
PINE AGRITECH, cimb maintain UNDERPERFORM with target price $0.12
SIA, dbs maintain BUY
SIHUAN PHARMACAUTICAL, daiwa maintain BUY with target price $1.58
SINGAPORE POST, csfb maintain NEUTRAL with target price $1.19($1.22)
SINGAPORE POST, dbs upgrade to BUY with target price $1.12
SINGAPORE POST, jpm maintain NEUTRAL with target price $1.10
SINGAPORE POST, ms maintain EQUAL-WEIGHT with target price $1.23
SINGAPORE POST, uob downgrade to HOLD with target price $1.07($1.33)
SPC, dbs maintain BUY with target price $8.22
STARHUB, citi maintain BUY with target price $3.20($3.30)
TEE INTERNATIONAL, ocbc dropping coverage with target price $0.26
YANGZIJIANG, ubs maintain BUY with target price $1.30($2.65)
[ SECTOR ]
BANK by jpm
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ALLCO REIT, dbs maintain BUY with target price $0.93($1.26)
-Story: 2Q08 results were within expectation. Gross revenue grew 57.9% y-o-y to S$27.6m, while NPI grew 37.6% to S$20.9m. Distributable income grew 61.4% to S$17.2m, translating into 2.4cts DPU in 2Q08. For 1H08, unitholders are getting 3.99 cts DPU. Allco also recorded a write-down for its investment properties, mainly from Cosmo and Centerlink, of S$29.7m, resulting in NAV falling to S$1.39 per share on 30 Jun 2008 (1Q08: S$1.45).
-Point: The better 2Q08 performance was driven by higher rents achieved at Central Park and contributions from properties purchased after 2H07, i.e. Centerlink, the Japanese assets and Keypoint. Moving forward, there are several issues to look at: (i) expiry of S$70m loan in Nov08 that is expected to be repaid from proceeds from the divestment of AWPF, and (ii) strategic review of its Australian assets. Proceeds will be used to pare down existing facilities and for capital re-cycling for asset acquisitions lined up by Frasers Centrepoint Ltd (FCL). In this respect, we remain optimistic about opportunities in the medium term with its new parentage. Allco should benefit given FCL’s established presence in Asia Pacific and a ready pipeline of assets worth S$700m.
-Relevance: We have adjusted FY08F and FY09F DPU to 6.9 and 7.0cts, respectively. Our DCF-backed target price is reduced to S$0.93 after imputing higher risk free rate of 3.9%, beta of 0.8 and a lower terminal growth rate of 0.5%. The share price could underperform in the near term, given the uncertainty in terms of the structure and direction of the REIT following the change in parentage. But valuation wise, Allco is trading at attractive 0.6x P/BV and offers FY08-FY09F DPU yields of 8.9% – 9.0%. Maintain Buy.
BOUSTEAD, dbs maintain BUY with target price $2.82
-Story: Boustead has been celebrating its 180th year of business in Singapore with a flurry of order wins across business segments. Recent order wins include a S$67m contract to design and build an integrated semiconductor equipment manufacturing facility, and a S$37m contract to design and build an aircraft engine MRO facility adjacent to Singapore’s Changi Airport. In addition, its wholly owned subsidiary Salcon announced its biggest water project to date in Libya, with an effective investment value of ~S$114m.
-Point: Thus, we note that the orderbook momentum has been rather brisk in FY09 (from April onwards) and we are pretty confident that Boustead is on track to meet our full year projections. YTD order wins stand at S$303m, or about 67% of our full year projection of S$450m. Apart from being on track to meet our orderbook expectations, the contracts would boost FY08 and FY09 earnings more than what we had initially expected as project commencement is ahead of schedule.
-Relevance: In addition to contributions from the contract wins, we have also factored in an expected S$26m gain (vs. our previous forecast of S$13m) from the proposed sale of a building under construction and land at Ubi Ave1, for a consideration of S$200m. Consequent to our positive view about Boustead’s continued strength in winning new contracts, especially in its water treatment and real estate solutions segments, we maintain our BUY recommendation at a Target Price of S$2.85. This translates to an implied PE of 10x FY09 earnings.
CAMBRIDGE, daiwa maintain OUTPERFORM with target price $0.84
-We maintain our 2 (Outperform) rating for Cambridge Industrial Trust (Cambridge) after the announcement of its 2Q08 results on 29 July because a sustainable distribution-per-unit (DPU) yield of over 10% backed by a solid and soon-to-be Shariah-compliant asset base is not a bad deal, in our opinion. We have raised our sixmonth target price, based on our RNG valuation method, to S$0.84 from S$0.82.
-Cambridge’s 2Q08 DPU was 13.9% below our forecast (based on our pro-rated 2008 DPU forecast). The major negative variance was an absence of any new acquisitions (our full-year forecast assumed about S$80m of previously unannounced acquisitions for 2008). This factor was offset partially by the lowerthan- expected borrowing costs.
- With an extremely cautious stance on asset growth, we have assumed there will be no new acquisitions for 2008. By our forecasts, Cambridge will complete about S$100m this year based on deals announced to date. For subsequent years, we have toned down our acquisition assumption to S$200m from S$350m. We have revised down our DPU forecasts by 4.2% for 2008, 6.3% for 2009, and 5.4% for 2010 on the lower acquisition assumptions.
- We have raised our six-month target price, based on our RNG valuation method, to S$0.84 from S$0.82, after including the estimated contribution from the S$55.2m Natural Cool HQ property under option (completion scheduled for 3Q08). For Cambridge, our valuation is based only on the existing asset base and announced acquisitions as of FY08 with no assumptions for future acquisitions.
- Cambridge is taking the final steps for Shariah compliance, which management expects by September 2008. As management explained during the briefing on 29 July, it is not easy for any S-REIT to attain Shariah compliance, due to the extensive list of non-permissible activities (including financial services based on interest, sale and manufacture of non-halal products, hotels and resorts) commonplace in commercial S-REITs. Fortunately for Cambridge, about 99% of its rental income comes from permissible sources, so the cost of compliance is negligible and Shariah compliance would tap into a new class of investors, as well as Shariah-compliant financing opportunities. We are not sure whether these benefits for Cambridge would outweigh the opportunity costs of turning away future deals involving financial services, hospitality, entertainment, or the integrated resorts, or relatedactivities. After all, the major drivers of the Singapore economy in the future are non-Shariah-compliant activities, in our opinion.
