UOBKayhian on 24 May 2012
Valuation
· We maintain our BUY recommendation on China Aviation Oil (CAO), but with a lower target price of S$1.32. This is due to a lower forecasted dividend payout as the management wishes to retain more cash for earnings-accretive acquisitions going forward. We derive our target price at the average fair value suggested from our dividend discounted cashflow model and the P/E valuation model pegged to its peers group P/E of 8.5x FY12E. The stock is still trading at a discount to the 3-year average PE ratio of 13.6x.
Investment Highlights
· CAO had recently completed the acquisition of China Aviation Oil (Hong Kong) Company Limited (CAOHK) and North American Fuel Corporation (NAFCO) for US$15.7m. CAOHK supplies jet fuel to airline companies at various airports in China, Hong Kong, Taiwan and London. NAFCO is an agent and wholesaler of jet fuel in the United States of America. CAO updates that the NPAT of these two companies amount to approximately US$2m p.a.
· To widen its jet fuel supply network, CAO now provides jet fuel refueling services to China Southern Airlines (CSA) at airports in Frankfurt, Amsterdam, Dubai, Bangkok and Auckland and Air China Airlines at Anchorage and Los Angeles. Going forward, CAO looks to secure more contacts to supply jet fuel to more Chinese airlines refueling at more airports out of China.
· CAO is currently working with MF Global Singapore to retrieve the US$4.3m it had with the bankrupt broker. From the media releases of MF Global, the provisional liquidators have already effected payment to more than 90% of entitled customers since April and thus we believe CAO will be able to write back most of the US$4.3m provision as soon as next quarter.
1Q12 Financial Results
· CAO reported a 4.8% yoy decline in net profit to US$20.4m due to lower contribution from share of results of associates despite stronger revenue and gross profit. CAO reported a 46.4% yoy increase in revenue to US$2.9b, attributable to a larger trading volume of jet fuel and higher average price recorded in 1Q12. The trading volume of jet fuel supply grew 11.1% yoy to 2.31m tonnes for 1Q 2012 and jet fuel prices averaged US$129.6/bbl compared with an average of US$114.2/bbl in 1Q11.
· Gross profit rose 15.4% yoy to US$13.6m compared with US$11.8m for 1Q11 due to higher gains from oil trading activities and the consolidation of contribution from the newly-acquired CAOHK. However, the share of profits from associates declined 10.5% yoy to US$11.2m for 1Q12 as Shanghai Pudong International Airport Aviation Fuel Supply Company Ltd (SPIA) recorded lower profit from smaller inventory appreciation.
Thursday 24 May 2012
Auric Pacific
Kim Eng on 24 May 2012
Background: Auric Pacific has five business divisions. Marketing & distribution (of packaged consumer F&B products including fine wines, beers and meat) accounts for 60% of revenue. Auric also manufactures baked goods under in-house brands Sunshine (bread) and Buttercup (margarine), which contribute 10% of sales, while 35% of sales come from food retail and food court, eg wholly-owned subsidiary Delifrance and food court operations via 61%-owned Food Junction (acquired in 2007). The rest is mainly investment income from quoted securities (eg DBS RCPS).
Why are we highlighting this stock? The company recently appointed Miss Saw Phaik Hwa as the CEO, effective from 1 May 2012. As the ex-CEO of SMRT, she presided over the numerous mishaps that have befallen the public transit company, a series of highlypublic breakdowns that caused much inconvenience to commuters and eventually resulted in her departure.
What did Auric see in Miss Saw? Despite the unfortunate circumstances surrounding her departure, which were rather lamentable, it is undeniable that she has deep experience in running retail and marketing businesses. Before she joined SMRT in 2002, she had held various senior positions in dutyfree retail chain operator DFS for 19 years. Also, while she was at SMRT, she was credited for increasing SMRT’s rental and advertising income from almost zero to nearly half of group EBIT by end-2011.
Good fit for Auric, on paper. Auric’s main business is in the distribution of fast-moving consumable goods, such as fine wines. Through its key subsidiaries Sunshine Bakery, Delifrance and Food Junction, it is also involved in the manufacturing of baked food products and the operation of food retail outlets. Based on her experience in DFS and SMRT, Miss Saw is a good fit for Auric, at least on paper.
What she could do for Auric. Auric’s topline has been stagnant in the last three years except for manufacturing and food court operations. It would appear that the wholesale & distribution and food retail businesses need a “wake-me-up”. While profits have grown in 2010 and 2011, most of the growth has come from investment and other income. In addition, we think overheads are on the high side, especially selling & marketing costs (17% of sales).
Jury is still out. Valuations are not demanding for a food company at 9x historical PER and 0.6x NTA (Dairy Farm, for instance, trades at 29x PER). It is also supported by a 4.8% dividend yield and is net cash (almost 50% of market cap). But it remains to be seen if Miss Saw can turn things around. For now, investors have voted with their feet. Since Auric announced her appointment on 9 April, the stock has dropped 14% versus the index’s decline of 6%.
Background: Auric Pacific has five business divisions. Marketing & distribution (of packaged consumer F&B products including fine wines, beers and meat) accounts for 60% of revenue. Auric also manufactures baked goods under in-house brands Sunshine (bread) and Buttercup (margarine), which contribute 10% of sales, while 35% of sales come from food retail and food court, eg wholly-owned subsidiary Delifrance and food court operations via 61%-owned Food Junction (acquired in 2007). The rest is mainly investment income from quoted securities (eg DBS RCPS).
Why are we highlighting this stock? The company recently appointed Miss Saw Phaik Hwa as the CEO, effective from 1 May 2012. As the ex-CEO of SMRT, she presided over the numerous mishaps that have befallen the public transit company, a series of highlypublic breakdowns that caused much inconvenience to commuters and eventually resulted in her departure.
What did Auric see in Miss Saw? Despite the unfortunate circumstances surrounding her departure, which were rather lamentable, it is undeniable that she has deep experience in running retail and marketing businesses. Before she joined SMRT in 2002, she had held various senior positions in dutyfree retail chain operator DFS for 19 years. Also, while she was at SMRT, she was credited for increasing SMRT’s rental and advertising income from almost zero to nearly half of group EBIT by end-2011.
Good fit for Auric, on paper. Auric’s main business is in the distribution of fast-moving consumable goods, such as fine wines. Through its key subsidiaries Sunshine Bakery, Delifrance and Food Junction, it is also involved in the manufacturing of baked food products and the operation of food retail outlets. Based on her experience in DFS and SMRT, Miss Saw is a good fit for Auric, at least on paper.
What she could do for Auric. Auric’s topline has been stagnant in the last three years except for manufacturing and food court operations. It would appear that the wholesale & distribution and food retail businesses need a “wake-me-up”. While profits have grown in 2010 and 2011, most of the growth has come from investment and other income. In addition, we think overheads are on the high side, especially selling & marketing costs (17% of sales).
Jury is still out. Valuations are not demanding for a food company at 9x historical PER and 0.6x NTA (Dairy Farm, for instance, trades at 29x PER). It is also supported by a 4.8% dividend yield and is net cash (almost 50% of market cap). But it remains to be seen if Miss Saw can turn things around. For now, investors have voted with their feet. Since Auric announced her appointment on 9 April, the stock has dropped 14% versus the index’s decline of 6%.
Singapore Offshore & Marine
DMG & Partners Research
on 23 May 2012
Stocks tumbled but offshore spending outlook looks good. Rising risk of a European crisis and lower oil prices have lead to steep decline in share prices of Singapore Offshore & Marine (O&M) and Chinese shipbuilding stocks. While market conditions are somewhat cloudier compared to three months ago, we remain positive on the O&M sector as the drivers for the sector are still positive: (1) tight availability of rigs in the market due to rising demand and fleet renewal; (2) financing has improved for established clients, although not for speculators. We expect Singapore offshore rig builders to add more new orders and enhance their revenue visibility, which now extends up to 2015 and beyond. Our preferred big-cap pick is now Sembcorp Industries (SCI) given twin catalysts from offshore marine and steady earnings growth from Utilities. We also like Ezion Holdings, a midcap stock.
O&M margins moderating but not unexpected. Keppel’s record 1Q12 earnings of S$751m (+141% YoY), beat estimates on property earnings while SMM posted a below-consensus 1Q12 net profit of S$113m (-25% YoY) on lower margins. Keppel O&M’s operating margins of 15.1% was above SMM’s margins of 12.8% and at the top end of management’s near-term guidance of 12-15%.
SMM is targeting around 15% operating margins in FY12.
Negative on Chinese shipbuilding but upgrade YZJ to Neutral on valuation. Since we downgrade YZJ to Sell on 21 Feb 2012, the stock has declined 27%. Following the sharp fall, we now raise YZJ to Neutral with an unchanged TP of S$1.04. Downside will be supported by its strong balance sheet and 5.8% yield. We remain negative on the Chinese commercial shipbuilding sector
as we expect margin compression due to aggressive bid for new jobs to fill shipyard capacity.
Key risks to our view: (1) oil prices falling and sustaining below investment hurdle rate; and (2) pullback of financing for rig owners and vessel owners.
Stocks tumbled but offshore spending outlook looks good. Rising risk of a European crisis and lower oil prices have lead to steep decline in share prices of Singapore Offshore & Marine (O&M) and Chinese shipbuilding stocks. While market conditions are somewhat cloudier compared to three months ago, we remain positive on the O&M sector as the drivers for the sector are still positive: (1) tight availability of rigs in the market due to rising demand and fleet renewal; (2) financing has improved for established clients, although not for speculators. We expect Singapore offshore rig builders to add more new orders and enhance their revenue visibility, which now extends up to 2015 and beyond. Our preferred big-cap pick is now Sembcorp Industries (SCI) given twin catalysts from offshore marine and steady earnings growth from Utilities. We also like Ezion Holdings, a midcap stock.
O&M margins moderating but not unexpected. Keppel’s record 1Q12 earnings of S$751m (+141% YoY), beat estimates on property earnings while SMM posted a below-consensus 1Q12 net profit of S$113m (-25% YoY) on lower margins. Keppel O&M’s operating margins of 15.1% was above SMM’s margins of 12.8% and at the top end of management’s near-term guidance of 12-15%.
SMM is targeting around 15% operating margins in FY12.
Negative on Chinese shipbuilding but upgrade YZJ to Neutral on valuation. Since we downgrade YZJ to Sell on 21 Feb 2012, the stock has declined 27%. Following the sharp fall, we now raise YZJ to Neutral with an unchanged TP of S$1.04. Downside will be supported by its strong balance sheet and 5.8% yield. We remain negative on the Chinese commercial shipbuilding sector
as we expect margin compression due to aggressive bid for new jobs to fill shipyard capacity.
Key risks to our view: (1) oil prices falling and sustaining below investment hurdle rate; and (2) pullback of financing for rig owners and vessel owners.
Sarin Technologies
Kim Eng on 24 May 2012
1-for-4 bonus issue. Sarin announced a proposed 1-for-4 bonus share issue on 6 May 2012. The proposed issue received in-principle approval from the Singapore Exchange on 14 May 2012. Further to this, Sarin also announced the books closure date for the bonus share issue to be on 24 May 2012. The existing share capital of the company comprised of 271,656,904 shares (including 1,689,000 treasury shares). Up to 67,914,226 new bonus shares will be issued which will increase the total number of shares to 339,571,130. Consequently, our split-adjusted target price for Sarin is now SGD1.82.
Lining up new growth markets. Previously, Sarin’s products were primarily focused on providing solutions for the rough diamond market. Following the successful GalaxyTM product, which is still at an early growth stage, Sarin’s targeted move into the polished diamond segment should open up a new growth market for the company.
Launching D-LightTM in Las-Vegas. In line with its plan to penetrate the polished diamond market, Sarin will be launching its light performance technology product at the JCK show in Las Vegas from 31 May to 4 June 2012. JCK Las Vegas is where the jewellery industry comes together to buy and source for new products and will be an excellent opportunity for Sarin to showcase its D-lightTM product. The DlightTM assesses, grades and visualizes a diamond’s light performance characteristics, namely brilliance, fire, sparkle and light symmetry. We have estimated the future annual revenue potential for the D-lightTM at USD40m and net profit potential at USD29m. The other two products and service which it plans to launch in 2H12 for the polished diamond market are the D-Loupe and the Diamond Assay Service.
Adjusting our target price to SGD1.82, Maintain BUY. We adjust our target price accordingly for the bonus shares. Based on the enlarged number of shares, our target price would now be SGD1.82, still pegged to 16x FY12F PER. We also made adjustments to the per share figures. No change in our forecasts and recommendations. Maintain BUY.
1-for-4 bonus issue. Sarin announced a proposed 1-for-4 bonus share issue on 6 May 2012. The proposed issue received in-principle approval from the Singapore Exchange on 14 May 2012. Further to this, Sarin also announced the books closure date for the bonus share issue to be on 24 May 2012. The existing share capital of the company comprised of 271,656,904 shares (including 1,689,000 treasury shares). Up to 67,914,226 new bonus shares will be issued which will increase the total number of shares to 339,571,130. Consequently, our split-adjusted target price for Sarin is now SGD1.82.
Lining up new growth markets. Previously, Sarin’s products were primarily focused on providing solutions for the rough diamond market. Following the successful GalaxyTM product, which is still at an early growth stage, Sarin’s targeted move into the polished diamond segment should open up a new growth market for the company.
Launching D-LightTM in Las-Vegas. In line with its plan to penetrate the polished diamond market, Sarin will be launching its light performance technology product at the JCK show in Las Vegas from 31 May to 4 June 2012. JCK Las Vegas is where the jewellery industry comes together to buy and source for new products and will be an excellent opportunity for Sarin to showcase its D-lightTM product. The DlightTM assesses, grades and visualizes a diamond’s light performance characteristics, namely brilliance, fire, sparkle and light symmetry. We have estimated the future annual revenue potential for the D-lightTM at USD40m and net profit potential at USD29m. The other two products and service which it plans to launch in 2H12 for the polished diamond market are the D-Loupe and the Diamond Assay Service.
Adjusting our target price to SGD1.82, Maintain BUY. We adjust our target price accordingly for the bonus shares. Based on the enlarged number of shares, our target price would now be SGD1.82, still pegged to 16x FY12F PER. We also made adjustments to the per share figures. No change in our forecasts and recommendations. Maintain BUY.
Wednesday 23 May 2012
ComfortDelgro
OCBC on 23 May 2012
ComfortDelgro Corporation Limited (CD) is the second largest land transportation company in the world with a global network of over 46,300 vehicles spanning seven countries. Bus and taxi are its main operating segments, contributing almost 80% of revenue (1Q12) and 69% of operating profits (OP), while domestic operations constitute 59.3% of revenue. Its recent 1Q12 results also showed broad-based increases across most operating segments. And we expect this modest growth to continue but anticipate subdued OP margins, as domestic pressures squeeze margins on its bus and rail segments, and marginalising positive results from its taxi and overseas ventures. Forecasting only slight increases in OP margins in FY12/13, we utilised the dividend-discount model (DDM) for our valuation with a conservative payout assumption of 50% of PATMI. Initiate coverage with HOLD at a fair value estimate of S$1.53.
Global land transportation giant
ComfortDelgro Corporation Limited (CD) is the second largest land transportation company in the world with a global network of over 46,300 vehicles spanning seven countries. Its main operating segments are bus and taxi, which contribute almost 80% of revenue (1Q12) and 69% of operating profits (OP). CD also has segments providing rail, vehicle inspection, automotive engineering and driving centre services. Geographically, its domestic operations constitute 59.3% of revenue, with the rest coming from overseas ventures.
Top-line growth to continue…
From FY2003-11, CD’s revenue grew at a decent CAGR of 8%, and its recent 1Q12 results also showed broad-based increases across most operating segments. With continuous support from increasing ridership levels on its bus and rail operations, boosted by greater fleet utilisation and increased cashless transactions in its Singapore taxi business, we expect CD’s top-line to continue on its upward trajectory, albeit at slower pace of 4.6% in both FY12 and FY13.
…but operating margins could face some pressure
However, CD’s bus and rail segments in 1Q12 contributed only 7.2% of the group’s OP despite having a 23% share of revenue. We expect the Singapore bus and rail segments to be a drag on operating profit (OP) margins going forward as 1) regulatory pressures and public sentiment related to the public transportation system will reduce the possibility of positive fare adjustments, 2) operating expenses increase due to higher repair/maintenance and fuel/electricity costs on the back of increased service runs, and 3) expansion costs related to the upcoming Downtown Line.
Initiate with HOLD - conservative assumptions applied
With domestic pressures limiting OP margin growth, we forecast only slight increases for FY12 (+0.2ppt) and FY13 (+0.5ppt). Utilising the dividend-discount model (DDM) for our valuation, with a conservative payout assumption of 50% of PATMI (CD has a policy of distributing at least 50% of net profit to shareholders), we obtain a fair value estimate of S$1.53, representing an upside of 3.2% over its current price, and initiate coverage with HOLD.
ComfortDelgro Corporation Limited (CD) is the second largest land transportation company in the world with a global network of over 46,300 vehicles spanning seven countries. Bus and taxi are its main operating segments, contributing almost 80% of revenue (1Q12) and 69% of operating profits (OP), while domestic operations constitute 59.3% of revenue. Its recent 1Q12 results also showed broad-based increases across most operating segments. And we expect this modest growth to continue but anticipate subdued OP margins, as domestic pressures squeeze margins on its bus and rail segments, and marginalising positive results from its taxi and overseas ventures. Forecasting only slight increases in OP margins in FY12/13, we utilised the dividend-discount model (DDM) for our valuation with a conservative payout assumption of 50% of PATMI. Initiate coverage with HOLD at a fair value estimate of S$1.53.