CAMBRIDGE INDUSTRIAL TRUST, ubs maintain BUY with target price $0.99($1.03)
- Event: CMIT reports Q208 DPU 1.56?(-4.3% UBSe). CMIT reported Q208 result with quarterly DPU of 1.56?(-4.3% UBSe; +0.0% YoY). The result was slightly below expectations with Q208 net property income at S$15.9m (-1.9% UBSe; +44.5% YoY). We expect NPI to improve with progressive recognition of income from the new H108 acquisitions (S$32.1m). Given current economic uncertainty, mgmt. has articulated a more moderate acquisition strategy.
- Impact: Strategic movements – Shariah-compliance and Oxley stake. Along with the result was CMIT’s proposed move to Shariah-compliance (subject to unitholder approval) ?potentially opening access to Islamic capital. In addition, Oxley Capital Group stated its intent to acquire up to 80% of the mgmt. business (currently ?40%).
- Action: Reiterate Buy at PTS$0.99. CMIT offers one of the highest DPU yields in the SREIT sector at 9.8% with a P/NAV of -16.5%. With a decidedly more conservative tone towards near-term acquisitions, we think it will likely keep within its optimal 45% gearing. We reiterate Buy. We have included the latest acquisition (S$10m) and assume interest rate reverts to 4.5% (from 3.3%) in 2012. We reduce our PT to S$0.99 from S$1.03.
- Valuation. Our 1-yr forward PT of S$0.99 is derived from a beta of 0.90, riskfree rate of 3.4% and market risk premium of 5%.
CAPITARETAIL CHINA TRUST, gs maintain SELL with target price $1.22($1.46)
-What’s changed. CRCT reported 2Q08 DPU of 1.7 cents, 10% ahead of management’s forecast but in line with our estimates, mainly due to lower-than-projected net interest expense. Assuming all distributable income is paid out, DPU would have been 1.84 cents. For 1H08, CRCT’s NPI was Rmb$157.1mn and its DPU was 3.25 cents. Comparable portfolio gross revenue for 2Q08 rose 8.2% yoy largely due to increased occupancy levels at Wangjing Mall, Qibao Mall, and Xinwu Mall. As at June 1, 2008, CRCT’s 8 malls were valued at Rmb5.54bn vs. Rmb5.34bn as at Sept. 30, 2007, with a portfolio NPI yield of 6.4%. NAV net of distribution for CRCT as at June 30, 2008 was S$1.07. CRCT’s gearing stands at 30%, with an average cost of debt of 2.5% pa. CRCT has US$105mn of debt to be refinanced by Nov. 2008.
-Implications. We note that management is looking for rental growth of 6%-8% pa over the next few years, which is above our estimate of 5% pa. What concerns us is whether CRCT can deliver on acquisition growth as management intends to grow its asset size from around S$1.1bn today to about S$3bn in 2009. We are hopeful that capital market conditions may improve such that Reits can rely on capital markets to fund acquisition growth. Based on current market conditions, we think it will be difficult for CRCT to tap the equity markets to deliver yield accretive acquisition growth. We note that sponsor CapitaLand has a visible pipeline in store, ~17 malls ready for injection.
-Valuation. We raise our beta on CRCT to 0.9 from 0.8. and remove the acquisition premium of S$0.20 for CRCT in light of the difficult climate for yield-accretive acquisition growth. We lower our DCF-based 12m TP to S$1.22 from S$1.46, but keep ourSell rating.
-Key risks. Key risks include execution on growth via acquisitions.
CAPITARETAIL CHINA TRUST, ml maintain UNDERPERFORM with target price $1.15
-2Q08 results. CapitaRetail China Trust has reported 2Q08 results with DPU of 1.70cps, up 10% QoQ but flat YoY. 1H08 DPU accounts for 44% of our FY08 estimates, however S$0.9mn of income has been retained for payout in 2H08. We also expect a stronger second half due to full income contribution from Xizhimen Mall together with the completionof asset enhancement works at Saihan Mall.
-Management less optimistic on acquisition growth. The key takeaway from the analyst briefing was that management appeared less optimistic on the outlook for acquisition growth. While they still hope to achieve target asset size of S$3bn by end 2009 they indicated that further acquisitions will be likely put on hold until sentiments in the equity market improves.
-Operational metrics. Portfolio metrics improved marginally with greater contribution from Qibao and Xizhimen Mall. NPI of Saihan Mall continued to decline with ongoing asset enhancement works (due for completion 2H08). On a same store basis NPI growth (excluding Xizhimen Mall) was down 3.5% YoY and up 2.7% QoQ. Occupancy rates also improved, rising from 94.1% in 1Q08 to 97.1% in 2Q08.
-Maintain Underperform. We maintain our Underperform rating on CRCT with PO of S$1.15/share. While operational metrics appeared to have stabilized we remain cautious on the ability of the REIT to expand and future debt costs. In the current environment we struggle to identify near term catalysts that will trigger share price outperformance.
CAPITALAND, csfb maintain NEUTRAL with target price $6.75
- 54%-owned subsidiary, Australand (ALZ AU) announced on Monday a 1-for-1 non-underwritten renounceable rights offering at A$0.60 per security (at a steep 38.5% discount to last trading price of A$0.975) to raise as much as A$557 mn (S$724 mn) from shareholders after 1H08 profit fell 79% after asset write-downs.
- CAPL has undertaken to take up its proportionate entitlement of A$302 mn, and should no other minorities take up their entitlements, it will end up with a c.70% stake of ALZ.
- We estimate ALZ makes up 12% of CAPL.s FY08 earnings forecasts, and this write-down could cut CAPL.s earnings by 3%. ALZ.s share price has corrected 41% since our last RNAV review, implying a 2.5% cut in RNAV. We will further review our forecasts after the 2Q08 results release on Friday.
- We believe this highlights risks: (1) potentially the start of asset write-downs for developers (regional ones especially); (2) further funding needs going forward that could soak up liquidity, e.g. for CAPL.s REITs; (3) slower growth for its capital recycling model.
CAPITALAND, jpm maintain OVERWEIGHT with target price $7
- Australand’s rights issue is an adverse signal: CapitaLand is committing A$302million for its share of a renounceable 1-for-1 rights issue by 54%-owned Australian subsidiary Australand. If all Australand minorities do not take up their entitlements at the deeply discounted price of A$0.60 per stapled security, CapitaLand’s stake in Australand would increase to 70%. Australand needs the additional equity partly to tide it through the drought in Australia’s real estate capital markets.
- Implications for the group: CapitaLand’s support of Australand’s rights issue also serves as a reminder that the group will likely stand behind its affiliates (notably the REITs like CMT, CCT, ART and CRCT), with unallocated group level capital potentially being deployed to cover upcoming funding needs of the affiliates in a worst-case scenario where capital markets seize up completely.
- We have lowered our FY09E SOTP valuation for CapitaLand to S$6.97 (previously S$8.36/share to Dec-08E): We have taken this opportunity to revise our SOTP valuation to take into account a conservative position on the Australand stake, and have reduced our intangible asset valuation (for the real estate funds management and asset origination businesses). We expect the stock to trade in a range S$5.70-7.00/share in the next year, framed by our conservative FY08E underlying asset valuation at the lower end and our FY09E SOTP valuation at the upper end.
- Risks to our valuation: Having now reduced our valuations to (we feel) very conservative levels, there is upside bias in the risks to our valuations. A return of risk appetite for Asian real estate would lift our valuations by lowering the group’s costs of capital.
CHARTERED SEMICON, daiwa downgrade to HOLD with target price $0.65
- We have downgraded our rating for Chartered Semiconductor (Chartered) from 2 (Outperform) to 3 (Hold), due to our concerns about the company’s rapid escalation in costs, its disadvantageous position for price hikes, its slowing high-margin mature-technology business, and profitability over the next four quarters.
- Earnings forecasts and target price cut ?We have revised down our 2008 net-profit forecast from US$51m to a net loss of US$31m, due to rising material, utility, and depreciation costs. We forecast Chartered to record operating losses from 3Q08 to 2Q09. We have also lowered our six-month target price from S$0.88 to S$0.71, as we now apply a target PBR of 0.9x (down from 1.05x) due to the potential forthcoming losses and significant downward revisions to our average ROE forecasts.
- Positives and negatives ?We like Chartered’s progress with ramping up production at the advanced 65nm process, customer engagements at the 45/65nm process and its intention to raise prices. However, we dislike its disappointing 3Q08 margin guidance, comments about a further (five percentage-point) escalation in costs from 4Q08, and deteriorating financial health.
- 2Q08 was in line operationally, but disappointing 3Q08 guidance ?Chartered’s 2Q08 revenue of US$458m and operating loss of US$0.6m were in line with our forecasts, but a US$49.5m tax benefit put the bottom line way ahead of our forecast. Its 3Q08 revenue guidance of an increase of 2-5% QoQ is marginally lower than our forecast of a rise of 5-8% QoQ, but its guidance of a gross-profit margin of about 11% (down from 15.3% for 2Q08) is disappointing, in our view.
- Capex up ?Chartered has raised its 2008 capex budget from US$590m to US$750m to accelerate its 45nm development, and convert part of its 130nm eight-inch capacity from aluminum to copper interconnects.
COSCO, citi maintain BUY with target price $4.15
- 2Q08 Preview ?Cosco reports next Monday evening, 4 August after the market close. We expect a strong set of results and forecast profit of S$112m (+33% qoq, +39% yoy), driven by offshore related (eg. conversion) and higher value added ship repair activities. This should account for ~40% of our full year profit estimates of ~S$500m.
- Consensus forecast achievable ?Cosco share price has been lacklustre over the past 3 months, amid concerns of rising steel prices, and slower-thanexpected contract wins. Earlier, our estimates were below consensus, but have now turned consensus after the recent sharp EPS revisions. Despite the absence of positive newsflow, we believe our forecast is achievable. Results and guidance should provide clarity on margin, bulk carriers’ delivery schedule, coupled with its on-going bid for Sevan’s fleet of new build semi-subs.
- Concerns overdone? ?Newsflow of vessel delays amongst Chinese yards have raised concerns that Cosco could be facing similar bottlenecks (eg. equipment supply). Our industry checks suggest the execution progress is on track; first carrier is scheduled for delivery in Aug 08 while the subsequent 9 carriers are also on schedule for completion in 2H08. Offshore related work is also seeing solid traction, having recently completed several conversion work across its Dalian, Nantong and Zhoushan yards (pls see figure 2 on pg 3).
- Embarking on semi-sub new build program ?Cosco’s maiden hull fabrication for Sevan 650 Driller is already close to finishing and is likely to secure the second and final phase, involving higher complex integration work. We believe demonstrating its ability to entrench deeper in the supply chain beyond hull fabrication is critical and will help capture the semi-sub new build cycle. Cosco is in the final negotiation stages with Sevan to proceed on the 2 recent secured LOI (rigs), possibly on a full turnkey basis. Success in semi-sub enables diversification from the previously ship-building dominated activities, which is more vulnerable to steel price volatility.
- Maintain Buy ?Our target price is S$4.15, based on 14-15x FY09E P/E and suggests upside of 39% from current levels.
EPURE INTERNATIONAL, dbs maintain BUY with target price $1.07
-Story: Epure, and its wholly owned subsidiary Beijing Sound Environment Group Co., Ltd, were ranked by China Water, an authoritative website on China water sector, as the most influential local water group in the PRC. Epure’s lead over the smaller PRC-based competitors was further enhanced with recent orders win, including: 1) the first Design-Build-Operate (DBO) contract for wastewater treatment plants in Shaanxi, China, with financing support from provincial and central governments, and 2) the unusually large RMB103m industrial EPC project from Jilin Iron and Steel Co., Ltd, which requires Epure to solely carry out the project in 7 different modules and technologies, vs. the usual practice in China of engaging up to 7 various suppliers.
-Point: We believe that Epure will be one of the prime beneficiaries of the Chinese government’s growing recognition of the link between sustainable economic growth and pro-active environment protection. Indeed, Epure’s proven success in securing and completing large municipal water and wastewater treatment projects (>100,000 tons per day) and industrial wastewater treatment contracts (in various industries) across provinces in the PRC is clear testimony of the group’s integrated capabilities and deep market penetration.
-Relevance: We estimate that Epure has won about RMB862m new orders in y-t-d 2008, vs. our new orders win assumption of RMB900m for 2008. The group’s net order book is RMB1.2b, and we believe that 95% of our revenue projection for FY08 is now backed by secured contracts. Our net profit estimate is RMB275m in FY08, and fair value is S$1.07, based on 25x FY08 PE. Catalysts ahead include another major contract win and evidence of sustained gross margin in 2Q08. Maintain BUY.
FORTUNE REIT, mac maintain OUTPERFORM with target price HK$6.70
- Fortune REIT (FRT) reported its 1H08 results. Distribution per unit (DPU) was HK$0.1851/unit, up by 4.6% vs 1H07 and slightly above our forecast. Top-line revenue improved only ~1% YoY, to HK$309m, due to tenant repositioning and asset enhancement works impacting revenue. DPU increased YoY as a result of a lower 16.5% tax rate (previously 17.5%) and better cost management. NTA was HK$9.02/unit, portfolio occupancy was at 92.6%, and the gearing ratio was relatively conservative at 23.4%.