Global land transportation giant
ComfortDelgro Corporation Limited (CD) is the second largest land transportation company in the world with a global network of over 46,300 vehicles spanning seven countries. Its main operating segments are bus and taxi, which contribute almost 80% of revenue (1Q12) and 69% of operating profits (OP). CD also has segments providing rail, vehicle inspection, automotive engineering and driving centre services. Geographically, its domestic operations constitute 59.3% of revenue, with the rest coming from overseas ventures.
Top-line growth to continue…
From FY2003-11, CD’s revenue grew at a decent CAGR of 8%, and its recent 1Q12 results also showed broad-based increases across most operating segments. With continuous support from increasing ridership levels on its bus and rail operations, boosted by greater fleet utilisation and increased cashless transactions in its Singapore taxi business, we expect CD’s top-line to continue on its upward trajectory, albeit at slower pace of 4.6% in both FY12 and FY13.
…but operating margins could face some pressure
However, CD’s bus and rail segments in 1Q12 contributed only 7.2% of the group’s OP despite having a 23% share of revenue. We expect the Singapore bus and rail segments to be a drag on operating profit (OP) margins going forward as 1) regulatory pressures and public sentiment related to the public transportation system will reduce the possibility of positive fare adjustments, 2) operating expenses increase due to higher repair/maintenance and fuel/electricity costs on the back of increased service runs, and 3) expansion costs related to the upcoming Downtown Line.
Initiate with HOLD - conservative assumptions applied
With domestic pressures limiting OP margin growth, we forecast only slight increases for FY12 (+0.2ppt) and FY13 (+0.5ppt). Utilising the dividend-discount model (DDM) for our valuation, with a conservative payout assumption of 50% of PATMI (CD has a policy of distributing at least 50% of net profit to shareholders), we obtain a fair value estimate of S$1.53, representing an upside of 3.2% over its current price, and initiate coverage with HOLD.
CDL Hospitality Trusts
OCBC on 23 May 2012
The Singapore Tourism Board aims to grow tourism’s GDP contribution from 4% to as much as 8%. It has also recently been emphasising a focus on attracting quality tourists who spend more, as opposed to simply trying to grow the absolute number of tourists. This strategy would likely continue to pay off for high-end hotels, which have outperformed budget hotels in 1Q12 (RevPAR growths of 14.5% and 5.5% YoY respectively). We have updated our in-house hotel database and foresee that for 2012-2015, growth in demand for hotel rooms of 6.4% p.a. will comfortably outstrip supply growth of 3.7% p.a., with high-end hotels facing better supply-side dynamics. We maintain a BUY rating on CDLHT and our fair value of S$2.04.
Growing influence of hospitality
We think it is notable that the Singapore Tourism Board (STB) is targeting a possible doubling of tourism’s GDP contribution to 8%. In 2011, tourism accounted for 4.1% of GDP, substantially higher than the 3.6% in 2010 and 2.4% in 2009. In 1Q12, real GDP grew 1.6% YoY while the Accommodation & Food Services sector (a rough proxy for tourism) grew faster at 4% YoY. For 2012, STB is aiming for S$23-24b in tourism receipts, implying a 3.6-8.1% YoY increase. The target growth rate, which STB has indicated could be revised upwards, is significantly higher than the official 2012 GDP growth forecast of 1-3% and highlights the increasing importance of tourism.
Stronger performance for high-end hotels
The STB has recently highlighted that it wants to focus on attracting quality tourists who spend more, as opposed to simply trying to grow the absolute number of tourists. This emphasis will probably continue to benefit high-end hotel players like CDLHT. For 1Q12, tourist arrivals jumped 14.6% YoY to 3.5m. Based on preliminary figures, high-end Singapore hotels showed RevPAR growth of 14.5% in 1Q12, outperforming budget hotels (+5.5% YoY). The robust RevPAR growth for high-end hotels was supported by larger increases in rental rates. We believe that our 7.5% RevPAR growth rate assumption for CDLHT’s Singapore hotels in 2012 is not aggressive.
Favorable supply dynamics for high-end hotels
Updating our in-house hotel database, we forecast that overall hotel room supply will increase by 3.7% p.a. for 2012-2015, comfortably outstripped by hotel room demand growth of 6.4% p.a. High-end hotel room supply will grow by 3.0% p.a., slower than the 5.3% p.a. for budget hotels. The temporary closing of Pan Pacific Singapore for renovations from Apr to Aug has also taken 778 high-end rooms off the market.
The Singapore Tourism Board aims to grow tourism’s GDP contribution from 4% to as much as 8%. It has also recently been emphasising a focus on attracting quality tourists who spend more, as opposed to simply trying to grow the absolute number of tourists. This strategy would likely continue to pay off for high-end hotels, which have outperformed budget hotels in 1Q12 (RevPAR growths of 14.5% and 5.5% YoY respectively). We have updated our in-house hotel database and foresee that for 2012-2015, growth in demand for hotel rooms of 6.4% p.a. will comfortably outstrip supply growth of 3.7% p.a., with high-end hotels facing better supply-side dynamics. We maintain a BUY rating on CDLHT and our fair value of S$2.04.
Growing influence of hospitality
We think it is notable that the Singapore Tourism Board (STB) is targeting a possible doubling of tourism’s GDP contribution to 8%. In 2011, tourism accounted for 4.1% of GDP, substantially higher than the 3.6% in 2010 and 2.4% in 2009. In 1Q12, real GDP grew 1.6% YoY while the Accommodation & Food Services sector (a rough proxy for tourism) grew faster at 4% YoY. For 2012, STB is aiming for S$23-24b in tourism receipts, implying a 3.6-8.1% YoY increase. The target growth rate, which STB has indicated could be revised upwards, is significantly higher than the official 2012 GDP growth forecast of 1-3% and highlights the increasing importance of tourism.
Stronger performance for high-end hotels
The STB has recently highlighted that it wants to focus on attracting quality tourists who spend more, as opposed to simply trying to grow the absolute number of tourists. This emphasis will probably continue to benefit high-end hotel players like CDLHT. For 1Q12, tourist arrivals jumped 14.6% YoY to 3.5m. Based on preliminary figures, high-end Singapore hotels showed RevPAR growth of 14.5% in 1Q12, outperforming budget hotels (+5.5% YoY). The robust RevPAR growth for high-end hotels was supported by larger increases in rental rates. We believe that our 7.5% RevPAR growth rate assumption for CDLHT’s Singapore hotels in 2012 is not aggressive.
Favorable supply dynamics for high-end hotels
Updating our in-house hotel database, we forecast that overall hotel room supply will increase by 3.7% p.a. for 2012-2015, comfortably outstripped by hotel room demand growth of 6.4% p.a. High-end hotel room supply will grow by 3.0% p.a., slower than the 5.3% p.a. for budget hotels. The temporary closing of Pan Pacific Singapore for renovations from Apr to Aug has also taken 778 high-end rooms off the market.
Wilmar International
OCBC on 22 May 2012
Wilmar International Limited’s (WIL) stock price took a big hit after posting a dismal set of 1Q12 results on 10 May. From the previous day close of S$4.70, the stock closed 9% lower on the day after its 1Q12 results announcement. And since then, the stock has fallen by another 13% to hit a recent low of S$3.71. We note that the stock has also fallen 37% from its 52-week high of S$5.99. At its current price, we note that WIL is trading around 12.2x consensus FY12 EPS, or around one standard deviation below its 5-year mean. During the previous subprime financial crisis, WIL’s PER fell to a low of 9.7x, or about -1.5x SD below its historical mean. Given that the market is still adopting a more risk adverse approach, we lower our fair value estimate from S$4.30 to S$3.87 (based on 13.5x PER versus 15x previously). Maintain HOLD as valuations are not demanding.
Big hit to stock price
Wilmar International Limited’s (WIL) stock price took a big hit after posting a dismal set of 1Q12 results on 10 May, when its core net profit tumbled 51% YoY to US$206m, meeting just 12% of our FY12 forecast. From the previous day close of S$4.70, the stock closed 9% lower on the day after its 1Q12 results announcement. And since then, the stock has fallen by another 13% to hit a recent low of S$3.71. We note that the stock has also fallen 37% from its 52-week high of S$5.99.
Muted outlook remains a concern
As we had articulated in our 22 Feb report, the market seems to have priced in a much stronger recovery which did not materialise. Instead, WIL’s 1Q12 results suggest that the outlook for its prospects in China continue to be quite muted, especially on the oilseeds crushing segment. During its results briefing, management said it continues to see surplus crushing capacity in China, which may take as long as three years to clear, suggesting that depressed margins may persist into the foreseeable future.
Maintain HOLD – valuations now decent
Following WIL’s 1Q12 results, we have already slashed our FY12 and FY13 core net profit estimates, which are now 9% and 4% respectively below consensus. Hence, there is little need to readjust our numbers again. At its current price, we note that WIL is trading around 12.2x consensus FY12 EPS, or around one standard deviation below its 5-year mean. During the previous subprime financial crisis, WIL’s PER fell to a low of 9.7x, or about -1.5x SD below its historical mean. Given that the market is still adopting a more risk adverse approach, we lower our fair value estimate from S$4.30 to S$3.87 (based on 13.5x PER versus 15x previously). Maintain HOLD as valuations are not demanding.
Wilmar International Limited’s (WIL) stock price took a big hit after posting a dismal set of 1Q12 results on 10 May. From the previous day close of S$4.70, the stock closed 9% lower on the day after its 1Q12 results announcement. And since then, the stock has fallen by another 13% to hit a recent low of S$3.71. We note that the stock has also fallen 37% from its 52-week high of S$5.99. At its current price, we note that WIL is trading around 12.2x consensus FY12 EPS, or around one standard deviation below its 5-year mean. During the previous subprime financial crisis, WIL’s PER fell to a low of 9.7x, or about -1.5x SD below its historical mean. Given that the market is still adopting a more risk adverse approach, we lower our fair value estimate from S$4.30 to S$3.87 (based on 13.5x PER versus 15x previously). Maintain HOLD as valuations are not demanding.
Big hit to stock price
Wilmar International Limited’s (WIL) stock price took a big hit after posting a dismal set of 1Q12 results on 10 May, when its core net profit tumbled 51% YoY to US$206m, meeting just 12% of our FY12 forecast. From the previous day close of S$4.70, the stock closed 9% lower on the day after its 1Q12 results announcement. And since then, the stock has fallen by another 13% to hit a recent low of S$3.71. We note that the stock has also fallen 37% from its 52-week high of S$5.99.
Muted outlook remains a concern
As we had articulated in our 22 Feb report, the market seems to have priced in a much stronger recovery which did not materialise. Instead, WIL’s 1Q12 results suggest that the outlook for its prospects in China continue to be quite muted, especially on the oilseeds crushing segment. During its results briefing, management said it continues to see surplus crushing capacity in China, which may take as long as three years to clear, suggesting that depressed margins may persist into the foreseeable future.
Maintain HOLD – valuations now decent
Following WIL’s 1Q12 results, we have already slashed our FY12 and FY13 core net profit estimates, which are now 9% and 4% respectively below consensus. Hence, there is little need to readjust our numbers again. At its current price, we note that WIL is trading around 12.2x consensus FY12 EPS, or around one standard deviation below its 5-year mean. During the previous subprime financial crisis, WIL’s PER fell to a low of 9.7x, or about -1.5x SD below its historical mean. Given that the market is still adopting a more risk adverse approach, we lower our fair value estimate from S$4.30 to S$3.87 (based on 13.5x PER versus 15x previously). Maintain HOLD as valuations are not demanding.
Tiger Airways
OCBC on 22 May 2012
FY12 was a difficult year for Tiger Airways’ (TGR) after the Australian aviation authorities imposed restrictions on its Australian operations and further aggravated by high jet fuel prices. However, TGR is now on the road to recovery. TGR is scheduled to begin operations in Sydney from Jul 2012, allowing it to ramp up its operations and optimise the utilisation of its aircraft. Its regional JVs are also taking shape, which should allow Tiger Singapore to return to gradual capacity expansion. However, if Mandala and SEAir fail to take on the earmarked aircraft, TGR’s core operations will again be saddled with having too many aircraft. We increase our fair value estimate of TGR from S$0.60/share to S$0.67/share, so as to reflect its improving operations, and upgrade it to HOLD.
FY12 – a difficult year for TGR
In FY12, Tiger Airways’ (TGR) revenue slipped 1% to S$618m and it swung to a net loss of S$104m, from a net profit of S$40m in FY11. TGR’s net loss was in line with our estimate of S$107m, but was 12% bigger than consensus net loss forecast of S$93m. FY12 was a difficult year for TGR after the Australian aviation authorities imposed restrictions on its Australian operations and jet fuel prices remained persistently high.
FY13 – year of recovery
In Australia, TGR is on track to begin operations in Sydney as its second base from Jul 2012. Tiger Australia will then be able ramp up its operations to 64 sectors/day and optimise the utilisation of its 10 aircraft. Meanwhile, TGR’s strategy of forming regional JVs is taking shape and with the JVs absorbing part of the aircraft deliveries, Tiger Singapore can stop its forced capacity expansion. PT Mandala Airlines (Mandala) has returned to the skies and, according to management, early operating statistics are encouraging. Separately, TGR has revived negotiations on its proposed investment in the Philippines’ South East Asian Airlines (SEAir) by signing a revised term sheet to purchase a 40% stake for US$7m.
Risk in JVs’ ability to take on additional aircraft
Management guided that TGR’s fleet will grow to 43 by end-FY13, of which 19 are earmarked for Singapore, 11 in Australia, eight with Mandala and five with SEAir. This means Mandala and SEAir have to each absorb another five aircraft from TGR, failing which TGR’s core operations will again be saddled with having too many aircraft.
Upgrade to HOLD with higher fair value of S$0.67
We increase our fair value estimate of TGR from S$0.60/share to S$0.67/share, by increasing its P/B multiple from 1.9x to 2.2x, to reflect TGR’s encouraging plans and improving operations. Based on this, we upgrade TGR’s rating to HOLD. However, key risks to its operations, including execution risks, remain.
FY12 was a difficult year for Tiger Airways’ (TGR) after the Australian aviation authorities imposed restrictions on its Australian operations and further aggravated by high jet fuel prices. However, TGR is now on the road to recovery. TGR is scheduled to begin operations in Sydney from Jul 2012, allowing it to ramp up its operations and optimise the utilisation of its aircraft. Its regional JVs are also taking shape, which should allow Tiger Singapore to return to gradual capacity expansion. However, if Mandala and SEAir fail to take on the earmarked aircraft, TGR’s core operations will again be saddled with having too many aircraft. We increase our fair value estimate of TGR from S$0.60/share to S$0.67/share, so as to reflect its improving operations, and upgrade it to HOLD.
FY12 – a difficult year for TGR
In FY12, Tiger Airways’ (TGR) revenue slipped 1% to S$618m and it swung to a net loss of S$104m, from a net profit of S$40m in FY11. TGR’s net loss was in line with our estimate of S$107m, but was 12% bigger than consensus net loss forecast of S$93m. FY12 was a difficult year for TGR after the Australian aviation authorities imposed restrictions on its Australian operations and jet fuel prices remained persistently high.
FY13 – year of recovery
In Australia, TGR is on track to begin operations in Sydney as its second base from Jul 2012. Tiger Australia will then be able ramp up its operations to 64 sectors/day and optimise the utilisation of its 10 aircraft. Meanwhile, TGR’s strategy of forming regional JVs is taking shape and with the JVs absorbing part of the aircraft deliveries, Tiger Singapore can stop its forced capacity expansion. PT Mandala Airlines (Mandala) has returned to the skies and, according to management, early operating statistics are encouraging. Separately, TGR has revived negotiations on its proposed investment in the Philippines’ South East Asian Airlines (SEAir) by signing a revised term sheet to purchase a 40% stake for US$7m.
Risk in JVs’ ability to take on additional aircraft
Management guided that TGR’s fleet will grow to 43 by end-FY13, of which 19 are earmarked for Singapore, 11 in Australia, eight with Mandala and five with SEAir. This means Mandala and SEAir have to each absorb another five aircraft from TGR, failing which TGR’s core operations will again be saddled with having too many aircraft.
Upgrade to HOLD with higher fair value of S$0.67
We increase our fair value estimate of TGR from S$0.60/share to S$0.67/share, by increasing its P/B multiple from 1.9x to 2.2x, to reflect TGR’s encouraging plans and improving operations. Based on this, we upgrade TGR’s rating to HOLD. However, key risks to its operations, including execution risks, remain.
Tiger Airways
Kim Eng on 23 May 2012
Background: Tiger Airways (Tiger) is a low-cost carrier offering short-haul flights spanning Asia and Australia. It operates a fleet of thirty A320 aircraft, and has stakes in regional carriers such as PT Mandala (Indonesia) and Southeast Asian Airlines (Philippines).