- NPI flat YoY, but DPU up 4.6% due to lower tax. Rental reversions were very strong at +25.6% for 1H08 and average passing rentals increased 8% YoY to HK$26.52psf/m.However, net property income was flat YoY at HK$229m, which reflected tenant repositioning at a couple of key malls and the ongoing asset enhancement works affecting rental income. Whilst this is somewhat disappointing in the short term, we believe the longer-term benefits of asset enhancement works will improve both rentals and provide further cost savings. DPU increased 4.6% YoY mainly due to lower tax paid as a result of the new tax rate of 16.5%.
- HK$36m budgeted for FY08 for asset enhancements. Management has clarified its asset enhancement plan since the FY07 results. Management aims to improve the accessibility and public space layout of its malls, reconfigure and re-zone certain areas and to actively manage mall costs by conserving energy costs through better equipment and efficient lighting. Despite not contributing directly to the bottom line in the short term, FRT should benefit in the longer term.
- Gearing conservative, debt costs locked in. FRT maintains a fairly conservative balance sheet. Gearing was relatively low at 23.4% with around 52% of its debt at fixed funding rates. With FRT preferring to enhance its existing investment properties as opposed to acquiring new properties, we believe gearing should be maintained at fairly conservative levels.
-Earnings revision. We have raised our FY08E and FY09E DPU forecasts to HK$0.371/unit and HK$0.387/unit, respectively.
HONG KONG LAND, uob maintain HOLD with target price US$4.78
-Expecting underlying net profit to report a 40% yoy growth. Hongkong Land will announce interim results on Thursday (31 July). We expect underlying net profit to come to US$217m, representing a 40% yoy growth on 1HFY07’s US$155m. The biggest unknown is how much residential development profit would be booked in the period. Having moved deep into the positive reversion cycle, we are looking for rental income to rise 28% yoy, or 15% qoq, to US$268m. Interim dividend is expected to increase 25% to US$0.50/share.
-Unlikely to be a positive catalyst. Regardless of the reported numbers, we expect the results to either have a neutral or negative impact on share price. Even if the results beat forecasts, they would not alleviate concern over the outlook of office rents in Central CBD. On the other hand, disappointing results would weigh on the share price naturally. There is an analyst briefing on Friday when management will talk more about the current market conditions. However, they do not give specific details about rents due to sensitivity of the matter.
-Watch out for the revalued book value. Another interesting figure to watch out for is the latest revalued book value. We expect at least a 10% appreciation from last December’s US$6.12/share, reflecting the general increase in capital value of offices in the first six months of this year. However, this interim book value would be very close to the near-term peak level, if it has not reached the peak level already.
-The tide is turning for Hongkong Land. Although Central rents have remained surprisingly resilient, we expect Hong Kong to eventually see the ripple effect of the financial turmoil overseas. In our opinion, rents in Central are very close to the peak, if they have not peaked already, due to the following reasons: a) the smaller landlords in Central will start to soften on rental demand to lock in tenants, b) changing economic prospects will make tenants hesitant to commit at such a high rental level and will also be an excuse for them to relocate to cheaper districts, and c) there are plenty of new top-quality grade A office buildings coming on stream in the secondary locations in the next year or so.
-Our base-case. However, the saving grace of Central is its 1% vacancy rate and the absence of new supply in the foreseeable future. Barring any shocks imported from overseas, we expect office rents to slide 10% in the next 12 months.
-Reflecting the quality of its assets, Hongkong Land has always been a relatively “expensive?stock, having traded at an average 25% discount to NAV. It is currently trading at a 36% discount to our appraised NAV of US$6.37, suggesting the market has already priced in more than a 10% fall in Central office rents. However, in view of the pressure for rental to come down, Hongkong Land is unlikely to outperform.
HYFLUX, dbs maintain BUY with target price $3.53
-Story: Hyflux specializes in the increasingly popular membrane technologies. Geographically, it is also the most diversified SGX-listed water play with operations spanning Singapore, China and the Middle East and North African (MENA) region.
-Point: Poised for promising growth given 1) excellent industry dynamics, 2) deeper penetration into MENA and 3) a broader menu of solutions such as desalination and oil recycling. Additionally, Hyflux is enjoying fee income as trustee-manager of Hyflux Water Trust (HWT) and recurring dividend income from its remaining 31.5% stake in HWT. More importantly, the company can divest completed projects to HWT to lighten its financial burden and recycle capital to capture better, bigger projects or other opportunities in new markets. S$1.6b of EPC orderbook presents excellent visibility till 2010. Of this, we expect 23% and 31% would be converted into Engineering, Procurement and Construction (EPC) revenue in FY08 and FY09 respectively. Given the robustness of water demand globally, we expect Hyflux’s orderbook to continue to grow at a healthy pace. YTD, Hyflux has secured S$818m worth of contracts including a US$468m desalination win in Algeria. In addition to more orders from China, Hyflux will contest for another US$200m of Algerian orders for end 2008.
-Relevance: Our fair value of S$3.53 (23.7x 09PE) is based on sum-of-the-parts valuation. Although valuation seems high on absolute PE terms, its PEG ratio of 0.5 is relatively attractive considering Hyflux’s 53% EPS CAGR (2007-2009) compared to industry average of 10%. Key risks will be project execution and delays.
HYFLUX WATER TRUST, dbs maintain BUY with target price $0.9
-Story: We recently visited some of Hyflux Water Trust’s (“HWT? water and wastewater assets in China, including one of the 9 plants offered by sponsor Hyflux to HWT for acquisition as part of the ROFOAR pipeline.
-Point: We came back reassured about the Trust’s ability to manage its assets – leveraging on the experience and track record of parent Hyflux for all aspects of day-today operations and administration. Being located out of large industrial parks still in the early stages of development, HWT has a distinct advantage as it allows them to be a part of the industrial growth story being actively promoted by the local governments. Along with this potential of organic expansion, Hyflux has offered HWT a portfolio of 9 assets with a combined capacity of 290,000 cu m/day (representing about 65% of existing capacity) for potential acquisition, at an offer price of S$180m. HWT currently has zero gearing and debt financing should not be a problem, with an US$60m line already in place. Though the offer price looks to be on the higher side at first glance, at 1.6x P/BV (as against valuation of IPO portfolio at 1.3x P/BV), we believe that the acquisition should be yield-accretive from FY11 onwards. HWT would be taking its decision on the offer by 4Q08.
-Relevance: HWT is a defensive earnings play with predictable cash flows, promising a DPU yield of 7-8% for FY08 and FY09. At current valuation of 0.9x P/BV, HWT compares favourably with REITS and other infrastructure/ shipping trusts listed in Singapore and we maintain our BUY recommendation at a DDM-backed Target Price of S$0.90 (Cost of Equity – 11.1%). We believe re-rating is on the cards as and when HWT begins to deliver on it post-IPO acquisition schedule.
LIPPO-MAPLETREE INDONESIA RETAIL TRUST, ocbc maintain BUY with target price $0.7
-Outperforms IPO guidance this time. Lippo-Mapletree Indonesia Retail Trust (LMIR) had a relatively smoother ride over 2Q08 ?it posted S$24.5m in gross revenue, 15% higher than the trust had guided during its November 2007 IPO. This was a welcome change from the previous period, when it had missed its own guidance by 5.11%. The trust will pay out 1.5 S cents per unit for the quarter, 3% above guidance. On a normalized QoQ basis, DPU is almost unchanged as the trust had been able to cushion the last period’s revenue shortfall with some one-time gains.
-Sun Plaza booster, rest on track. Earnings were primarily boosted by Sun Plaza, which was acquired on 31 March. The retail mall in Medan, LMIR’s first (partially) debt-funded buy, increased the trust’s total portfolio NLA by almost 20%. Management disclosed that the portfolio ex-Sun Plaza performed as per LMIR’s guidance ?contributing about 1.46 S cents of the 1.50 S cents DPU. Management also told us that rent reversions have been in line with LMIR’s assumptions at its IPO ?the trust is seeing reversionary growth of about 10% per annum. Occupancy rates are also increasing as expected (see Exhibit 1) except for dark horse Bandung Indah where occupancy shot up to 97.4% as of 30 June from 89.3% on 31 March.
-Asset enhancement plans. Macro-level uncertainties have led LMIR to re-assess its acquisition plans and we continue to expect a more conservative pace than what was indicated at its IPO. In any case, our valuation has always been based on the existing portfolio alone. In the meantime, the trust plans to roll out asset enhancement initiatives worth about S$3m at the trust’s Istana Plaza and Mal Lippo Cikarang malls that will increase the malls?NLA by 2.4% and 17.3%, respectively.
-Revise up DPU estimate, maintain BUY. We have tweaked our occupancy and rent assumptions, increasing our DPU estimates by about 4%1. Meanwhile, LMIR has appreciated over 9% since our last report in June. Our view on the trust is unchanged ?the oft-discussed macroeconomic risks are balanced by the opportunities inherent in Indonesia’s retail sector. And while market conditions have currently reined in the trust’s acquisition plans, its low 10.2% gearing and strong acquisition pipeline gives it headroom for growth as credit conditions improve. LMIR’s 10.1% FY08F distribution yield (annualized) is an attractive entry point for investors, in our view ?maintain BUY and S$0.70 fair value estimate.
LIPPO-MAPLETREE, ubs maintain BUY with target price $1
- Event. LMIRT has reported a solid Q2?8 result, with DPU of 1.5?(UBSe 1.57? running 3% ahead of prospectus since listing in Nov?7. The portfolio is now 96.5% occupied, having improved from 92.8% at Dec?7.
- Defensive income + 5yrs income FX hedging. With the price still 26% below the IPO price, we believe this result should reassure investors as to the resilience of LMIRT’s food anchored, suburban malls. We remain confident that this is still a materially under-optimised portfolio, with remixing of the malls likely to drive excess growth over the next few years.
- Action ?Reiterate Buy rating. Despite the fuel price hikes, a recent site visit highlighted management’s expectations of nominal rental growth exceeding the 8%pa prospectus assumption, offsetting the currency weakness. The delivery of organic growth >10%pa is likely to be the main catalyst over the next 12mths in driving a re-rating of LMIRT, with the conservative gearing of only 10.2% enabling LMIRT to provide a strong inflation hedge given the medium term linkage of rental to nominal sales growth.
- Valuation. Our 12mth DCF derived PT is unchanged at $1.00. At current prices LMIRT is offering an annualised yield of 10.3% on the Q2?8 DPU.
PARKWAY LIFE REIT, uob maintain BUY with target price $1.54($1.52)
-Enhancing contributions from Singapore hospitals. Parkway Life REIT has embarked on asset enhancement initiatives to improve the returns from low revenue yielding space. Space previously occupied by management and support functions has been decanted to create centres of excellence. Renovation works are ongoing to set up Parkway Cancer Centre at Mount Elizabeth Hospital, Parkway Heart Centre and Obstetrics & Gynaecology wards at Gleneagles Hospital, and Women Centre at East Shore Hospital. The enhancement allows the hospitals to hire more specialist consultants, thus increasing patient admission and variable rent. Parkway Life REIT does not have to bear the costs incurred for refurbishment as the lessee, Parkway Holdings, is responsible for capex till Dec 09.
-Protection against slowdown. CPI was 2.1% in 2007. The minimum rent payable from Singapore hospitals this year would be 3.1% (CPI + 1%) higher than levels in 2007. Downside protection kicks in on 23 Aug 08, a year after listing. Parkway Life REIT is protected against fluctuation in admission of international patients due to slower growth in regional countries. Revenue contribution from Mount Elizabeth, Gleneagles and East Shore hospitals increased by only a marginal 0.8% qoq to S$12m in 2QFY08. This comprises a base rent of S$7.5m and a variable rent of S$4.5m.
-Diversification from acquisitions in Japan. Parkway Life REIT has acquired a pharmaceutical production and distribution facility in Matsudo City, Chiba prefecture and two nursing homes located in Yokohama City and Ibaraki City for S$69.4m. In particular, rental income from the two nursing homes is index-linked to inflation with rent reviews every five years. These acquisitions allow Parkway Life REIT to gain exposure to Japan where the population is ageing rapidly. Revenue contribution from the Japanese properties was S$0.5m in 2QFY08 (1.5-month contribution from Matsuda facility, 1-month contribution from nursing homes). The Japanese properties will provide full-quarter contribution in 3QFY08.
-Low gearing provides significant room for acquisitions. Parkway Life REIT will partner sponsor Parkway Holdings to expand in the region with Parkway Life REIT acquiring third-party hospital buildings and Parkway Holdings taking over as operator. The company’s gearing is low at only 10%. There is headroom of S$570m for growth via acquisitions if it utilises debt capacity for optimal debt level of 45%. Parkway Life REIT targets to double the size of its portfolio to S$1.6b by end-FY09. It also plans to diversify into medical offices, research & development (R&D) facilities and warehouse and manufacturing facilities for the biomedical and pharmaceutical industries.
-Reiterate BUY. We like Parkway Life REIT for its healthcare focus. It provides strong defensive qualities as rental income from hospitals in Singapore and nursing homes in Japan is linked to inflation. Our target price is S$1.54 based on the discounted dividend model (required rate of return: 7.6%; terminal growth: 2.8%). The stock is trading at a 12.7% discount to NAV/share of S$1.34. Parkway Life REIT declared DPU of 1.66 cents, which will be paid on 27 Aug 08.