Why are we highlighting this stock? Tiger released their FY12 results recently, which showed an operating and net loss primarily due to the grounding of their Australian operations in Jul-Aug 2011, as well as taking a hit from increased fuel costs. However, their passenger statistics seem to be recovering from the Australian saga, with further affirmation from the Civil Aviation Safety Authority of Australia that Tiger could resume flying up to 64 daily sectors by 2H 2012.
Capping a disappointing year. Although Tiger managed to maintain revenues at almost similar levels YoY, escalating costs resulted in net losses for the company. Fuel cost was again the main culprit, with a full-year increase of 30% (+SGD 63 mil) contributing half of the overall FY12 expense escalation of SGD 127 mil.
Passenger levels recovering. Encouragingly, Tiger’s latest statistics depicting passengers carried have been showing a firm uptrend, although load factors are still below pre-grounding levels due to additional capacity introduced in FY12. Tiger will be moderating capacity growth to 7% in 1H13 to allow for demand to catch up.
Looking forward to FY13. Australian authorities have given the green light for Tiger to resume flying up to 64 daily sectors (from 38 daily sectors) from July 2012. This allows Tiger to resume Australian operations at levels similar to those before the grounding, with Sydney being planned as its second domestic base. Although not likely to contribute materially to profits, its tie-ups with PT Mandala and SEAir should also begin to take shape next year.
Background: Tiger Airways (Tiger) is a low-cost carrier offering short-haul flights spanning Asia and Australia. It operates a fleet of thirty A320 aircraft, and has stakes in regional carriers such as PT Mandala (Indonesia) and Southeast Asian Airlines (Philippines).
Why are we highlighting this stock? Tiger released their FY12 results recently, which showed an operating and net loss primarily due to the grounding of their Australian operations in Jul-Aug 2011, as well as taking a hit from increased fuel costs. However, their passenger statistics seem to be recovering from the Australian saga, with further affirmation from the Civil Aviation Safety Authority of Australia that Tiger could resume flying up to 64 daily sectors by 2H 2012.
Capping a disappointing year. Although Tiger managed to maintain revenues at almost similar levels YoY, escalating costs resulted in net losses for the company. Fuel cost was again the main culprit, with a full-year increase of 30% (+SGD 63 mil) contributing half of the overall FY12 expense escalation of SGD 127 mil.
Passenger levels recovering. Encouragingly, Tiger’s latest statistics depicting passengers carried have been showing a firm uptrend, although load factors are still below pre-grounding levels due to additional capacity introduced in FY12. Tiger will be moderating capacity growth to 7% in 1H13 to allow for demand to catch up.
Looking forward to FY13. Australian authorities have given the green light for Tiger to resume flying up to 64 daily sectors (from 38 daily sectors) from July 2012. This allows Tiger to resume Australian operations at levels similar to those before the grounding, with Sydney being planned as its second domestic base. Although not likely to contribute materially to profits, its tie-ups with PT Mandala and SEAir should also begin to take shape next year.
Tuesday 22 May 2012
China Merchants Holdings
Kim Eng on 22 May 2012
Background: China Merchants Holdings (Pacific) (CMHP) is a toll road operator in China. The company currently invests in and operates three toll roads in China. CMHP is 82.5% owned by the China Merchants Group (CMG), a state-owned enterprise and China’s leading investor and operator of toll roads with investments in 25 toll roads, bridges and tunnels.
Why are we highlighting this stock? CMHP recently reported a 150% YoY increase in its 1Q12 earnings,
mainly due to the contributions from Yongtaiwan Expressway. As stated in its 2011 annual report, the management has committed to paying dividends of at least SGD 0.055 per share over FY12-13. That translates to an attractive minimum yield of ~8.5% per annum.
Resilient earnings from toll roads. Excluding Yongtaiwen Expressway, which was acquired in last July, earnings from the other toll roads still grew by 10.9% YoY, mainly due to the 52.2% improvement in contribution from Guiliu Expressway on higher toll revenue, lower repair and maintenance cost and lower tax expenses. This is also despite the fact that CMHP is in the process of divesting its 60% stake in Yuyao Highway, which is no longer equity accounted.
Attractive and defensive dividends. The management has committed to a stable dividend policy and is targeting dividends of at least SGD 0.055 per share for FY12 and FY13 each, which translates to a minimum yield of 8.5% at the current share price. We believe that the resilience of its earnings can underpin the sustainability of the dividends, which is a virtue in today’s uncertain markets.
Still on the lookout for acquisitions. The Group is seeking acquisition opportunities to grow its toll road portfolio. It targets to keep net gearing at below 0.6x (currently 0.4x) and has not ruled out equity fund raisings to finance future acquisitions and improve the stock’s liquidity. The stock is currently tightly held by substantial shareholders China Merchants Group.
Background: China Merchants Holdings (Pacific) (CMHP) is a toll road operator in China. The company currently invests in and operates three toll roads in China. CMHP is 82.5% owned by the China Merchants Group (CMG), a state-owned enterprise and China’s leading investor and operator of toll roads with investments in 25 toll roads, bridges and tunnels.
Why are we highlighting this stock? CMHP recently reported a 150% YoY increase in its 1Q12 earnings,
mainly due to the contributions from Yongtaiwan Expressway. As stated in its 2011 annual report, the management has committed to paying dividends of at least SGD 0.055 per share over FY12-13. That translates to an attractive minimum yield of ~8.5% per annum.
Resilient earnings from toll roads. Excluding Yongtaiwen Expressway, which was acquired in last July, earnings from the other toll roads still grew by 10.9% YoY, mainly due to the 52.2% improvement in contribution from Guiliu Expressway on higher toll revenue, lower repair and maintenance cost and lower tax expenses. This is also despite the fact that CMHP is in the process of divesting its 60% stake in Yuyao Highway, which is no longer equity accounted.
Attractive and defensive dividends. The management has committed to a stable dividend policy and is targeting dividends of at least SGD 0.055 per share for FY12 and FY13 each, which translates to a minimum yield of 8.5% at the current share price. We believe that the resilience of its earnings can underpin the sustainability of the dividends, which is a virtue in today’s uncertain markets.
Still on the lookout for acquisitions. The Group is seeking acquisition opportunities to grow its toll road portfolio. It targets to keep net gearing at below 0.6x (currently 0.4x) and has not ruled out equity fund raisings to finance future acquisitions and improve the stock’s liquidity. The stock is currently tightly held by substantial shareholders China Merchants Group.
Monday 21 May 2012
Singapore Airlines
OCBC on 21 May 2012
Singapore Airlines (SIA) last week announced that the parent airline will be suspending services to Abu Dhabi and Athens, with the last flight scheduled on 26 Oct 2012. While the group is looking to optimise the parent airline’s service network by removing unprofitable routes, it is planning for SilkAir to play an increasingly bigger role. SilkAir is targeted to boost capacity by 22% in FY13, grow its service network to more regional secondary cities, and serve as a more extensive feeder to the parent airline. SIA is also eyeing increased collaboration between Scoot and 33%-owned associate Tiger Airways, which should get easier since both LCCs will be flying out of Terminal 2 at Changi Airport starting from Sep 2012. We maintain our fair value estimate of S$10.85/share and HOLD rating on SIA.
Services to Abu Dhabi and Athens withdrawn
Singapore Airlines (SIA) last week announced the parent airline will be suspending services to Abu Dhabi in the UAE and Athens in Greece, with the last flight scheduled on 26 Oct 2012. The withdrawals come after continued weak operating statistics on these routes. The parent airline will continue to serve Dubai in the UAE and offer connections to Athens via its Star Alliance partners.
CEO’s vision
The Business Times also carried an extensive interview with SIA CEO Goh Choon Phong, who shared his vision in growing the group. With a centralised capacity and route planning, SilkAir is likely to play an increasingly bigger role within the group. SilkAir is targeted to boost capacity by 22% in FY13, grow its service network to more regional secondary cities, and serve as a more extensive feeder to the parent airline. This move to focus the group’s growth in Asia also allows the parent airline, which is set for a considerably lower 3% addition to its capacity in FY13, to optimise its service network by removing unprofitable routes.
Possible Scoot tie-up with Tiger Airways
SIA’s new mid-to-long haul low cost carrier (LCC) Scoot recently announced it will be flying to Bangkok starting from Jul 2012, which baffled investors by competing directly with the group’s 33%-owned associate Tiger Airways (TGR) in a short haul route. However, SIA CEO revealed that, without interfering with the management of TGR, the group is looking at increased collaboration between the two LCCs. While the proposed collaboration should get easier since both LCCs will be flying out of Terminal 2 at Changi Airport starting from Sep 2012, it is still unclear as to how the two LCCs will complement each other.
Maintain HOLD
By sharing its vision with investors, SIA has shown it has a clear strategy in navigating these tough times for aviation. We maintain our fair value estimate of S$10.85/share and HOLD rating on SIA.
Singapore Airlines (SIA) last week announced that the parent airline will be suspending services to Abu Dhabi and Athens, with the last flight scheduled on 26 Oct 2012. While the group is looking to optimise the parent airline’s service network by removing unprofitable routes, it is planning for SilkAir to play an increasingly bigger role. SilkAir is targeted to boost capacity by 22% in FY13, grow its service network to more regional secondary cities, and serve as a more extensive feeder to the parent airline. SIA is also eyeing increased collaboration between Scoot and 33%-owned associate Tiger Airways, which should get easier since both LCCs will be flying out of Terminal 2 at Changi Airport starting from Sep 2012. We maintain our fair value estimate of S$10.85/share and HOLD rating on SIA.
Services to Abu Dhabi and Athens withdrawn
Singapore Airlines (SIA) last week announced the parent airline will be suspending services to Abu Dhabi in the UAE and Athens in Greece, with the last flight scheduled on 26 Oct 2012. The withdrawals come after continued weak operating statistics on these routes. The parent airline will continue to serve Dubai in the UAE and offer connections to Athens via its Star Alliance partners.
CEO’s vision
The Business Times also carried an extensive interview with SIA CEO Goh Choon Phong, who shared his vision in growing the group. With a centralised capacity and route planning, SilkAir is likely to play an increasingly bigger role within the group. SilkAir is targeted to boost capacity by 22% in FY13, grow its service network to more regional secondary cities, and serve as a more extensive feeder to the parent airline. This move to focus the group’s growth in Asia also allows the parent airline, which is set for a considerably lower 3% addition to its capacity in FY13, to optimise its service network by removing unprofitable routes.
Possible Scoot tie-up with Tiger Airways
SIA’s new mid-to-long haul low cost carrier (LCC) Scoot recently announced it will be flying to Bangkok starting from Jul 2012, which baffled investors by competing directly with the group’s 33%-owned associate Tiger Airways (TGR) in a short haul route. However, SIA CEO revealed that, without interfering with the management of TGR, the group is looking at increased collaboration between the two LCCs. While the proposed collaboration should get easier since both LCCs will be flying out of Terminal 2 at Changi Airport starting from Sep 2012, it is still unclear as to how the two LCCs will complement each other.
Maintain HOLD
By sharing its vision with investors, SIA has shown it has a clear strategy in navigating these tough times for aviation. We maintain our fair value estimate of S$10.85/share and HOLD rating on SIA.
Ezra Holdings
Kim Eng on 21 May 2012
Background: Ezra is an offshore contractor and provider of integrated offshore solutions. Its services include subsea construction and maintenance, drilling support, towing and mooring, pipe and cable operations, high speed cargo and crew transportation. It operates globally under the EMAS brand name and has 16 offices in five continents.
Recent developments: Stripping out a USD34.8m onetime gain on disposal of available-for-sale (AFS) investments, Ezra would have been in a net loss position of USD13m for 2QFY8/12, against a reported net profit of USD22m. Despite the dismal performance, there are some bright spots going into 2HFY8/12 and beyond, especially for its subsea business.
Subsea contracts above USD1b. Following the acquisition of Aker Marine Contractors (AMC) in March last year, Ezra’s subsea capabilities have expanded, with the segment accounting for almost half of its 1HFY8/12 revenue. Total subsea orderbook has exceeded USD1b with more than half of all orders expected to be recognised in FY8/12. Barring any hiccups in execution, this should imply a stronger 2HFY8/12 performance. Additionally, Ezra is bidding for about USD4.4b worth of projects in the North Sea, Africa, Asia Pacific and the Americas.
OSV market seeing recovery. The oversupply in the Offshore Support Vessel (OSV) market could ease in
2013/2014, leading to a recovery in charter rates. This would bode well for Ezra’s Offshore Support Services
segment.
Beware its high gearing. Ezra’s gearing level has increased steadily from 0.12x in FY8/09 to 1.1x as at 2QFY8/12. Operating cash flows are weak and we do not rule out the possibility that it may need to take on more debt or raise more funds.
Background: Ezra is an offshore contractor and provider of integrated offshore solutions. Its services include subsea construction and maintenance, drilling support, towing and mooring, pipe and cable operations, high speed cargo and crew transportation. It operates globally under the EMAS brand name and has 16 offices in five continents.
Recent developments: Stripping out a USD34.8m onetime gain on disposal of available-for-sale (AFS) investments, Ezra would have been in a net loss position of USD13m for 2QFY8/12, against a reported net profit of USD22m. Despite the dismal performance, there are some bright spots going into 2HFY8/12 and beyond, especially for its subsea business.
Subsea contracts above USD1b. Following the acquisition of Aker Marine Contractors (AMC) in March last year, Ezra’s subsea capabilities have expanded, with the segment accounting for almost half of its 1HFY8/12 revenue. Total subsea orderbook has exceeded USD1b with more than half of all orders expected to be recognised in FY8/12. Barring any hiccups in execution, this should imply a stronger 2HFY8/12 performance. Additionally, Ezra is bidding for about USD4.4b worth of projects in the North Sea, Africa, Asia Pacific and the Americas.
OSV market seeing recovery. The oversupply in the Offshore Support Vessel (OSV) market could ease in
2013/2014, leading to a recovery in charter rates. This would bode well for Ezra’s Offshore Support Services
segment.
Beware its high gearing. Ezra’s gearing level has increased steadily from 0.12x in FY8/09 to 1.1x as at 2QFY8/12. Operating cash flows are weak and we do not rule out the possibility that it may need to take on more debt or raise more funds.
Friday 18 May 2012
CapitaRetail China Trust
OCBC on 18 May 2012
Located in mainland China, CRCT’s retail malls are positioned as one-stop family-oriented shopping, dining and entertainment destinations for areas with large population catchment. Based on FY11 figures, CRCT’s portfolio has an average property yield of 6.5% (based on book valuation), which is attractive compared to Singapore retail property yields of around 5-6%. Increasing urbanization and the continued growth in household disposable income serve as powerful long-term drivers for retail sales, which should grow faster than the GDP for at least the next few years. With some 28% of its leases by gross rental income due for renewal this year, CRCT could see significant positive rental reversions. We initiate with a BUY rating and S$1.44 fair value based on a dividend discount model analysis.
Quality assets with good locations
Located in mainland China, CRCT’s retail malls are positioned as one-stop family-oriented shopping, dining and entertainment destinations for areas with large population catchment. Anchor tenants include Carrefour, Walmart and the Beijing Hualian Group. The majority of CRCT’s exposure is to Beijing, where four out of its nine properties are located. The Beijing malls accounted for 69% of revenue in 2011, with the two larger ones accounting for 51%. Based on FY11 figures, CRCT’s portfolio has an average property yield of 6.5% (based on book valuation), which is attractive compared to Singapore retail property yields of around 5-6%.
Consumption as a pillar of growth
China is pursuing domestic consumption as the key strategy to reduce the economy’s reliance on exports. Consumption is likely to overtake investment as China’s largest driver of growth in 2012 for the first time in over a decade. Increasing urbanization and the continued growth in household disposable income serve as powerful long-term drivers for retail sales, which could grow faster than the GDP for at least the next few years. We note that that a healthy 82% of CRCT’s committed leases have turnover rent provisions. This allows CRCT to see direct upside from growth in retail sales.
Organic and inorganic growth
Partially due to the purchase of CapitaMall Minzhongleyuan last year, a significant 28% of CRCT’s leases by gross rental income is due for expiry in 2012. This should enable it to see good positive rental reversions. CRCT is also looking to enhance the performance of its two largest assets, CapitaMall Xizhimen and CapitaMall Wangjing. The opening of Xizhimen’s basement connection to the subway interchange has led to significantly increased footfall and strong leasing interest.
Initiate with a BUY
We initiate with a BUY rating and a S$1.44 fair value based on a DDM analysis. CRCT is currently trading at an est. FY12 yield of 7.0%.
Located in mainland China, CRCT’s retail malls are positioned as one-stop family-oriented shopping, dining and entertainment destinations for areas with large population catchment. Based on FY11 figures, CRCT’s portfolio has an average property yield of 6.5% (based on book valuation), which is attractive compared to Singapore retail property yields of around 5-6%. Increasing urbanization and the continued growth in household disposable income serve as powerful long-term drivers for retail sales, which should grow faster than the GDP for at least the next few years. With some 28% of its leases by gross rental income due for renewal this year, CRCT could see significant positive rental reversions. We initiate with a BUY rating and S$1.44 fair value based on a dividend discount model analysis.
Quality assets with good locations
Located in mainland China, CRCT’s retail malls are positioned as one-stop family-oriented shopping, dining and entertainment destinations for areas with large population catchment. Anchor tenants include Carrefour, Walmart and the Beijing Hualian Group. The majority of CRCT’s exposure is to Beijing, where four out of its nine properties are located. The Beijing malls accounted for 69% of revenue in 2011, with the two larger ones accounting for 51%. Based on FY11 figures, CRCT’s portfolio has an average property yield of 6.5% (based on book valuation), which is attractive compared to Singapore retail property yields of around 5-6%.
Consumption as a pillar of growth
China is pursuing domestic consumption as the key strategy to reduce the economy’s reliance on exports. Consumption is likely to overtake investment as China’s largest driver of growth in 2012 for the first time in over a decade. Increasing urbanization and the continued growth in household disposable income serve as powerful long-term drivers for retail sales, which could grow faster than the GDP for at least the next few years. We note that that a healthy 82% of CRCT’s committed leases have turnover rent provisions. This allows CRCT to see direct upside from growth in retail sales.
Organic and inorganic growth
Partially due to the purchase of CapitaMall Minzhongleyuan last year, a significant 28% of CRCT’s leases by gross rental income is due for expiry in 2012. This should enable it to see good positive rental reversions. CRCT is also looking to enhance the performance of its two largest assets, CapitaMall Xizhimen and CapitaMall Wangjing. The opening of Xizhimen’s basement connection to the subway interchange has led to significantly increased footfall and strong leasing interest.
Initiate with a BUY
We initiate with a BUY rating and a S$1.44 fair value based on a DDM analysis. CRCT is currently trading at an est. FY12 yield of 7.0%.
ECS Holdings
OCBC on 18 May 2012
ECS Holdings (ECS) reported 1Q12 revenue of S$901.6m (+7.1% YoY) which met our expectations. PATMI slumped 41.0% YoY to $6.2m. Excluding forex and other exceptional items, we estimate that core earnings would have declined 36.1% YoY to S$6.6m, forming 15.2% of our full-year projections. This was below our expectations, due to weaker-than-expected gross margin. Looking ahead, while we expect ECS’s performance to pick up more strongly in 2H12, ongoing macroeconomic uncertainties would continue to form a major risk to its operations, in our view. Coupled with the weak 1Q12 results, we cut our FY12 core PATMI forecasts by 19.9% (FY13 by 17.5%). But even with a lower fair value of S$0.555 (previously S$0.69), we maintain BUY as valuations remain undemanding.
1Q12 core earnings below expectations
ECS Holdings (ECS) reported a mixed set of 1Q12 results, with revenue meeting our expectations but PATMI came in below due largely to weaker-than-expected gross margin. Revenue increased 7.1% YoY to S$901.6m, forming 23.2% of our FY12 estimates. PATMI slumped 41.0% to S$6.2m. Excluding forex and other exceptional items, we estimate that core earnings would have declined 36.1% to S$6.6m, or 15.2% of our full-year projections. Sequentially, revenue fell 2.5% and net profit declined 31.6%.
Lower margins cast a pall on profitability
ECS’s gross margin declined from 5.1% in 1Q11 to 4.0% in 1Q12. This was attributed to a change in sales mix, as its lower-margin Distribution segment constituted a higher proportion of its revenue, while gross margin for this segment also dipped 1.1ppt YoY to 2.8% due partly to competitive pressures. Gross margin was also affected by lower early payment discounts and rebates earned.
Likely a back-end loaded year
We expect ECS’s operating performance to pick up more strongly in 2H12, driven by the following factors: 1) continued recovery from its Thailand operations which was affected by the flash floods, 2) contribution in 2Q and 3Q from some projects for its Enterprise Systems segment which encountered delays in 1Q, 3) higher expected demand for new ultrabook offerings and the launch of the Windows 8 operating system.
Pare estimates and fair value, but maintain BUY
Notwithstanding this, we see the need to cut our FY12 core PATMI forecasts by 19.9% (FY13 by 17.5%) given the weak 1Q12 results and continued uncertainties in the macroeconomic environment. This is based largely on softer gross margin assumptions, but partially mitigated by lower finance costs estimates given ECS’s reduced debt level. Our fair value declines from S$0.69 to S$0.555. Maintain BUY as valuations remain undemanding, with the stock trading at 5.3x FY12F EPS, or half a standard deviation below its 5-year average forward core PER.
ECS Holdings (ECS) reported 1Q12 revenue of S$901.6m (+7.1% YoY) which met our expectations. PATMI slumped 41.0% YoY to $6.2m. Excluding forex and other exceptional items, we estimate that core earnings would have declined 36.1% YoY to S$6.6m, forming 15.2% of our full-year projections. This was below our expectations, due to weaker-than-expected gross margin. Looking ahead, while we expect ECS’s performance to pick up more strongly in 2H12, ongoing macroeconomic uncertainties would continue to form a major risk to its operations, in our view. Coupled with the weak 1Q12 results, we cut our FY12 core PATMI forecasts by 19.9% (FY13 by 17.5%). But even with a lower fair value of S$0.555 (previously S$0.69), we maintain BUY as valuations remain undemanding.
1Q12 core earnings below expectations
ECS Holdings (ECS) reported a mixed set of 1Q12 results, with revenue meeting our expectations but PATMI came in below due largely to weaker-than-expected gross margin. Revenue increased 7.1% YoY to S$901.6m, forming 23.2% of our FY12 estimates. PATMI slumped 41.0% to S$6.2m. Excluding forex and other exceptional items, we estimate that core earnings would have declined 36.1% to S$6.6m, or 15.2% of our full-year projections. Sequentially, revenue fell 2.5% and net profit declined 31.6%.
Lower margins cast a pall on profitability
ECS’s gross margin declined from 5.1% in 1Q11 to 4.0% in 1Q12. This was attributed to a change in sales mix, as its lower-margin Distribution segment constituted a higher proportion of its revenue, while gross margin for this segment also dipped 1.1ppt YoY to 2.8% due partly to competitive pressures. Gross margin was also affected by lower early payment discounts and rebates earned.
Likely a back-end loaded year
We expect ECS’s operating performance to pick up more strongly in 2H12, driven by the following factors: 1) continued recovery from its Thailand operations which was affected by the flash floods, 2) contribution in 2Q and 3Q from some projects for its Enterprise Systems segment which encountered delays in 1Q, 3) higher expected demand for new ultrabook offerings and the launch of the Windows 8 operating system.
Pare estimates and fair value, but maintain BUY
Notwithstanding this, we see the need to cut our FY12 core PATMI forecasts by 19.9% (FY13 by 17.5%) given the weak 1Q12 results and continued uncertainties in the macroeconomic environment. This is based largely on softer gross margin assumptions, but partially mitigated by lower finance costs estimates given ECS’s reduced debt level. Our fair value declines from S$0.69 to S$0.555. Maintain BUY as valuations remain undemanding, with the stock trading at 5.3x FY12F EPS, or half a standard deviation below its 5-year average forward core PER.
Eratat Lifestyle
Kim Eng on 18 May 2012
Background: Eratat Lifestyle designs, manufactures and distributes retail attire and footwear, which are
marketed under its brand “ERATAT”. The products are sold in 830 specialty shops and shop-in-malls located
in first- and second-tier cities in China.
Why are we highlighting this stock? Worries mount for Eratat as investors are shaken by several events
occurring in the past year, namely, a lump-sum payment of CNY52m to its distributors, adjustment of receivable terms from 61-90 days to 90-120 days and renovation subsidy costs which could persist until 2Q12. Despite management’s reassurances and consistent internal audits, investor confidence is at an all-time low.
Sales incentive amounted to 35% of net profit in FY11. Eratat achieved record sales in FY11, breaking the CNY1b mark for the first time in its history. As a bonus, the group paid CNY4.3m to each of its 12 distributors. This sales incentive totalled CNY51.7m and effectively accounted for 35% of its FY11 profit. Eratat cited two reasons for its action: (1) distributors’ loyalty to the group and (2) their valiant efforts in achieving record sales. Subsequently, dividend payout was lowered to 8% against 12% in FY10, while cash pile remained high at CNY222m as of 4Q11. For investors, this was understandably a difficult pill to swallow.
Receivables lengthened. Questions were raised when receivable terms were extended from 61-90 days to 90-120 days. Management explained that the move was in line with its brand repositioning from footwear to lifestyle and premium apparel, as well as to encourage distributors to open more specialty shops, thereby strengthening its distribution network. It stressed that no receivables have defaulted to-date.
Slow sales with change in product mix. Eratat’s 1Q12 results showed that the change in product mix has slowed down sales by 19% YoY to CNY187.7m. The 64.1% YoY plunge in net profit to CNY13.5m was
attributed to renovation subsidy costs of CNY20.9m for distributors to renovate 370 shops in 1H12, as well
as higher salary adjustments. While the stock trades at dirt-cheap valuations, better business execution to enhance shareholder value and a higher degree of transparency would serve as positive catalysts at this stage.
Background: Eratat Lifestyle designs, manufactures and distributes retail attire and footwear, which are
marketed under its brand “ERATAT”. The products are sold in 830 specialty shops and shop-in-malls located
in first- and second-tier cities in China.
Why are we highlighting this stock? Worries mount for Eratat as investors are shaken by several events
occurring in the past year, namely, a lump-sum payment of CNY52m to its distributors, adjustment of receivable terms from 61-90 days to 90-120 days and renovation subsidy costs which could persist until 2Q12. Despite management’s reassurances and consistent internal audits, investor confidence is at an all-time low.
Sales incentive amounted to 35% of net profit in FY11. Eratat achieved record sales in FY11, breaking the CNY1b mark for the first time in its history. As a bonus, the group paid CNY4.3m to each of its 12 distributors. This sales incentive totalled CNY51.7m and effectively accounted for 35% of its FY11 profit. Eratat cited two reasons for its action: (1) distributors’ loyalty to the group and (2) their valiant efforts in achieving record sales. Subsequently, dividend payout was lowered to 8% against 12% in FY10, while cash pile remained high at CNY222m as of 4Q11. For investors, this was understandably a difficult pill to swallow.
Receivables lengthened. Questions were raised when receivable terms were extended from 61-90 days to 90-120 days. Management explained that the move was in line with its brand repositioning from footwear to lifestyle and premium apparel, as well as to encourage distributors to open more specialty shops, thereby strengthening its distribution network. It stressed that no receivables have defaulted to-date.
Slow sales with change in product mix. Eratat’s 1Q12 results showed that the change in product mix has slowed down sales by 19% YoY to CNY187.7m. The 64.1% YoY plunge in net profit to CNY13.5m was
attributed to renovation subsidy costs of CNY20.9m for distributors to renovate 370 shops in 1H12, as well
as higher salary adjustments. While the stock trades at dirt-cheap valuations, better business execution to enhance shareholder value and a higher degree of transparency would serve as positive catalysts at this stage.
M1
Kim Eng on 18 May 2012
Prepay it forward. M1’s new prepaid MasterCard offering looks attractive enough to help it regrow its prepaid mobile segment, which has seen negative net-adds for the past two quarters. We maintain our BUY call on M1 and target price of SGD2.85, based on implied yield of 5% on FY12F DPS of SGD0.145.
Pioneers new prepaid MasterCard. The M1 Prepaid MasterCard is a multi-purpose debit card that allows users to top up M1’s prepaid cards, pay public transit fares, ERP and car park charges and make contactless purchases. We think it is an interesting product that should help M1 increase customer stickiness and reverse negative net-adds in prepaid. The main selling point is that it offers a simple way to pay for goods and services but without the complexity of owning a credit card.
Aimed at the young, the old and everyone in-between. M1 is targeting this card at any consumer who values convenience in general; in other words, the majority of its customer base can benefit. We think there are wide applications for the young, the elderly, migrant workers as well as professionals. For example, parents can charge the card with a fixed mobile allowance as well as their monthly allowances. Spending can be tracked online for better budgeting and financial management. There are no age or income restrictions to obtain this card.
Spotlight on StarHub. We took a look at the prepaid plans that are available on the market today and concluded that StarHub appears to be vulnerable to this new product from M1. We would not be surprised if
it runs a negative prepaid net-add number in 2Q12 and 3Q12. Our comparison shows that StarHub currently is the least competitive in mobile voice calls, both locally and internationally. A 20-minute voice call costs SGD1.74 for StarHub versus SGD1.60 for M1 and SingTel, and its IDD rates to Indonesia and the Philippines are 2-4 times higher.
Maintain BUY on M1 with target price of SGD2.85. M1 has guided a stable outlook for FY12, driven by both its mobile data and fixed services segments. We expect its new product to drive higher-quality prepaid net-adds as well. Maintain BUY and target price of SGD2.85, based on implied yield of 5% on FY12F DPS of SGD0.145.
Prepay it forward. M1’s new prepaid MasterCard offering looks attractive enough to help it regrow its prepaid mobile segment, which has seen negative net-adds for the past two quarters. We maintain our BUY call on M1 and target price of SGD2.85, based on implied yield of 5% on FY12F DPS of SGD0.145.
Pioneers new prepaid MasterCard. The M1 Prepaid MasterCard is a multi-purpose debit card that allows users to top up M1’s prepaid cards, pay public transit fares, ERP and car park charges and make contactless purchases. We think it is an interesting product that should help M1 increase customer stickiness and reverse negative net-adds in prepaid. The main selling point is that it offers a simple way to pay for goods and services but without the complexity of owning a credit card.
Aimed at the young, the old and everyone in-between. M1 is targeting this card at any consumer who values convenience in general; in other words, the majority of its customer base can benefit. We think there are wide applications for the young, the elderly, migrant workers as well as professionals. For example, parents can charge the card with a fixed mobile allowance as well as their monthly allowances. Spending can be tracked online for better budgeting and financial management. There are no age or income restrictions to obtain this card.
Spotlight on StarHub. We took a look at the prepaid plans that are available on the market today and concluded that StarHub appears to be vulnerable to this new product from M1. We would not be surprised if
it runs a negative prepaid net-add number in 2Q12 and 3Q12. Our comparison shows that StarHub currently is the least competitive in mobile voice calls, both locally and internationally. A 20-minute voice call costs SGD1.74 for StarHub versus SGD1.60 for M1 and SingTel, and its IDD rates to Indonesia and the Philippines are 2-4 times higher.
Maintain BUY on M1 with target price of SGD2.85. M1 has guided a stable outlook for FY12, driven by both its mobile data and fixed services segments. We expect its new product to drive higher-quality prepaid net-adds as well. Maintain BUY and target price of SGD2.85, based on implied yield of 5% on FY12F DPS of SGD0.145.
Thursday 17 May 2012
Frasers Commercial Trust
UOBKayhian on 17 May 2012
What’s New
· China Square Precinct Master Plan. Frasers Commercial Trust (FCOT), together with Far East Organization and The Great Eastern Life Assurance Co Ltd has unveiled the China Square Precinct Master Plan, a collaborative effort to revitalise the downtown heritage area and create a vibrant retail, entertainment and hospitality destination with a combination of old and new urban forms. The Master Plan will integrate the companies’ respective developments, namely China Square Central (CSC), Far East Square and Great Eastern Centre, into a precinct known as “China Place”.
· Enhanced connectivity. The first phase of development will feature the construction of a covered linkway connecting the three properties, as well as the future Telok Ayer MRT station. The linkway costs an estimated S$14m which will be shared equally among the three partners. This project is slated to commence in Jun 12 and targeted for completion by Feb 13.
· Hotel developments. Far East Organization is also planning two hotel developments within Far East Square. These developments comprise a 37-room designer boutique hotel that will be converted from offices within the conservation shophouses, and a new 28-storey 292-room hotel that will serve the business community in the surrounding Central Business District.
Stock Impact
· Improvements at minimal cost. In our view, this initiative is likely to benefit CSC by improving its connectivity and integration with Telok Ayer MRT as well as adjoining developments Far East Square and Great Eastern Centre. We estimate that FCOT will need to invest less than S$10m for the construction of the proposed linkway, which we expect will be funded through internal sources.
· Room to improve occupancy and tenant mix. Our previous site visit to CSC’s retail space suggests potential to improve occupancy and tenant mix. Channel checks revealed that there are a few unoccupied units on the ground floor, while tenant mix at the basement is too broad, which includes a gym, low-end eateries, a Christian bookstore, a laundry and a redemption fulfilment centre among others. In addition, the retail podium lacks strong anchor tenants to draw and retain shoppers.
· Revitalisation of Tanjong Pagar and Shenton Way. We believe that CSC could also benefit from the revitalisation of Tanjong Pagar and Shenton Way that includes new offices and residential developments. CSC houses the nearest supermarket to upcoming residential developments such as Robinson Suites and One Shenton, ParkRoyal on Pickering, and a new hotel due to be completed by end-12.
Earnings Revision.
· No change to forecast. We maintain our profit forecast.
Valuation
· Re-iterate BUY with target price of S$1.07 (no change), implying 15.7 % upside from the current price and FY13 DPU yield of 8.2%. Our target price is based on an 8.7% discount rate and long-term growth rate of 2.0%.
What’s New
· China Square Precinct Master Plan. Frasers Commercial Trust (FCOT), together with Far East Organization and The Great Eastern Life Assurance Co Ltd has unveiled the China Square Precinct Master Plan, a collaborative effort to revitalise the downtown heritage area and create a vibrant retail, entertainment and hospitality destination with a combination of old and new urban forms. The Master Plan will integrate the companies’ respective developments, namely China Square Central (CSC), Far East Square and Great Eastern Centre, into a precinct known as “China Place”.