PINE AGRITECH, cimb maintain UNDERPERFORM with target price $0.12
- Soybean prices still high despite recent correction. Despite the softening of corn and soybean prices in past weeks, prices remain higher than the levels at the beginning of the year and at end-1Q08.
- More downside risks for SOS. As SOS consignment sales through supermarkets are taking longer to gain traction, and visibility for SOS sales to the previous master distributor, Shenji, remains poor, we believe there is further downside risk for SOS. With soybean costs trekking up and a potentially steeper-than-expected decline in SOS sales, we believe Pine will face more margin pressure in the coming quarters.
- Keeping FY08-10 EPS estimates for now; downside risks remain. We are keeping our EPS estimates pending Pine’s 2Q08 results announcement on 11 Aug. We will be revisiting our estimates after the results, with a view to a downgrade.
- Maintain Underperform and target price of S$0.12. We maintain our target price of S$0.12, based on 6x CY09 P/E. Visibility for SOS sales remains poor and earnings risks are high. There is a possibility that Pine’s 2Q08 net profit could come in below our estimate of Rmb65m. Maintain Underperform.
SIA, dbs maintain BUY
-SIA’s 1Q09 results were below our expectations even as revenue, which climbed 14% yoy to S$4.1bn, came in ahead of our estimates. The Group’s bottom line in 1Q09 declined by 15% yoy to S$359m. This was slightly ahead of consensus expectations. Whilst the firm top line growth was led by strong passenger carriage growth (+6.3% in RPK) and higher yields (+7.8%), SIA’s core passenger business was hit by significantly higher fuel costs, which rose by over 70% yoy. Hedging gains helped claw back some S$349m for SIA. At the operating profit level, the passenger business saw its contribution fall by 31% yoy to S$265m. There were also lower than expected contributions from SATS (-16% to S$38m) and SIA Engineering (-44% to S$16m).
-We continue to like the Group’s prospects despite the impact from higher oil prices as we believe SIA will continue to be resilient and grow in the long term. Apart from higher fuel costs, SIA continues to post impressive passenger carriage growth as well as tight cost management (non-fuel costs declined by 2.2% in 1Q09). The Group’s balance sheet remains strong, with net cash of c. S$5bn. We are in the midst of reviewing our estimates and target price pending an analyst briefing on Wednesday and are also looking to revise our estimates for SATS and SIE.
-Meanwhile, maintain BUY, target price is under review.
SIHUAN PHARMACAUTICAL, daiwa maintain BUY with target price $1.58
-We maintain our 1 (Buy) rating for Sihuan Pharmaceutical Holdings (Sihuan) and sixmonth target price of S$1.58, based on a peer-comparison PER of around 13x (as at 23 June) on our FY08 forecasts. We expect a continuing strong earnings performance to result in a positive re-rating for the stock.
- Sihuan is scheduled to announce its 2Q08 results on 31 August. We forecast the company to record a 79.2% YoY jump in pre-tax profit to Rmb71.4m, backed by continued strong demand for Kelinao, Anjieli and Chuanqing. However, our forecast growth rate for its net profit is lower at 25.7%, due to a one-off tax adjustment for 2Q07.
- In our view, the key item to watch for at the results announcement would be the sales growth for the cinepazide maleate injection (ie, Kelinao and Anjieli). The administrative protection for this key product expired in April, and some investors were concerned about the emergence of new competition. We are of the view that competition, if any, would only surface after three years, taking into account the time required for clinical trials and competitive bidding. At the moment, management is not aware of any local pharmaceutical company having applied to conduct clinical trials for this product.
- Meanwhile, we expect sales growth for Kelinao and Anjieli to remain strong, with the expansion of its marketing reaching more hospitals and hospital departments, as well as the improved affordability in rural areas. Zhejiang province overtook Beijing recently to become the largest market for Kelinao, due to strong demand from the rural areas. We expect similar trends to emerge in other wealthy coastal provinces, such as Guangdong province.
SINGAPORE POST, csfb maintain NEUTRAL with target price $1.19($1.22)
- On 29 July, after market close, SingPost reported its 1Q FY09, inline with our expectations at 25% of FY09E sales and net profit.
- 1Q09 sales +5% YoY driven by: +2% mail, +12% logistics and +18% retail. Growth in mail was driven by higher mail volume while logistics growth was from Speedpost and warehousing. Retail growth was driven by catalog sales, financial and agency.
- Owing to good cost control and better rental yield, op. profit +8% YoY and OPM was 40.5%, improvement from 38.8% in 4Q08 and 39.4% a year ago. Ex. one-offs, net profit +12% YoY to S$39 mn. A DPS of 1.25cts was declared, translating to FY yield of 7%.
- While it is still early, management indicated that it is reviewing opportunities to unlock the value of SingPost Centre. Ahead, inflationary cost pressure and margin pressure from the liberalisation of basic mail services are expected, although management says that it is positioned to address the challenges.
- We made minor changes to forecasts on revenue mix and margins assumptions. Our new FY09 TP is S$1.19 (from S$1.22).
SINGAPORE POST, dbs upgrade to BUY with target price $1.12
-Story: Underlying net profit of S$38.9m (11.6% y-o-y, 15.6% q-o-q) was above our S$35.0m forecast. The surprise came from lower than expected increase in operating expenses, up only 3.4% y-o-y compared to our estimate of 10%. Rental income at S$7.2m (up 35% y-o-y, 11% q-o-q) also improved due to higher rental rates and an increase in lettable space.
-Point: Operating expenses were lower than expected mainly due to (1) lower traffic expenses from route optimization for international mail business and (2) lower selling expenses as marketing activities have been planned for later part of the year. Nevertheless, management is not ruling out cost pressures in the near term. Thus, despite the better than expected 1QFY09 numbers, we are not revising up our FY09 earnings estimates.
-Relevance: With this set of results, management has shown its ability to control costs in the current inflationary environment. The stock plunged over 13% in the last three months on concerns on cost pressures, and now presents an attractive entry opportunity in our opinion. We upgrade Singpost to BUY with unchanged target price of S$1.12 pegged at 15x FY09 PER (based on the lower end of its historical range of 15-18x).
-Update on potential building sale. HQ building sale is currently in the exploratory stage. We believe that management is aware of the stream of rental income from the building and any decision to unlock the value would be done with that in mind. In the last set of results, management had highlighted esubstitution as an area of interest for growth. We think that part of the sale proceeds from potential sale of HQ building could be used for acquisition in this area, while the rest paid out as dividends.