· Enhanced connectivity. The first phase of development will feature the construction of a covered linkway connecting the three properties, as well as the future Telok Ayer MRT station. The linkway costs an estimated S$14m which will be shared equally among the three partners. This project is slated to commence in Jun 12 and targeted for completion by Feb 13.
· Hotel developments. Far East Organization is also planning two hotel developments within Far East Square. These developments comprise a 37-room designer boutique hotel that will be converted from offices within the conservation shophouses, and a new 28-storey 292-room hotel that will serve the business community in the surrounding Central Business District.
Stock Impact
· Improvements at minimal cost. In our view, this initiative is likely to benefit CSC by improving its connectivity and integration with Telok Ayer MRT as well as adjoining developments Far East Square and Great Eastern Centre. We estimate that FCOT will need to invest less than S$10m for the construction of the proposed linkway, which we expect will be funded through internal sources.
· Room to improve occupancy and tenant mix. Our previous site visit to CSC’s retail space suggests potential to improve occupancy and tenant mix. Channel checks revealed that there are a few unoccupied units on the ground floor, while tenant mix at the basement is too broad, which includes a gym, low-end eateries, a Christian bookstore, a laundry and a redemption fulfilment centre among others. In addition, the retail podium lacks strong anchor tenants to draw and retain shoppers.
· Revitalisation of Tanjong Pagar and Shenton Way. We believe that CSC could also benefit from the revitalisation of Tanjong Pagar and Shenton Way that includes new offices and residential developments. CSC houses the nearest supermarket to upcoming residential developments such as Robinson Suites and One Shenton, ParkRoyal on Pickering, and a new hotel due to be completed by end-12.
Earnings Revision.
· No change to forecast. We maintain our profit forecast.
Valuation
· Re-iterate BUY with target price of S$1.07 (no change), implying 15.7 % upside from the current price and FY13 DPU yield of 8.2%. Our target price is based on an 8.7% discount rate and long-term growth rate of 2.0%.
SMRT
OCBC on 17 May 2012
Following a directive issued by LTA, SMRT will begin replacing, with immediate effect, the power supplying third rail at locations where hairline cracks on some parts of the third rail joints are more visible. The cost for this replacements have not been accounted for by management’s estimates this year, and we expect to see a slight uptick in this year’s capital expenditure with the increase coming from an acceleration of costs from later years. Despite the latest development and ongoing COI hearings, SMRT’s share price has managed to hold steady and even outperformed against a backdrop of broad-market declines. At this juncture, we deem the possibility of further sharp sell-offs to be remote as SMRT services and its operational cash flows remain in demand and resilient. Maintain HOLD with a fair value estimate of S$1.71.
SMRT to start replacing third rail
Following a directive issued by the Land Transport Authority (LTA) yesterday, SMRT will begin replacing, with immediate effect, the power supplying third rail at locations where hairline cracks on some parts of the third rail joints are more visible. Although the presence of hairline cracks does not pose any immediate concerns, the move is more of a precautionary measure and the LTA has also reiterated the need for SMRT to closely monitor the condition of the third rail joints across its entire rail network.
Additional capex not accounted for
SMRT had previously disclosed a S$500m capital expenditure plan for FY13 with the excess from its usual annual budget (~S$100m-S$140m) related to a portion of the S$900m, seven-year plan to upgrade and renew aging MRT assets. According to SMRT’s work and time-line projections, the cost of the third rail replacement has not been included in this year’s estimates. While the final amount will only be known pending the outcome of its third rail checks, we expect to see a slight uptick in this year’s capital expenditure with the increase coming from an acceleration of costs from later years.
Share price has held steady since results
As for SMRT’s share price, it has held steady despite initial selling pressure following its weak FY12 results, and has managed to outperform the FTSE STI Index over the past two and a half weeks (-0.9% vs. -5.3%). While the COI continues its public hearings, we deem the possibility of further sharp sell-offs to be remote as SMRT services and its operational cash flows remain in demand and resilient.
Maintain HOLD
We reiterate our belief that SMRT will not have difficulty addressing its higher capital outlay requirements given its existing net cash position and available MTN programme, and leave our conservative 60% PATMI dividend payout ratio estimates unchanged. Maintain HOLD with a fair value estimate of S$1.71.
Following a directive issued by LTA, SMRT will begin replacing, with immediate effect, the power supplying third rail at locations where hairline cracks on some parts of the third rail joints are more visible. The cost for this replacements have not been accounted for by management’s estimates this year, and we expect to see a slight uptick in this year’s capital expenditure with the increase coming from an acceleration of costs from later years. Despite the latest development and ongoing COI hearings, SMRT’s share price has managed to hold steady and even outperformed against a backdrop of broad-market declines. At this juncture, we deem the possibility of further sharp sell-offs to be remote as SMRT services and its operational cash flows remain in demand and resilient. Maintain HOLD with a fair value estimate of S$1.71.
SMRT to start replacing third rail
Following a directive issued by the Land Transport Authority (LTA) yesterday, SMRT will begin replacing, with immediate effect, the power supplying third rail at locations where hairline cracks on some parts of the third rail joints are more visible. Although the presence of hairline cracks does not pose any immediate concerns, the move is more of a precautionary measure and the LTA has also reiterated the need for SMRT to closely monitor the condition of the third rail joints across its entire rail network.
Additional capex not accounted for
SMRT had previously disclosed a S$500m capital expenditure plan for FY13 with the excess from its usual annual budget (~S$100m-S$140m) related to a portion of the S$900m, seven-year plan to upgrade and renew aging MRT assets. According to SMRT’s work and time-line projections, the cost of the third rail replacement has not been included in this year’s estimates. While the final amount will only be known pending the outcome of its third rail checks, we expect to see a slight uptick in this year’s capital expenditure with the increase coming from an acceleration of costs from later years.
Share price has held steady since results
As for SMRT’s share price, it has held steady despite initial selling pressure following its weak FY12 results, and has managed to outperform the FTSE STI Index over the past two and a half weeks (-0.9% vs. -5.3%). While the COI continues its public hearings, we deem the possibility of further sharp sell-offs to be remote as SMRT services and its operational cash flows remain in demand and resilient.
Maintain HOLD
We reiterate our belief that SMRT will not have difficulty addressing its higher capital outlay requirements given its existing net cash position and available MTN programme, and leave our conservative 60% PATMI dividend payout ratio estimates unchanged. Maintain HOLD with a fair value estimate of S$1.71.
Hoe Leong Corp
OCBC on 17 May 2012
Hoe Leong Corp (HOE) reported 1Q12 revenue and gross profit of S$20.6m (+32% YoY) and S$5.3m (+23% YoY) respectively, and these were generally in line with our estimates. However, a steep and unexpected loss of S$3.3m from share of results from associates and JVs (Semua: S$4.2m losses, Aries: S$0.9m profit) led to an overall 1Q net loss of S$0.9m (1Q11: S$1.7m net profit). While we are fairly comfortable about HOE’s core business, we remain cautious on its Semua stake. There is also a possibility that Semua’s financials could be consolidated in HOE. Given the lack of clarity, we lowered our fair value to S$0.20, based on 0.7x P/B. Maintain HOLD.
1Q results dragged down by associates
Hoe Leong Corp (HOE) reported 1Q12 revenue and gross profit of S$20.6m (+32% YoY) and S$5.3m (+23% YoY) respectively, and these were generally in line with our estimates. However, a steep and unexpected loss of S$3.3m from share of results from associates and JVs (Semua: S$4.2m losses, Aries: S$0.9m profit) led to an overall 1Q net loss of S$0.9m (1Q11: S$1.7m net profit).
Losses from Semua
HOE’s S$4.2m share of losses from its Malaysian associate Semua comprises (i) loss on disposal of a vessel (S$3.4m) and (ii) operating losses (S$0.8m). HOE previously purchased a 49% stake in Semua Group (an owner-operater of oil and chemical tankers) from Malaysia-listed Sumatec Group, for RM35.3m (S$15.1m) in Sep 2010 to diversify its business. However, the operating environment has since worsened and a turnaround is unlikely to happen soon.
Possible consolidation of financials
On 10 May 2012, HOE disclosed that since Semua did not meet the guaranteed RM31m profit for FY11, it has the right to seek compensation either through (i) an issuance of new Sumatec shares, (ii) a transfer of Semua shares held by Sumatec to HOE, or (iii) a combination of the two options. HOE is currently considering its options, and depending on the increase of its effective stake on Semua, there is a possibility that Semua’s financials could be consolidated into HOE in the future. More importantly, this consolidation could have a material impact on HOE’s profitability and balance sheet ratios.
Maintain HOLD with lower fair value
While we are fairly comfortable about HOE’s core business, we remain cautious on its Semua stake. Risks include impairment on its Semua stake and a material impact on HOE’s balance sheet on consolidation. Given the lack of clarity, we lowered our fair value to S$0.20, based on 0.7x P/B. Maintain HOLD.
Hoe Leong Corp (HOE) reported 1Q12 revenue and gross profit of S$20.6m (+32% YoY) and S$5.3m (+23% YoY) respectively, and these were generally in line with our estimates. However, a steep and unexpected loss of S$3.3m from share of results from associates and JVs (Semua: S$4.2m losses, Aries: S$0.9m profit) led to an overall 1Q net loss of S$0.9m (1Q11: S$1.7m net profit). While we are fairly comfortable about HOE’s core business, we remain cautious on its Semua stake. There is also a possibility that Semua’s financials could be consolidated in HOE. Given the lack of clarity, we lowered our fair value to S$0.20, based on 0.7x P/B. Maintain HOLD.
1Q results dragged down by associates
Hoe Leong Corp (HOE) reported 1Q12 revenue and gross profit of S$20.6m (+32% YoY) and S$5.3m (+23% YoY) respectively, and these were generally in line with our estimates. However, a steep and unexpected loss of S$3.3m from share of results from associates and JVs (Semua: S$4.2m losses, Aries: S$0.9m profit) led to an overall 1Q net loss of S$0.9m (1Q11: S$1.7m net profit).
Losses from Semua
HOE’s S$4.2m share of losses from its Malaysian associate Semua comprises (i) loss on disposal of a vessel (S$3.4m) and (ii) operating losses (S$0.8m). HOE previously purchased a 49% stake in Semua Group (an owner-operater of oil and chemical tankers) from Malaysia-listed Sumatec Group, for RM35.3m (S$15.1m) in Sep 2010 to diversify its business. However, the operating environment has since worsened and a turnaround is unlikely to happen soon.
Possible consolidation of financials
On 10 May 2012, HOE disclosed that since Semua did not meet the guaranteed RM31m profit for FY11, it has the right to seek compensation either through (i) an issuance of new Sumatec shares, (ii) a transfer of Semua shares held by Sumatec to HOE, or (iii) a combination of the two options. HOE is currently considering its options, and depending on the increase of its effective stake on Semua, there is a possibility that Semua’s financials could be consolidated into HOE in the future. More importantly, this consolidation could have a material impact on HOE’s profitability and balance sheet ratios.
Maintain HOLD with lower fair value
While we are fairly comfortable about HOE’s core business, we remain cautious on its Semua stake. Risks include impairment on its Semua stake and a material impact on HOE’s balance sheet on consolidation. Given the lack of clarity, we lowered our fair value to S$0.20, based on 0.7x P/B. Maintain HOLD.
Hi-P International
Kim Eng on 17 May 2012
Background: Hi-P provides contract manufacturing services and electro-mechanical modules to the telecommunications, consumer electronics and electrical, computing, life sciences and medical, and automotive industries. It has 15 manufacturing plants globally, located over five sites in China (Shanghai, Tianjin, Suzhou, Chengdu and Xiamen) and in Thailand, Mexico, Poland and Singapore.
Why are we highlighting this stock? As expected, Hi-P reported a big fall in profits in 1Q12 to just $1.5m. However, Hi-P expects a stronger 2H in 2012 and for full year net profit to exceed FY11’s SGD45m. Assuming 1H12 net profit of SGD10m, it would have to earn SGD35 in 2H12, and if this momentum continues, FY13 results could certainly exceed FY10’s peak of SGD67m. As the stock has retreated in the last few weeks and is currently hovering around the 200-day moving average, it may be worthwhile to take a bet on Hi-P on further weakness.
Valuations starting to reflect reality. At the recent peak of SGD1.05, Hi-P was valued at 20x FY11 earnings! Granted that earnings were at depressed levels, this was absolutely on the over-priced side for an old-world manufacturing stock. It has now fallen back to a more reasonable valuation, its long-term historical mean of 12x. If earnings can recover to FY10 peak levels, the stock would be trading at its long-term mean again. Any further weakness would suggest undervaluation for the stock.
• Capex burst may be a leading indicator. Hi-P expects to spend SGD180m in 2012 to expand its production capacity and accelerate its automation program. This is almost two times what it spent in FY11 and FY10 combined! To some extent, this is driven by its problems with labour costs in China and the need to automate to lower costs. However, it also suggests Hi-P is optimistic enough on future orders to justify this level of capex. Specifically, management mentioned new business opportunities for wireless, computing & peripherals, home appliances, sports digital devices and personal grooming devices.
Background: Hi-P provides contract manufacturing services and electro-mechanical modules to the telecommunications, consumer electronics and electrical, computing, life sciences and medical, and automotive industries. It has 15 manufacturing plants globally, located over five sites in China (Shanghai, Tianjin, Suzhou, Chengdu and Xiamen) and in Thailand, Mexico, Poland and Singapore.
Why are we highlighting this stock? As expected, Hi-P reported a big fall in profits in 1Q12 to just $1.5m. However, Hi-P expects a stronger 2H in 2012 and for full year net profit to exceed FY11’s SGD45m. Assuming 1H12 net profit of SGD10m, it would have to earn SGD35 in 2H12, and if this momentum continues, FY13 results could certainly exceed FY10’s peak of SGD67m. As the stock has retreated in the last few weeks and is currently hovering around the 200-day moving average, it may be worthwhile to take a bet on Hi-P on further weakness.
Valuations starting to reflect reality. At the recent peak of SGD1.05, Hi-P was valued at 20x FY11 earnings! Granted that earnings were at depressed levels, this was absolutely on the over-priced side for an old-world manufacturing stock. It has now fallen back to a more reasonable valuation, its long-term historical mean of 12x. If earnings can recover to FY10 peak levels, the stock would be trading at its long-term mean again. Any further weakness would suggest undervaluation for the stock.
• Capex burst may be a leading indicator. Hi-P expects to spend SGD180m in 2012 to expand its production capacity and accelerate its automation program. This is almost two times what it spent in FY11 and FY10 combined! To some extent, this is driven by its problems with labour costs in China and the need to automate to lower costs. However, it also suggests Hi-P is optimistic enough on future orders to justify this level of capex. Specifically, management mentioned new business opportunities for wireless, computing & peripherals, home appliances, sports digital devices and personal grooming devices.
Offshore & Marine
Kim Eng on 17 May 2012
Mixed bag of results. Offshore & Marine (O&M) related stocks under our coverage reported a mixed bag of first-quarter results. Although there are some variances from our expectations, this has not changed our views on the sector. Our top picks to ride the O&M cycle are the bellwether stocks namely Keppel Corp (Keppel) and Sembcorp Marine (SMM). We also like Sembcorp Industries (SCI) for its increasingly resilient Utilities segment. Ezion, a smaller-market-cap stock stands out with strong expected 3-year EPS CAGR of over 35%. We are less sanguine on the Chinese shipbuilders such as Cosco and Yangzijiang. We also took the opportunity to adjust our forecasts and valuations for Keppel (Page 4).
Positive on the rig-builders. Our preference for the rig-builders is based on the premise of heightened Exploration & Production (E&P) activities by the oil majors. Taken together, capital spending is also expected to rise by 10% YoY in 2012. This should open the tap for a flow of new rig and offshore contract orders. Our optimism is further supported by high oil prices, structural requirements for higher specification and safer rigs, rig-replacement cycle of aging fleet and signs of higher charter and utilisation rates. Anecdotal evidence also suggests that enquiry pipelines for new rig and offshore contracts are healthy across all categories.
Negative on the shipbuilders. We remain negative on the Chinese shipbuilders given macro headwinds surrounding the shipbuilding sector which we believe will persist for 2012. We expect demand for new dry-bulk carriers to be weak due to oversupply and lower iron-ore trade. The containership newbuild segment has a less negative outlook, supported by shippers seeking more efficient vessels in order to enhance cost leadership in the long term, but this would only be possible for ship owners with strong financials. Overall, newbuild prices are expected to remain depressed with sustained margin pressures.
Risks from a global recession. We are mindful of the risk of the global economy plunging into a recession which will affect the credit markets. Oil companies could postpone their spending plans in the event that oil prices dip below USD80/bbl, but we think that this scenario is unlikely.
Order flow key driver. Order flow is the key stock price driver in the coming months and would serve to confirm our views on the sector. Both Keppel and SMM have good earnings visibility supported by their strong orderbooks. For Cosco and Yangzijiang, we expect the negative sector-related factors discussed above to take precedence and weigh down on the duo’s performance.
Mixed bag of results. Offshore & Marine (O&M) related stocks under our coverage reported a mixed bag of first-quarter results. Although there are some variances from our expectations, this has not changed our views on the sector. Our top picks to ride the O&M cycle are the bellwether stocks namely Keppel Corp (Keppel) and Sembcorp Marine (SMM). We also like Sembcorp Industries (SCI) for its increasingly resilient Utilities segment. Ezion, a smaller-market-cap stock stands out with strong expected 3-year EPS CAGR of over 35%. We are less sanguine on the Chinese shipbuilders such as Cosco and Yangzijiang. We also took the opportunity to adjust our forecasts and valuations for Keppel (Page 4).