SINGAPORE POST, jpm maintain NEUTRAL with target price $1.10
- SingPost’s 1Q FY09 results came in line with expectations: Recurring net profit accounted for 25% of our full year earnings estimate. The 2H08 issue of costs outpacing revenue growth seems to have been brought under control. Operating costs increased by 4% y-o-y mirroring operating revenue growth of 4.6% y-o-y to S$121MM. Recurring net profit for the group overall grew by 11.6% y-o-y to S$38.9MM on the back of the contribution from the non-mail divisions i.e. logistics and retail. Logistics and retail operating profit grew by 33% and 42% y-o-y respectively but only contributed S$2.8MM each whereas mail operating profit was up only 1% y-o-y to S$37.5MM.
- Operating costs seems to have been brought under control for now due to better outsourcing of volume-related costs and a reduction in SG&A. Unionized labor is still the main source of cost pressure, up 10.8% y-o-y but within expectations. Labor now accounts for 41% of total operating expenses but is still far lower than the 60-80% range of global peers. Management warns that cost pressures will continue going forward and it will do its best to counter this with increased productivity.
- As expected, SingPost declared its usual quarterly interim DPS of 1.25 cents, half of the operating cash flow for the period. We expect the company’s final year gross dividend payout to track close to its free cash flow, growing 8% a year.
- A key risk to our DCF-based Dec-08 S$1.10 PT is industry deregulation and the UN classification of Singapore as a developed country, which would imply higher postage fees for international mail. It would be very hard for any new entrant to mount credible competition, but any impact would have repercussions on the very stagnant mail business. Key catalyst for the stock is the monetization of SPC and a special dividend.
SINGAPORE POST, ms maintain EQUAL-WEIGHT with target price $1.23
-Conclusion: We retain our Equal-weight rating and price target of S$1.23. We like SingPost’s stable and defensive dividend yield of 6% per annum, but slowing core mail segment growth and operating cost pressures, although partially mitigated by effective management strategies, are a concern.
-What’s new: SingPost reported 1QF08 net profit of S$39.5 million, a 3% improvement from 1QF07, above our expectations. Excluding the one-off gains from sale of the Boon Lay post office and gains from sale of the US business of the Spring JV in 1QF07, recurring net income improvement was higher at 13%.
-Implications: With stable dividend yields of 6% per annum, we view SingPost as attractive to investors seeking refuge from market volatility. We believe that the potential unlocking of hidden value in SingPost Centre, possibly via a sale of the building, is in the preliminary stages and unlikely to occur within the next six months. Conversely, should the building be sold, we believe that this could result in a potential special dividend payment of S$0.19-0.34/share, implying a special dividend yield of 19-33% at the current share price. This would be a strong upside catalyst for SingPost stock, in our view.
SINGAPORE POST, uob downgrade to HOLD with target price $1.07($1.33)
-Singapore Post (SingPost) reported revenue growth of 4.6% yoy to S$120.9m in 1QFY09. Net profit of S$39.5m was up 2.9% yoy. We downgrade SingPost to HOLD on slower growth ahead.
-Mail segment revenue saw modest 2.4% yoy growth, mainly driven by 4% yoy growth in domestic mail. International mail, accounting for 32% of mail segment revenue, increased only marginally by 0.7% yoy. Both the logistics and retail segments registered double-digit growth in the quarter, partly due to strong growth in e-shopping relating to VPost. Revenue grew 4.6% yoy to S$120.9m in 1QFY09, with the mail segment contributing 73% of total revenue.
-EBIT margin widened to 40.6% in 1QFY09 (39.3% in 1QFY08), partly due to less selling expenses and slower growth of volume-related expenses. Selling expenses (down 55.3% yoy) only accounted for 1.1% of total revenue in 1QFY09, vs 2.6% in the year-ago period, as SingPost has planned more marketing activities in the later part of FY09. Volume-related expenses only grew 2.9% yoy due to flat international mail growth and consequently lower traffic expenses. SingPost is under cost pressure in the current inflationary environment. Labour costs, the biggest cost component (40% of total expenses), jumped 10.8% yoy to S$32.8m mainly due to wage adjustments, higher pay for temporary workers and a 1.5ppt increment in CPF contribution.
-Net profit up by 2.9% to S$39.5m. Excluding one-off items, net profit would be S$38.9m in 1QFY09, 11.6% or $4m higher yoy. However, after adjusting for selling expenses postponed to the later part of FY09 and forex gain in 1QFY09, the impact from one-off items could be greatly offset.
-Competition uncertainty overhang. Under the competition framework set by Infocommunication Development Authority of Singapore (IDA), SingPost will continue to hold the master keys but it must provide other postal service operators with access to its distribution network. Consultation on SingPost’s Reference Access Offer (RAO) papers was closed in Jun 08. IDA did not set a deadline to finalise the RAO papers. How IDA regulates RAO rates and executes the new framework will be closely watched. As of now, four new entrants have been granted postal services licences.
SPC, dbs maintain BUY with target price $8.22
-2Q08 results were within our expectation, inching up 0.5% y-o-y to a record S$180.2m. Stripping out S$14.1m divestment gain from the previous year, core net profit grew 8% y-o-y. Sequentially, net profit jumped 83.1%. The record profit was driven by stronger refining margin of US$13/bbl (2Q07: US$9/bbl, 1Q08: US$7/bbl) and surging crude oil prices that boosted E&P profit.
-However, the strong refining margin was offset by: (i) lower refinery utilization rate of c.90%, due to scheduled maintenance, (ii) higher processing and hedging costs, (iii) weaker US$ (-10% y-o-y against SGD), (iv) higher finance cost (+60% y-o-y), and (v) higher effective tax rate of 20% due to a larger profit contribution from E&P. E&P accounted for 3% of sales and 27% of pre-tax profit in 2Q08, compared to 0.7% and 4% in 2Q07, respectively.
-1H08 net profit accounts for 51% of our current full year forecast. Despite the recent pullback of crude oil price and softer refining margins, our assumptions are still intact. We have assumed: (i) SPC’s refining margin would average US$6.3/bbl for 2008 vs US$10/bbl in 1H08, and (ii) Brent crude price target of US$115/bbl in 2008 vs US$113 YTD. However, we may fine tune our assumptions following a conference call with SPC today. Although we expect refining margin to soften in 2H08, it should remain healthy at US$5-6/bbl.
-SPC announced an interim dividend of S$0.20 per share( ex-div on 12 Aug 2008). At current price, SPC’s valuation remains inexpensive, while its attractive dividend yield of close to 10% should limit downside. Maintain Buy, target price unchanged at. S$8.22.