Positive on the rig-builders. Our preference for the rig-builders is based on the premise of heightened Exploration & Production (E&P) activities by the oil majors. Taken together, capital spending is also expected to rise by 10% YoY in 2012. This should open the tap for a flow of new rig and offshore contract orders. Our optimism is further supported by high oil prices, structural requirements for higher specification and safer rigs, rig-replacement cycle of aging fleet and signs of higher charter and utilisation rates. Anecdotal evidence also suggests that enquiry pipelines for new rig and offshore contracts are healthy across all categories.
Negative on the shipbuilders. We remain negative on the Chinese shipbuilders given macro headwinds surrounding the shipbuilding sector which we believe will persist for 2012. We expect demand for new dry-bulk carriers to be weak due to oversupply and lower iron-ore trade. The containership newbuild segment has a less negative outlook, supported by shippers seeking more efficient vessels in order to enhance cost leadership in the long term, but this would only be possible for ship owners with strong financials. Overall, newbuild prices are expected to remain depressed with sustained margin pressures.
Risks from a global recession. We are mindful of the risk of the global economy plunging into a recession which will affect the credit markets. Oil companies could postpone their spending plans in the event that oil prices dip below USD80/bbl, but we think that this scenario is unlikely.
Order flow key driver. Order flow is the key stock price driver in the coming months and would serve to confirm our views on the sector. Both Keppel and SMM have good earnings visibility supported by their strong orderbooks. For Cosco and Yangzijiang, we expect the negative sector-related factors discussed above to take precedence and weigh down on the duo’s performance.
Wednesday 16 May 2012
Olam International Limited
OCBC on 16 May 2012
Olam International Limited (Olam) reported 9MFY12 revenue of S$11,947.7m and estimated core net profit of S$215.3m, meeting 63.2% and 60.5% of our FY12 estimates respectively. Going forward, Olam seems to be a tad more optimistic about its Food business; and more muted towards its Industrial Raw Materials segment. While we are keeping our FY12 and FY13 estimates intact, we note that the market is adopting a more “risk off” approach in light of the renewed global economic uncertainties. In response, we lower our fair value to S$2.24 from S$2.63, based on 15x blended FY12/FY13F EPS (vs. 18x FY12F previously). We maintain our HOLD rating in anticipation of more near-term weakness among commodity plays.
9MFY12 results mostly in line
Olam International Limited (Olam) reported 9MFY12 revenue of S$11,947.7m, up 6.3%, meeting 63.2% of our FY12 forecast, on the back of a 17.2% increase in sales volume to 7.22m metric tonnes (MT). Reported NPAT fell 13/6% to $$261.4m; but excluding gains from biological assets and derivative instruments, we estimate that core net profit would have fallen 16.5% to S$215.3m, or 60.5% of our core FY12 forecast. But we believe that this is still in-line with the group’s historical seasonality where it typically achieves around 60-65% of its earnings in the first nine months.
Food outlook still upbeat
Olam’s Food segment saw sales volume rise by 20.6% in 9MFY12; net contribution (NC) climbed 30.9%, as NC per ton also increased 8.5% to S$139. It now accounts for 84.2% of overall volume and 78.4% of 9MFY12 revenue. Going forward, Olam remains upbeat about its prospects, particularly upstream dairy farming in Russia and making biscuits and candy in Nigeria – the second largest market in Africa for packaged food consumption.
Industrial Materials more muted
Industrial Raw Materials category turned in a more muted performance. Although sale volume grew 2.1%, NC fell 34.8% on the back of a 36.2% decline in NC per ton to S$86. Olam notes that its Cotton and Wood Products BUs continued to face strong headwinds in 9MFY12. It now does not expect to see any rebound in the Cotton business in FY12. Nevertheless, it is slightly more optimistic about its Wood business, noting that the markets have began to see a slight recovery.
HOLD with lower S$2.24 fair value
While we are keeping our FY12 and FY13 estimates intact, we note that the market is adopting a more “risk off” approach in light of the renewed global economic uncertainties. In response, we lower our fair value to S$2.24 from S$2.63, based on 15x blended FY12/FY13F EPS (vs. 18x FY12F previously). We maintain our HOLD rating in anticipation of more near-term weakness among commodity plays.
Olam International Limited (Olam) reported 9MFY12 revenue of S$11,947.7m and estimated core net profit of S$215.3m, meeting 63.2% and 60.5% of our FY12 estimates respectively. Going forward, Olam seems to be a tad more optimistic about its Food business; and more muted towards its Industrial Raw Materials segment. While we are keeping our FY12 and FY13 estimates intact, we note that the market is adopting a more “risk off” approach in light of the renewed global economic uncertainties. In response, we lower our fair value to S$2.24 from S$2.63, based on 15x blended FY12/FY13F EPS (vs. 18x FY12F previously). We maintain our HOLD rating in anticipation of more near-term weakness among commodity plays.
9MFY12 results mostly in line
Olam International Limited (Olam) reported 9MFY12 revenue of S$11,947.7m, up 6.3%, meeting 63.2% of our FY12 forecast, on the back of a 17.2% increase in sales volume to 7.22m metric tonnes (MT). Reported NPAT fell 13/6% to $$261.4m; but excluding gains from biological assets and derivative instruments, we estimate that core net profit would have fallen 16.5% to S$215.3m, or 60.5% of our core FY12 forecast. But we believe that this is still in-line with the group’s historical seasonality where it typically achieves around 60-65% of its earnings in the first nine months.
Food outlook still upbeat
Olam’s Food segment saw sales volume rise by 20.6% in 9MFY12; net contribution (NC) climbed 30.9%, as NC per ton also increased 8.5% to S$139. It now accounts for 84.2% of overall volume and 78.4% of 9MFY12 revenue. Going forward, Olam remains upbeat about its prospects, particularly upstream dairy farming in Russia and making biscuits and candy in Nigeria – the second largest market in Africa for packaged food consumption.
Industrial Materials more muted
Industrial Raw Materials category turned in a more muted performance. Although sale volume grew 2.1%, NC fell 34.8% on the back of a 36.2% decline in NC per ton to S$86. Olam notes that its Cotton and Wood Products BUs continued to face strong headwinds in 9MFY12. It now does not expect to see any rebound in the Cotton business in FY12. Nevertheless, it is slightly more optimistic about its Wood business, noting that the markets have began to see a slight recovery.
HOLD with lower S$2.24 fair value
While we are keeping our FY12 and FY13 estimates intact, we note that the market is adopting a more “risk off” approach in light of the renewed global economic uncertainties. In response, we lower our fair value to S$2.24 from S$2.63, based on 15x blended FY12/FY13F EPS (vs. 18x FY12F previously). We maintain our HOLD rating in anticipation of more near-term weakness among commodity plays.
STX OSV
OCBC on 16 May 2012
STX OSV reported 1Q12 results that were broadly in line with our and the street’s estimates. 1Q revenue decreased by 12% YoY to NOK2.8b (1Q11: NOK3.2b), while net profit attributable to shareholders fell by 13% YoY to NOK269m (1Q11: NOK310m). Operating margin was unchanged at 12.9%. Order-book fell slightly to NOK16.0b (end-FY11: NOK16.7b). To account for the increasing uncertainty over the eurozone bloc, we tweaked our valuation peg to 9x (previously 9.7x). Maintain BUY with lower fair value estimate of S$2.00 (previously S$2.25).
1Q results within expectations
STX OSV reported 1Q12 results that were broadly in line with our and the street’s estimates. 1Q revenue decreased by 12% YoY to NOK2.8b (1Q11: NOK3.2b), while net profit attributable to shareholders fell by 13% YoY to NOK269m (1Q11: NOK310m). EBITDA and operating margins remained largely unchanged at 14.0% and 12.9% respectively. During the quarter, the group delivered five vessels and secured contracts for four vessels, bringing its net order-book to 53 vessels as of quarter-end.
NOK16b order-book
Although its order-book declined slightly to NOK16.0b (end 2011: NOK16.7bn), the new orders (i.e. 2 AHTS and 2 OSCVs) comprise larger and more complex vessels, signaling a possible rebound in activity for high-end offshore vessels. Should this trend persist, STX OSV would be well-positioned to secure new orders given its market leadership in constructing highly specialized vessels.
Improved outlook
According to STX OSV, vessel demand for the subsea support and construction segments continues to be strong, supported by increased offshore activity and increased backlog for subsea contractors. Charter rates for large AHTS have also continued to rise. The financing climate has somewhat improved over the past quarter, although concerns over the economic situation in the eurozone still persist.
Maintain BUY with lower fair value
We updated our model with the 1Q12 results and lowered our contract win assumptions to NOK11b from NOK13b previously (contracts secured ytd: ~NOK4b). To account for the uncertainty over the eurozone, we also tweaked our valuation peg to 9x (previously 9.7x). Maintain BUY with lower fair value estimate of S$2.00 (previously S$2.25).
STX OSV reported 1Q12 results that were broadly in line with our and the street’s estimates. 1Q revenue decreased by 12% YoY to NOK2.8b (1Q11: NOK3.2b), while net profit attributable to shareholders fell by 13% YoY to NOK269m (1Q11: NOK310m). Operating margin was unchanged at 12.9%. Order-book fell slightly to NOK16.0b (end-FY11: NOK16.7b). To account for the increasing uncertainty over the eurozone bloc, we tweaked our valuation peg to 9x (previously 9.7x). Maintain BUY with lower fair value estimate of S$2.00 (previously S$2.25).
1Q results within expectations
STX OSV reported 1Q12 results that were broadly in line with our and the street’s estimates. 1Q revenue decreased by 12% YoY to NOK2.8b (1Q11: NOK3.2b), while net profit attributable to shareholders fell by 13% YoY to NOK269m (1Q11: NOK310m). EBITDA and operating margins remained largely unchanged at 14.0% and 12.9% respectively. During the quarter, the group delivered five vessels and secured contracts for four vessels, bringing its net order-book to 53 vessels as of quarter-end.
NOK16b order-book
Although its order-book declined slightly to NOK16.0b (end 2011: NOK16.7bn), the new orders (i.e. 2 AHTS and 2 OSCVs) comprise larger and more complex vessels, signaling a possible rebound in activity for high-end offshore vessels. Should this trend persist, STX OSV would be well-positioned to secure new orders given its market leadership in constructing highly specialized vessels.
Improved outlook
According to STX OSV, vessel demand for the subsea support and construction segments continues to be strong, supported by increased offshore activity and increased backlog for subsea contractors. Charter rates for large AHTS have also continued to rise. The financing climate has somewhat improved over the past quarter, although concerns over the economic situation in the eurozone still persist.
Maintain BUY with lower fair value
We updated our model with the 1Q12 results and lowered our contract win assumptions to NOK11b from NOK13b previously (contracts secured ytd: ~NOK4b). To account for the uncertainty over the eurozone, we also tweaked our valuation peg to 9x (previously 9.7x). Maintain BUY with lower fair value estimate of S$2.00 (previously S$2.25).
KS Energy
OCBC on 16 May 2012
KS Energy (KSE) reported a 5.6% fall in revenue to S$120.2m and a net loss of S$315k in 1Q12 vs. a net loss of S$8.3m in 1Q11. Revenue was within our expectations, accounting for 22.3% of our full year estimates. We estimate core net loss of S$10.5m in the quarter, close to our full year net loss forecast of S$11.5m. The group’s convertible bonds may be redeemed by bondholders in Mar 2013, but KSE has proven adept at raising funds from investors and partners. Hence we would not be surprised if there are news of further tie-ups in the near future. In line with recent weakness in market sentiment which has impacted valuations of the broader industry, we lower our peg from 1.5x to 1.4x FY12F NTA, such that our fair value estimate slips to S$0.85 (prev. S$0.91). Maintain HOLD.
1Q12 net loss narrows
KS Energy (KSE) reported a 5.6% fall in revenue to S$120.2m and a net loss of S$315k in 1Q12 vs. a net loss of S$8.3m in 1Q11. Revenue was within our expectations, accounting for 22.3% of our full year estimates. We note, however that there was a one-off gain of S$10.6m due to a reversal of fair value loss on an option relating to KS Endeavor; excluding that we estimate core net loss of S$10.5m in the quarter, close to our full year net loss forecast of S$11.5m.
Costs mostly stable
Revenue from the distribution business, which accounted for 71.1% of total revenue, saw a 3.5% drop in revenue in the last quarter, while the drilling division rose 40.2% YoY as more assets were chartered. Costs remained mostly stable except for a significant increase in direct depreciation charges due to capital assets commencing work on their charters as well as accelerated depreciation on a rig.
Convertible bonds with redemption option
The group’s convertible bonds (principal amount ~S$100m) have an option by bondholders who may redeem the bonds in Mar 2013. Management has been “weighing the various options available to meet this funding requirement” should the redemption option be exercised. KSE has proven adept at raising funds from investors and partners such as Itochu of Japan, Dubai-based Dutco and private equity fund Actis. Hence we would not be surprised if there are news of further tie-ups in the near future.
Restructuring ongoing
Business restructuring in the distribution segment is still ongoing, which will be a gradual process. Besides integration of different IT systems and operational procedures, there also has to be the amalgamation of employees from different companies and hence different working cultures. In line with recent weakness in market sentiment which has impacted valuations of the broader industry, we lower our peg from 1.5x to 1.4x FY12F NTA, and as such our fair value estimate slips to S$0.85 (prev. S$0.91). Maintain HOLD.
KS Energy (KSE) reported a 5.6% fall in revenue to S$120.2m and a net loss of S$315k in 1Q12 vs. a net loss of S$8.3m in 1Q11. Revenue was within our expectations, accounting for 22.3% of our full year estimates. We estimate core net loss of S$10.5m in the quarter, close to our full year net loss forecast of S$11.5m. The group’s convertible bonds may be redeemed by bondholders in Mar 2013, but KSE has proven adept at raising funds from investors and partners. Hence we would not be surprised if there are news of further tie-ups in the near future. In line with recent weakness in market sentiment which has impacted valuations of the broader industry, we lower our peg from 1.5x to 1.4x FY12F NTA, such that our fair value estimate slips to S$0.85 (prev. S$0.91). Maintain HOLD.
1Q12 net loss narrows
KS Energy (KSE) reported a 5.6% fall in revenue to S$120.2m and a net loss of S$315k in 1Q12 vs. a net loss of S$8.3m in 1Q11. Revenue was within our expectations, accounting for 22.3% of our full year estimates. We note, however that there was a one-off gain of S$10.6m due to a reversal of fair value loss on an option relating to KS Endeavor; excluding that we estimate core net loss of S$10.5m in the quarter, close to our full year net loss forecast of S$11.5m.
Costs mostly stable
Revenue from the distribution business, which accounted for 71.1% of total revenue, saw a 3.5% drop in revenue in the last quarter, while the drilling division rose 40.2% YoY as more assets were chartered. Costs remained mostly stable except for a significant increase in direct depreciation charges due to capital assets commencing work on their charters as well as accelerated depreciation on a rig.
Convertible bonds with redemption option
The group’s convertible bonds (principal amount ~S$100m) have an option by bondholders who may redeem the bonds in Mar 2013. Management has been “weighing the various options available to meet this funding requirement” should the redemption option be exercised. KSE has proven adept at raising funds from investors and partners such as Itochu of Japan, Dubai-based Dutco and private equity fund Actis. Hence we would not be surprised if there are news of further tie-ups in the near future.
Restructuring ongoing
Business restructuring in the distribution segment is still ongoing, which will be a gradual process. Besides integration of different IT systems and operational procedures, there also has to be the amalgamation of employees from different companies and hence different working cultures. In line with recent weakness in market sentiment which has impacted valuations of the broader industry, we lower our peg from 1.5x to 1.4x FY12F NTA, and as such our fair value estimate slips to S$0.85 (prev. S$0.91). Maintain HOLD.
PEC Ltd
OCBC on 15 May 2012
PEC Ltd reported a very weak set of 3Q12 results that caught us and the street by surprise. 3Q revenue increased by 22% YoY to S$107m (3Q11: S$88m), but net profit attributable to shareholders plunged 86% YoY to S$1.3m (3Q11: S$12.6m) on lower gross margin and higher operating costs. Net margin was just 1.2% (3Q11: 11.0%). While the group still has a very strong net cash position of S$112m (or S$0.44 per share), there is a possibility that it may incur losses over the near term horizon. Therefore, we lowered our fair value estimate to S$0.64 (previously S$0.93), based on 0.8x (previously 1.0x) P/B. Downgrade to HOLD.
Weak 3Q12 results
PEC Ltd reported a very weak set of 3Q12 results that caught us and the street by surprise. 3Q revenue increased by 22% YoY to S$107m (3Q11: S$88m), but net profit attributable to shareholders plunged 86% YoY to S$1.3m (3Q11: S$12.6m) on lower gross margin and lower operating leverage. Gross margin halved to 16.3% in 3Q12 (3Q11: 31%), mainly due to (i) intensive pricing competition, (ii) cost pressure from operations and (iii) completion of better margin project works in prior quarters. Its order-book also shrank to S$246m as at end Mar-12 (end Dec-11: S$270m).
Breaking point
With a net margin of just 1.2% for 3Q12, we believe that PEC is near its break-even point. Going forward, it needs to record quarterly revenue of about S$100m (with gross margin of at least 16%) or risk incurring losses in its core business. Its order-book (S$246m as of end Mar-12) looks sufficient for now, but the outstanding contracts are likely secured in late-2011 and may command lower project margins. Given the shortage of projects in the market, we think that oil companies now have the bargaining power to push down the rates for project and maintenance work. This implies lower margins over the medium term horizon.
Rotterdam claims unresolved
Although the problematic Rotterdam project was finally completed after the 3Q12, PEC has yet to resolve its claims. It has about S$18.3m of claims - for which provisions were made for S$11m – due from the Audex-Verwater JV. Meanwhile, we updated our estimates for 3Q12 results and lowered our FY13F gross margin assumptions to 15% (previously: 17%). Given the gloomy outlook, we downgrade our rating to HOLD and lowered our fair value estimate to S$0.64 (previously S$0.93) on 0.8x (previously 1.0x) P/B.
PEC Ltd reported a very weak set of 3Q12 results that caught us and the street by surprise. 3Q revenue increased by 22% YoY to S$107m (3Q11: S$88m), but net profit attributable to shareholders plunged 86% YoY to S$1.3m (3Q11: S$12.6m) on lower gross margin and higher operating costs. Net margin was just 1.2% (3Q11: 11.0%). While the group still has a very strong net cash position of S$112m (or S$0.44 per share), there is a possibility that it may incur losses over the near term horizon. Therefore, we lowered our fair value estimate to S$0.64 (previously S$0.93), based on 0.8x (previously 1.0x) P/B. Downgrade to HOLD.
Weak 3Q12 results
PEC Ltd reported a very weak set of 3Q12 results that caught us and the street by surprise. 3Q revenue increased by 22% YoY to S$107m (3Q11: S$88m), but net profit attributable to shareholders plunged 86% YoY to S$1.3m (3Q11: S$12.6m) on lower gross margin and lower operating leverage. Gross margin halved to 16.3% in 3Q12 (3Q11: 31%), mainly due to (i) intensive pricing competition, (ii) cost pressure from operations and (iii) completion of better margin project works in prior quarters. Its order-book also shrank to S$246m as at end Mar-12 (end Dec-11: S$270m).
Breaking point
With a net margin of just 1.2% for 3Q12, we believe that PEC is near its break-even point. Going forward, it needs to record quarterly revenue of about S$100m (with gross margin of at least 16%) or risk incurring losses in its core business. Its order-book (S$246m as of end Mar-12) looks sufficient for now, but the outstanding contracts are likely secured in late-2011 and may command lower project margins. Given the shortage of projects in the market, we think that oil companies now have the bargaining power to push down the rates for project and maintenance work. This implies lower margins over the medium term horizon.
Rotterdam claims unresolved
Although the problematic Rotterdam project was finally completed after the 3Q12, PEC has yet to resolve its claims. It has about S$18.3m of claims - for which provisions were made for S$11m – due from the Audex-Verwater JV. Meanwhile, we updated our estimates for 3Q12 results and lowered our FY13F gross margin assumptions to 15% (previously: 17%). Given the gloomy outlook, we downgrade our rating to HOLD and lowered our fair value estimate to S$0.64 (previously S$0.93) on 0.8x (previously 1.0x) P/B.
First Resources
Kim Eng on 16 May 2012
Solid 1Q profit. While most plantation stocks have reported weaker 1Q results so far, FR’s 1Q12 core net profit of USD49m (+60% YoY, -2% QoQ) was above our and street estimates. Seen in this light, its recent share price weakness is unjustified. Trading at 11x 2013 PER, we reiterate our BUY call and TP of SGD2.15 based on 14x 2013 PER.
Boost from sales growth. FR’s 1Q results met 28.5% of our full-year forecast and 26.2% of consensus estimates. Its net profit growth was mainly boosted by sales revenue growth of 82% YoY (+4% QoQ), underpinned by higher volume sales of CPO (+34% YoY, -6% QoQ) and refined palm products (+4,748% YoY, +22% QoQ). The growth in volume more than offset the decline in CPO ASP sold in 1Q12 at USD932/t (-11% YoY, -3% QoQ).
Beneficiary of Indonesia’s export duty. FR’s fractionation plant was running near full capacity in 1Q12, enjoying good downstream margins of USD89/t due to the export tax differentials between CPO and processed palm oil of ~8-10% for each tonne of palm oil. However, increased refining and processing activities in 1Q12, which generated lower margins vis-Ã -vis its upstream operations, resulted in FR posting a lower core EBIT margin of 45% (-12 ppt YoY, -11 ppt QoQ).
Expansion on track. FR achieved 2,666ha of new planting area in 1Q12, meeting 22% of our full-year estimate of 12,000ha (but lower than management’s internal target of 15,000-20,000ha). Meanwhile, it is on track for the commissioning of its 10th 45t/hr CPO mill and 105,000tpa kernel crushing plant in 2H12 to further boost earnings. This will help sustain FR’s medium-term growth prospects.
Earnings forecasts intact for now. FR recorded 4M12 FFB (nucleus) production of 539,407 tonnes (+19% YoY) or 29% of our full-year forecast. This is ahead of our expectations although we understand that the stellar growth rate may moderate going forward. Coupled with recent weakness in CPO price, we are inclined to keep our earnings forecasts for 2012 unchanged for now. Our CPO ASP estimates of MYR3,150/t (2012) and MYR3,000/t (2013-14) remain unchanged.
Solid 1Q profit. While most plantation stocks have reported weaker 1Q results so far, FR’s 1Q12 core net profit of USD49m (+60% YoY, -2% QoQ) was above our and street estimates. Seen in this light, its recent share price weakness is unjustified. Trading at 11x 2013 PER, we reiterate our BUY call and TP of SGD2.15 based on 14x 2013 PER.
Boost from sales growth. FR’s 1Q results met 28.5% of our full-year forecast and 26.2% of consensus estimates. Its net profit growth was mainly boosted by sales revenue growth of 82% YoY (+4% QoQ), underpinned by higher volume sales of CPO (+34% YoY, -6% QoQ) and refined palm products (+4,748% YoY, +22% QoQ). The growth in volume more than offset the decline in CPO ASP sold in 1Q12 at USD932/t (-11% YoY, -3% QoQ).
Beneficiary of Indonesia’s export duty. FR’s fractionation plant was running near full capacity in 1Q12, enjoying good downstream margins of USD89/t due to the export tax differentials between CPO and processed palm oil of ~8-10% for each tonne of palm oil. However, increased refining and processing activities in 1Q12, which generated lower margins vis-Ã -vis its upstream operations, resulted in FR posting a lower core EBIT margin of 45% (-12 ppt YoY, -11 ppt QoQ).
Expansion on track. FR achieved 2,666ha of new planting area in 1Q12, meeting 22% of our full-year estimate of 12,000ha (but lower than management’s internal target of 15,000-20,000ha). Meanwhile, it is on track for the commissioning of its 10th 45t/hr CPO mill and 105,000tpa kernel crushing plant in 2H12 to further boost earnings. This will help sustain FR’s medium-term growth prospects.
Earnings forecasts intact for now. FR recorded 4M12 FFB (nucleus) production of 539,407 tonnes (+19% YoY) or 29% of our full-year forecast. This is ahead of our expectations although we understand that the stellar growth rate may moderate going forward. Coupled with recent weakness in CPO price, we are inclined to keep our earnings forecasts for 2012 unchanged for now. Our CPO ASP estimates of MYR3,150/t (2012) and MYR3,000/t (2013-14) remain unchanged.
Olam International
Kim Eng on 16 May 2012
Below expectations. 3Q12 results were below expectations, with recurring net profit down 21% yoy to S$98.7m. This culminated in a 2% decline in 9M2012 recurring net profit. With poor earnings now likely to drag onto the 4rd quarter, the company is unlikely to meet consensus expectations of single-digit profit growth for the year.
Weaknesses stem from non-food segments. The industrial raw material segment posed 49% yoy decline in net contribution, with management citing poor demand across markets for products such as wood and cotton. The latter also suffered from farmers postponing future harvest sale and counterparty risk where management has taken undisclosed provisions. The commodity financial services segment also showed a significant decline in net contribution from S$21.1m to S$0.8m due to challenging trading conditions.
Not immune to risk. This quarter’s results show that Olam is not immune to risk, especially as it grows upstream/midstream and across various products. Its inventory (88% sold forward or hedged) rose by S$790m (100 days to 115 days) over the past twelve months, despite lower commodity prices, implying higher inventory build-up. This could be another possible risk factor should prices continue to weaken.
M&A execution risk could surface. Over the past five years, Olam has spent significant capex, mainly on inorganic M&A activities which are generally more expensive than Greenfield projects (in the form of goodwill and duplicate overheads etc). In the event of an economic slowdown, these may underperform and form an earnings drag. There may already be evidence this quarter, considering net contribution (a matrix similar to EBITDA less overheads) was actually up 4% yoy while bottomline was down 21%.
Unfavorable risk-reward, downgrade to SELL. We see earnings risk ahead, with management now guiding for a weak 4Q12. With poor earnings visibility, Olam is comparatively expensive at 1.4x P/B and 1.7x NTA. We lower our FY12-FY13 estimates by 15-20% and downgrade the stock to a SELL, pegging our new TP of $1.70 to 12.5 FY12F, more in-line with peers.
Below expectations. 3Q12 results were below expectations, with recurring net profit down 21% yoy to S$98.7m. This culminated in a 2% decline in 9M2012 recurring net profit. With poor earnings now likely to drag onto the 4rd quarter, the company is unlikely to meet consensus expectations of single-digit profit growth for the year.
Weaknesses stem from non-food segments. The industrial raw material segment posed 49% yoy decline in net contribution, with management citing poor demand across markets for products such as wood and cotton. The latter also suffered from farmers postponing future harvest sale and counterparty risk where management has taken undisclosed provisions. The commodity financial services segment also showed a significant decline in net contribution from S$21.1m to S$0.8m due to challenging trading conditions.
Not immune to risk. This quarter’s results show that Olam is not immune to risk, especially as it grows upstream/midstream and across various products. Its inventory (88% sold forward or hedged) rose by S$790m (100 days to 115 days) over the past twelve months, despite lower commodity prices, implying higher inventory build-up. This could be another possible risk factor should prices continue to weaken.
M&A execution risk could surface. Over the past five years, Olam has spent significant capex, mainly on inorganic M&A activities which are generally more expensive than Greenfield projects (in the form of goodwill and duplicate overheads etc). In the event of an economic slowdown, these may underperform and form an earnings drag. There may already be evidence this quarter, considering net contribution (a matrix similar to EBITDA less overheads) was actually up 4% yoy while bottomline was down 21%.
Unfavorable risk-reward, downgrade to SELL. We see earnings risk ahead, with management now guiding for a weak 4Q12. With poor earnings visibility, Olam is comparatively expensive at 1.4x P/B and 1.7x NTA. We lower our FY12-FY13 estimates by 15-20% and downgrade the stock to a SELL, pegging our new TP of $1.70 to 12.5 FY12F, more in-line with peers.
Tuesday 15 May 2012
Cordlife
UOBKayhian on 15 May 2012
Results
· Downgrade to HOLD with a lower target price of S$0.53 (previously S$0.66), implying 12.8% upside from current price. We recommend entry price of S$0.42 for 25% upside.
· 5.3% yoy profit growth. Cordlife Group (Cordlife) reported 9MFY12 net profit of S$4.6m, down 25.4% yoy. Excluding one-off listing expenses of S$1.9m, net profit was up 5.3% yoy to S$6.5m, which made up 68.4% of our full-year net profit forecast.
· Revenue up 14.2% yoy. 9MFY12 revenue was up 14.2% yoy to S$21.3m, equivalent to 66.8% of our full-year forecast. The increase in revenue was mainly due to an increase in the provision of cord blood banking services of about S$1.9m driven by an increase in the number of client deliveries from about 4,900 in 9MFY11 to about 5,300 in 9MFY12 and revenue of S$0.7m from the newly-started cord tissue banking services.
· Gross margin declined. Gross margin decreased from 70.9% in 9MFY11 to 68.8% in 9MFY12, due to the increased cost of testing required due to a change in regulatory standards.
Stock Impact
· Sales growth below expectation. 3QFY12 revenue grew by 13.2% yoy, below our forecast of 24.1% yoy. We had anticipated much stronger sales as: a) FY12 revenue was expected to rebound strongly from a low base in FY11, which was caused by a deterioration of the global economic condition, b) 2012 falls in the Year of the Dragon and we had forecasted a higher number of births, and c) Cordlife was expected to recognise first time revenue contribution from the tissue banking service.
Earnings Revision
· Lowered forecast. We have reduced our FY12-14F revenue forecast by 9.7%, 9.1% and 11.1% respectively, accounting for lower-than-expected penetration rate growth for cord blood banking services. As a result, we have also lowered our FY12-14F profit forecast by 4.2%, 18.6% and 19.5% respectively.
Valuation
· Downgrade to HOLD with a lower target price of S$0.53 (previously S$0.66) as we roll over our valuation basis to FY13. We derive our target price by applying a 13.6x PE to our FY13F EPS of 3.9 S cents, in line with peers’ average. We also reduce our target valuation multiple from 16.1x to 13.6x due to lower earnings growth expectations.
Results
· Downgrade to HOLD with a lower target price of S$0.53 (previously S$0.66), implying 12.8% upside from current price. We recommend entry price of S$0.42 for 25% upside.
· 5.3% yoy profit growth. Cordlife Group (Cordlife) reported 9MFY12 net profit of S$4.6m, down 25.4% yoy. Excluding one-off listing expenses of S$1.9m, net profit was up 5.3% yoy to S$6.5m, which made up 68.4% of our full-year net profit forecast.
· Revenue up 14.2% yoy. 9MFY12 revenue was up 14.2% yoy to S$21.3m, equivalent to 66.8% of our full-year forecast. The increase in revenue was mainly due to an increase in the provision of cord blood banking services of about S$1.9m driven by an increase in the number of client deliveries from about 4,900 in 9MFY11 to about 5,300 in 9MFY12 and revenue of S$0.7m from the newly-started cord tissue banking services.
· Gross margin declined. Gross margin decreased from 70.9% in 9MFY11 to 68.8% in 9MFY12, due to the increased cost of testing required due to a change in regulatory standards.
Stock Impact
· Sales growth below expectation. 3QFY12 revenue grew by 13.2% yoy, below our forecast of 24.1% yoy. We had anticipated much stronger sales as: a) FY12 revenue was expected to rebound strongly from a low base in FY11, which was caused by a deterioration of the global economic condition, b) 2012 falls in the Year of the Dragon and we had forecasted a higher number of births, and c) Cordlife was expected to recognise first time revenue contribution from the tissue banking service.
Earnings Revision
· Lowered forecast. We have reduced our FY12-14F revenue forecast by 9.7%, 9.1% and 11.1% respectively, accounting for lower-than-expected penetration rate growth for cord blood banking services. As a result, we have also lowered our FY12-14F profit forecast by 4.2%, 18.6% and 19.5% respectively.
Valuation
· Downgrade to HOLD with a lower target price of S$0.53 (previously S$0.66) as we roll over our valuation basis to FY13. We derive our target price by applying a 13.6x PE to our FY13F EPS of 3.9 S cents, in line with peers’ average. We also reduce our target valuation multiple from 16.1x to 13.6x due to lower earnings growth expectations.
SATS
OCBC on 15 May 2012
SATS Ltd’s (SATS) reported its FY12 financial results that were mostly in line with market expectations. SATS’ FY12 PATMI of S$171m was 2% higher than consensus estimate, even though revenue came in 2% below the street’s estimate at S$1.69b. Management proposed a final dividend of S$0.06/share and a special dividend of S$0.15/share, which translates to a full-year dividend payout ratio of 169%. By our estimation, SATS recorded organic revenue growth of 4% in FY12, driven by strong growth of 9% and 13% YoY in its Gateway services and In-flight catering segments respectively. Its Japanese subsidiary TFK also continued its post-earthquake recovery. However, share of net profit of associates slipped 12% to S$41m in FY12. We maintain its HOLD rating but increase our fair value estimate of SATS from S$2.43/share to S$2.55/share.
FY12 in line with market expectations
SATS Ltd’s (SATS) reported its FY12 financial results that were mostly in line with market expectations. SATS’ FY12 PATMI of S$171m was 2% higher than consensus estimate, even though revenue came in at S$1.69b, which was 2% below the street’s estimate. Management proposed a final dividend of S$0.06/share and a special dividend of S$0.15/share. Together with the interim dividend of S$0.05/share, SATS’ dividend payout ratio in FY12 was 169% of net profit.
Stable organic growth
In FY12, SATS underwent significant changes to its business segments due to 1) a full-year’s contribution from its Japanese subsidiary Tokyo Flight Kitchen (TFK) and 2) the divestment of its previous U.K. subsidiary Daniels. By our estimation, SATS in FY12 recorded strong organic revenue growth of 9% and 13% YoY in its Gateway services and In-flight catering segments respectively. However, revenue of its non-aviation food services segment was flat YoY. Collectively, these three business segments recorded organic revenue growth of 4% in FY12. In addition, its Japanese subsidiary TFK has recorded four consecutive quarters of steady QoQ recovery, as meal volumes continue to increase post-earthquake and stricter cost controls were implemented.