STARHUB, citi maintain BUY with target price $3.20($3.30)
- Weakness on likely uninspiring 2Q results an enhanced buying opportunity ?We think lower mobile margins beckon with 2Q results due 6 August, but see margin recovery prospects into 2H as MNP devolves into peaceful existence in Singapore. Capital reduction delivery boosting an already attractive 6.5% yield is a high probability event into 2H as well.
- Lower QoQ margins in 2Q? Our checks indicate high retention costs into MNP (started 13 June) driving weak 2Q margins as well (following a weak 1Q). We see 2Q EBITDA at S$165m (+0.9%yoy) and profit at S$76.9m (-5%yoy). We see 32% EBITDA margins (off service revenues) in 2Q (vs. 33.1% in 1Q).
- Full-year guidance at modest risk? Our modestly revised down estimates now leave us at 32% margins for the year (vs. StarHub’s 33% guidance). The more important issue, in our view, would be extent of margin recovery prospects into 2H08 and beyond, which then sets up well for earnings growth in 2009E off a weaker 2008. M1’s recent and constructive outlook bodes well in this regard.
- No NBN = surplus cash return? StarHub is part of “Infinity?Consortium with City Telecom (HK) and M1. The other bidder consortium is Axis NetMedia Corp-led “OpenNet?(with SingTel, SPH & SP Telecom), which we think is more likely to win the bid. This frees up StarHub to return surplus cash to equity. Target gearing of 1.5-1.8x (08E) net debt/EBITDA leaves S$135m-327m to ROE ?that’s 3-7% yield now and adds on to recurring 6.5-7% dividend yield.
- Reducing TP slightly to S$3.20 ?This follows our modest earnings cuts.
TEE INTERNATIONAL, ocbc dropping coverage with target price $0.26
-FY08 results close to expectation. TEE’s FY08 net profit of S$4.3m came in close to our forecasted net profit of S$4.1m despite revenue falling by approximately 10% to S$52.7m (FY07: S$58.9m). Investment property fair value adjustments contributed to a significant portion of the net profit. Stripping out the fair value adjustment of S$1.7m, FY08 net profit would be far lower than our expectation at about S$2.6m.
-Thai joint venture. TEE recently announced that it has entered into a joint venture with Thai investors to set up a company called Chewathai Ltd to develop real estate in Thailand. Trans Equatorial Engineering Pte Ltd, which is a wholly owned subsidiary of TEE, owns 49% of Chewathai. We view this move as an attempt to counter the effects of probable revenue loss from its property portfolio due to the slowing property market in Singapore.
-Slowing property market. The slowdown in the property market is evidenced from the recent drop in transacted prices of private residential units as compared to a year ago. This is likely to take a toll on TEE’s property development portfolio going forward. TEE launched its Rambai Road development in April and managed to sell about 75% of its units. The remaining developments are expected to be launched in 2H08 and 1H09. If market conditions continue to weaken, especially in the local property market, this could result in the group having to sell off the remaining developments in its portfolio at lower profit margins than the earlier launches.
-Rising costs. The current inflationary environment also poses a problem for TEE’s property redevelopment and electrical and engineering projects. With rising or high cost of raw materials, the variable cost factor in TEE’s contracts is likely to face higher cost risks. Against the backdrop of a slowing property market and rising costs, we anticipate margin erosion going forward.
-Challenging environment ahead; dropping coverage. We anticipate a choppy environment for the construction and development sectors going forward, in light of rising inflation and a private residential property market slowdown. This means that TEE is likely to face an uphill battle to maintain growing margins. In addition, trading volume for this stock is low at an average of 139,000 per day in the past one year. With the lack of trading liquidity and the challenging conditions ahead, we do not see any near to medium term price drivers and as such, we are dropping coverage on TEE.
YANGZIJIANG, ubs maintain BUY with target price $1.30($2.65)
- Cut EPS estimate by 4-7% for 2008-10E. We cut our 2008-10E EPS estimates from Rmb0.46/0.72/0.78 to Rmb0.44/0.67/0.74, as we assume higher input costs (steel price rising 23% YoY in 2008E compared with 15% YoY previously). Despite our revisions, YZJ’s earnings growth is one of the highest among its peers (68% CAGR in 2007-09E) driven by timely new capacity addition and improvement in its product mix.
- Slowdown in new orders in H108. YZJ secured US$809m in new contracts for 18 vessels of 282k CGT in H108, a rapid slowdown compared with a year ago. This is not surprising given China’s overall new contracts declined 46% YoY to 29.0m CGT, against a global slowdown in new contracts (down 31% YoY to 86.1m CGT in H108). However, this will not impact YZJ’s growth before 2010.
- YZJ’s shares underperforming peers. YZJ’s share price fell 25% and 39% in the last three and six months, respectively, underperforming both its domestic and regional peers. We believe the correction is overdone, given that its business operations are well on track.
- Valuation: cut price target to S$1.30, maintain Buy rating. We change our valuation methodology from DCF to P/BV, because: 1) cyclicality of the shipbuilding business could be severe and difficult to capture in models; and 2) we seek consistency with our approach to Korea shipbuilders. Our new price target is S$1.30 (S$2.65 earlier), based on peer average P/B of 2.6x 2009E, implying 14.3x/9.3x 2008E/2009E PE.
[ SECTOR ]
BANK by jpm
- 2Q08 results should lead to confidence being restored in the sector: The concerns have included substantial further marks on CDOs, asset quality turning dramatically, and market share losses for loans, and margins suffering from low Sibor. Upcoming results should address these to an extent, leading to further outperformance (YTD Singapore banks have outperformed MSCI Singapore by 12.3% and MSCI Asia ex Financials by 21.4%).
- Corporate loans, higher credit spreads, and a steep yield curve should drive NII in 2Q08: For non-NII, we expect no major surprises barring a tail event. Given renewed concerns about global financials, a no surprise outcome would be perceived positively. Operating costs should rise from the low base of 1Q08 when all the banks tightened their efficiency and should not be unexpected. A rise in credit costs, though, should lead to asset quality assumptions being revised on the street. We do not expect a cyclical deterioration in credit quality but a combination of slowing economy, higher inflation, and loan growth faster than nominal GDP should lead to normalization in credit costs.
- DBS: We expect S$627MM in net profit (see table on page 2), and the best loan growth for the sector at 20.3% y/y.
- UOB: We expect S$537MM in net profit (see table on page 3), and revenue strength offset by higher credit and operating costs.
- OCBC: We expect S$450MM in net profit (see table on page 4), and credit costs to outweigh any gains on non-NII.
- JPMorgan remains overweight on Singapore banks within a regional financials context and overweight on banks within Singapore equities. Our top pick in the sector is DBS.