Less contribution from associates
In the latest financial statements, SATS changed its accounting presentation of its share of profits of associates line to net of tax, rather than the pre-tax figures previously provided. Compared to the restated FY11 share of net profits of associates, contribution from associates slipped 12% to S$41m in FY12. Management attributed the fall to lower cargo volumes handled by its associates and a weaker USD.
Maintain HOLD with higher fair value of S$2.55
We maintain its HOLD rating but increase our fair value estimate of SATS from S$2.43/share to S$2.55/share, by pegging our FY13 EPS forecast against SATS’ five-year average P/E multiple of 14.5x.
SATS Ltd’s (SATS) reported its FY12 financial results that were mostly in line with market expectations. SATS’ FY12 PATMI of S$171m was 2% higher than consensus estimate, even though revenue came in 2% below the street’s estimate at S$1.69b. Management proposed a final dividend of S$0.06/share and a special dividend of S$0.15/share, which translates to a full-year dividend payout ratio of 169%. By our estimation, SATS recorded organic revenue growth of 4% in FY12, driven by strong growth of 9% and 13% YoY in its Gateway services and In-flight catering segments respectively. Its Japanese subsidiary TFK also continued its post-earthquake recovery. However, share of net profit of associates slipped 12% to S$41m in FY12. We maintain its HOLD rating but increase our fair value estimate of SATS from S$2.43/share to S$2.55/share.
FY12 in line with market expectations
SATS Ltd’s (SATS) reported its FY12 financial results that were mostly in line with market expectations. SATS’ FY12 PATMI of S$171m was 2% higher than consensus estimate, even though revenue came in at S$1.69b, which was 2% below the street’s estimate. Management proposed a final dividend of S$0.06/share and a special dividend of S$0.15/share. Together with the interim dividend of S$0.05/share, SATS’ dividend payout ratio in FY12 was 169% of net profit.
Stable organic growth
In FY12, SATS underwent significant changes to its business segments due to 1) a full-year’s contribution from its Japanese subsidiary Tokyo Flight Kitchen (TFK) and 2) the divestment of its previous U.K. subsidiary Daniels. By our estimation, SATS in FY12 recorded strong organic revenue growth of 9% and 13% YoY in its Gateway services and In-flight catering segments respectively. However, revenue of its non-aviation food services segment was flat YoY. Collectively, these three business segments recorded organic revenue growth of 4% in FY12. In addition, its Japanese subsidiary TFK has recorded four consecutive quarters of steady QoQ recovery, as meal volumes continue to increase post-earthquake and stricter cost controls were implemented.
Less contribution from associates
In the latest financial statements, SATS changed its accounting presentation of its share of profits of associates line to net of tax, rather than the pre-tax figures previously provided. Compared to the restated FY11 share of net profits of associates, contribution from associates slipped 12% to S$41m in FY12. Management attributed the fall to lower cargo volumes handled by its associates and a weaker USD.
Maintain HOLD with higher fair value of S$2.55
We maintain its HOLD rating but increase our fair value estimate of SATS from S$2.43/share to S$2.55/share, by pegging our FY13 EPS forecast against SATS’ five-year average P/E multiple of 14.5x.
Swiber Holdings
OCBC on 15 May 2012
Swiber Holdings (Swiber) reported a 29.1% YoY rise in revenue to US$194.4m but saw a 10.6% fall in net profit to US$8.6m in 1Q12, which were within our expectations. Gross profit margin increased from 16.2% in 1Q11 to 19.8% in 1Q12, but was lower on a sequential basis (4Q11: 21.0%). Current borrowings stood at US$372.8m as at 31 Mar 2012 as there is the possibility of a convertible bond redemption later this year. Though the group is likely to secure more contracts going forward, this means more funds would be needed for working capital. Along with the refinancing needs that may come up, we think that the high net debt situation is a risk in the current volatile market. As such we lower our peg to 10x core FY12/13F earnings, resulting in a lower fair value estimate of S$0.61 (prev. S$0.75). Maintain HOLD.
Decent 1Q12 results
Swiber Holdings (Swiber) reported a 29.1% YoY rise in revenue to US$194.4m but saw a 10.6% fall in net profit to US$8.6m in 1Q12, accounting for 27.0% and 27.4% of our full year estimates, respectively. Gross profit margin decreased from 21.0% in 4Q11 to 19.8% in 1Q12 but remains in the upper range of management’s guidance of 15-20%. Admin expenses, which saw a peak of S$21.3m in 4Q11, decreased to a more normalised S$13.8m in the last quarter.
US$373m refinancing needs this year
Current borrowings stood at US$372.8m with a cash balance of US$139.3m as at 31 Mar 2012. The former includes US$128m of bank loans, US$133m of bonds and convertible loan notes which have a notional amount of US$100m and may be redeemed on 16 Oct this year. The conversion price is S$0.84, more than 40% above the current stock price. We would be focusing on any developments on the convertible notes front to see if there is any possibility of reaching an agreement with the bondholders to extend the put date. As seen from Exhibit 1, the amount of current debt has been increasing in the past three quarters as more long-term debt turns current. Consequently, the level of short-term debt over the group’s cash balance has increased to about US$234m.
Maintain HOLD
Swiber’s outstanding order book of about US$1.2b is expected to contribute to results over the next two years. The group has secured contracts worth more than US$500m YTD and is likely to continue to win more work given the positive industry outlook. However, this also means more funds would be needed for working capital. Along with the refinancing needs that may come up this year, we think that the high net debt situation is a risk in the current volatile market. As such we lower our peg to 10x core FY12/13F earnings, resulting in a lower fair value estimate of S$0.61 (prev. S$0.75). Maintain HOLD.
Swiber Holdings (Swiber) reported a 29.1% YoY rise in revenue to US$194.4m but saw a 10.6% fall in net profit to US$8.6m in 1Q12, which were within our expectations. Gross profit margin increased from 16.2% in 1Q11 to 19.8% in 1Q12, but was lower on a sequential basis (4Q11: 21.0%). Current borrowings stood at US$372.8m as at 31 Mar 2012 as there is the possibility of a convertible bond redemption later this year. Though the group is likely to secure more contracts going forward, this means more funds would be needed for working capital. Along with the refinancing needs that may come up, we think that the high net debt situation is a risk in the current volatile market. As such we lower our peg to 10x core FY12/13F earnings, resulting in a lower fair value estimate of S$0.61 (prev. S$0.75). Maintain HOLD.
Decent 1Q12 results
Swiber Holdings (Swiber) reported a 29.1% YoY rise in revenue to US$194.4m but saw a 10.6% fall in net profit to US$8.6m in 1Q12, accounting for 27.0% and 27.4% of our full year estimates, respectively. Gross profit margin decreased from 21.0% in 4Q11 to 19.8% in 1Q12 but remains in the upper range of management’s guidance of 15-20%. Admin expenses, which saw a peak of S$21.3m in 4Q11, decreased to a more normalised S$13.8m in the last quarter.
US$373m refinancing needs this year
Current borrowings stood at US$372.8m with a cash balance of US$139.3m as at 31 Mar 2012. The former includes US$128m of bank loans, US$133m of bonds and convertible loan notes which have a notional amount of US$100m and may be redeemed on 16 Oct this year. The conversion price is S$0.84, more than 40% above the current stock price. We would be focusing on any developments on the convertible notes front to see if there is any possibility of reaching an agreement with the bondholders to extend the put date. As seen from Exhibit 1, the amount of current debt has been increasing in the past three quarters as more long-term debt turns current. Consequently, the level of short-term debt over the group’s cash balance has increased to about US$234m.
Maintain HOLD
Swiber’s outstanding order book of about US$1.2b is expected to contribute to results over the next two years. The group has secured contracts worth more than US$500m YTD and is likely to continue to win more work given the positive industry outlook. However, this also means more funds would be needed for working capital. Along with the refinancing needs that may come up this year, we think that the high net debt situation is a risk in the current volatile market. As such we lower our peg to 10x core FY12/13F earnings, resulting in a lower fair value estimate of S$0.61 (prev. S$0.75). Maintain HOLD.
Golden Agri-Resources
OCBC on 14 May 2012
Golden Agri-Resources (GAR) reported its 1Q12 results last Friday, with revenue rising 3.8% YoY and 14.4% QoQ to US$1519.1m, while net profit fell 30% YoY to US$162.0m (but made a 113% QoQ recovery). But it was a strong 113% QoQ recovery. All in, with revenue meeting 26.8% and earnings 28.1% of our full-year forecasts, Going forward, GAR believes that the industry outlook remains resilient with robust demand growth for palm oil coming from both emerging and develops countries; prices are also likely to be supported by limited supply growth of other vegetable oils, especially soybean. With numbers coming in mostly in line with our expectations, we are keeping our FY12 and FY13 forecasts unchanged. Still based on 12.5x FY12F EPS, our fair value also remains unchanged at S$0.77. But we upgrade our rating from Hold to BUY as the stock price has corrected quite a bit since our previous downgrade which we believe should have captured quite a bit of the negatives.
Decent start to 2012
Golden Agri-Resources (GAR) reported its 1Q12 results last Friday, with revenue rising 3.8% YoY and 14.4% QoQ to US$1519.1m, buoyed by still-firm CPO prices; GAR achieved ASP of US$1009/ton versus US$1150 in 1Q11 and US$965 in 4Q11. However, due to higher fertiliser application and labor cost, net profit fell 30% YoY to US$162.0m. But it was a strong 113% QoQ recovery. All in, with revenue meeting 26.8% and earnings 28.1% of our full-year forecasts, GAR has made a decent start to 2012. We understand that GAR has also largely cleared the bulk of unsold inventory from 4Q11 although it has started to build inventory ahead of the Hari Raya festivities.
Maintains mildly positive outlook
Going forward, GAR believes that the industry outlook remains resilient with robust demand growth for palm oil coming from both emerging and developed countries; prices are also likely to be supported by limited supply growth of other vegetable oils, especially soybean. GAR intends to focus on expanding both its upstream and downstream capabilities. Out of the projected US$500m capex, US$200m going to expand its palm oil plantation by 20-30k ha (both greenfield and via M&As). Another US$200m will be used to increase its downstream processing capacity in strategic locations, while the remaining US$100m will be used for infrastructure to extend its distribution coverage and logistic facilities to enhance its integrated operations.
Upgrade to BUY with unchanged S$0.77 fair value
With numbers coming in mostly in line with our expectations, we are keeping our FY12 and FY13 forecasts unchanged. Still based on 12.5x FY12F EPS, our fair value also remains unchanged at S$0.77. But we upgrade our rating from Hold to BUY as the stock price has corrected quite a bit since our previous downgrade which we believe should have captured quite a bit of the negatives.
Golden Agri-Resources (GAR) reported its 1Q12 results last Friday, with revenue rising 3.8% YoY and 14.4% QoQ to US$1519.1m, while net profit fell 30% YoY to US$162.0m (but made a 113% QoQ recovery). But it was a strong 113% QoQ recovery. All in, with revenue meeting 26.8% and earnings 28.1% of our full-year forecasts, Going forward, GAR believes that the industry outlook remains resilient with robust demand growth for palm oil coming from both emerging and develops countries; prices are also likely to be supported by limited supply growth of other vegetable oils, especially soybean. With numbers coming in mostly in line with our expectations, we are keeping our FY12 and FY13 forecasts unchanged. Still based on 12.5x FY12F EPS, our fair value also remains unchanged at S$0.77. But we upgrade our rating from Hold to BUY as the stock price has corrected quite a bit since our previous downgrade which we believe should have captured quite a bit of the negatives.
Decent start to 2012
Golden Agri-Resources (GAR) reported its 1Q12 results last Friday, with revenue rising 3.8% YoY and 14.4% QoQ to US$1519.1m, buoyed by still-firm CPO prices; GAR achieved ASP of US$1009/ton versus US$1150 in 1Q11 and US$965 in 4Q11. However, due to higher fertiliser application and labor cost, net profit fell 30% YoY to US$162.0m. But it was a strong 113% QoQ recovery. All in, with revenue meeting 26.8% and earnings 28.1% of our full-year forecasts, GAR has made a decent start to 2012. We understand that GAR has also largely cleared the bulk of unsold inventory from 4Q11 although it has started to build inventory ahead of the Hari Raya festivities.
Maintains mildly positive outlook
Going forward, GAR believes that the industry outlook remains resilient with robust demand growth for palm oil coming from both emerging and developed countries; prices are also likely to be supported by limited supply growth of other vegetable oils, especially soybean. GAR intends to focus on expanding both its upstream and downstream capabilities. Out of the projected US$500m capex, US$200m going to expand its palm oil plantation by 20-30k ha (both greenfield and via M&As). Another US$200m will be used to increase its downstream processing capacity in strategic locations, while the remaining US$100m will be used for infrastructure to extend its distribution coverage and logistic facilities to enhance its integrated operations.
Upgrade to BUY with unchanged S$0.77 fair value
With numbers coming in mostly in line with our expectations, we are keeping our FY12 and FY13 forecasts unchanged. Still based on 12.5x FY12F EPS, our fair value also remains unchanged at S$0.77. But we upgrade our rating from Hold to BUY as the stock price has corrected quite a bit since our previous downgrade which we believe should have captured quite a bit of the negatives.
Pacific Andes Resources Developments Ltd
OCBC on 14 May 2012
Pacific Andes Resources Developments Ltd (Pacific Andes) reported a stronger-than-expected 23% YoY jump in 2Q net earnings to HK$333.0m. Going forward, there are several positives including better quota, catch volume, higher selling prices for fishmeal as well as better efficiency and contribution from Tassal. In terms of its key markets, China is stable and it is seeing demand coming back from Japan and Korea. Africa is expected to be the fastest growing market for the group. We have raised our FY12 earnings from HK$731m to HK$791m due to the stronger 2Q. Using the same 6.5x earnings peg and adjusting for the rights issue, our fair value estimate for the stock is 17.8 cents. At current price, we maintain our BUY rating.
Stronger-than-expected 2Q results
Pacific Andes Resources Developments Ltd (Pacific Andes) reported a strong set of 2Q results (for the 3-month period ended 28 March 2012). Revenue grew 35% to HK$3,320.5m. Net earnings improved 23% YoY to HK$333.0m and also higher than our estimates. This gives 1H net earnings of HK$472.6m, or 65% of our full year estimates. The group attributed the better performance to both its core businesses of frozen fish SCM (53% of revenue) as well as better high revenue from its fishery and fish supply business (47%). The key markets are China (accounting for 69% of sales), Africa (13%), East Asia (9%) and Europe (8%).
Several positives on the horizon
For its South Pacific fishing operation, the group has deployed one super-trawler to Namibia to catch Horse Mackerel. In terms of its key markets, China is stable and it is seeing demand coming back from Japan and Korea. Africa is expected to be the fastest growing market for the group. For the Peruvian Fishmeal & Fish Oil operation, catch volume was down, but sales volume went up because of accumulated inventory. Management is expecting higher quota utilization in the following months (8% of 1H quota was used up by March versus about 62% currently), better selling prices for fishmeal (from US$1200-1250 per ton to US$1400-1500 per ton) and better efficiency to be some of the key factors for the coming quarter. For the SCM division, this quarter should also see contribution coming in from Tassal as well as to work on improving the margin from the current 2% to about 2.5-3.0%.
Maintain BUY, fair value estimate of 17.8 cents
Since announcing the recent 1-for-2 rights issues in early March, Pacific Andes shares have been languishing. While this was somewhat a dampener, the overhang is now over. We have adjusted our earnings for a better than expected 2Q, raising our FY12 earnings from HK$731m to HK$791m. Using the same 6.5x earnings peg and adjusting for the rights issue, our fair value estimate for the stock is 17.8 cents. At current price, we maintain our BUY rating.
Pacific Andes Resources Developments Ltd (Pacific Andes) reported a stronger-than-expected 23% YoY jump in 2Q net earnings to HK$333.0m. Going forward, there are several positives including better quota, catch volume, higher selling prices for fishmeal as well as better efficiency and contribution from Tassal. In terms of its key markets, China is stable and it is seeing demand coming back from Japan and Korea. Africa is expected to be the fastest growing market for the group. We have raised our FY12 earnings from HK$731m to HK$791m due to the stronger 2Q. Using the same 6.5x earnings peg and adjusting for the rights issue, our fair value estimate for the stock is 17.8 cents. At current price, we maintain our BUY rating.
Stronger-than-expected 2Q results
Pacific Andes Resources Developments Ltd (Pacific Andes) reported a strong set of 2Q results (for the 3-month period ended 28 March 2012). Revenue grew 35% to HK$3,320.5m. Net earnings improved 23% YoY to HK$333.0m and also higher than our estimates. This gives 1H net earnings of HK$472.6m, or 65% of our full year estimates. The group attributed the better performance to both its core businesses of frozen fish SCM (53% of revenue) as well as better high revenue from its fishery and fish supply business (47%). The key markets are China (accounting for 69% of sales), Africa (13%), East Asia (9%) and Europe (8%).
Several positives on the horizon
For its South Pacific fishing operation, the group has deployed one super-trawler to Namibia to catch Horse Mackerel. In terms of its key markets, China is stable and it is seeing demand coming back from Japan and Korea. Africa is expected to be the fastest growing market for the group. For the Peruvian Fishmeal & Fish Oil operation, catch volume was down, but sales volume went up because of accumulated inventory. Management is expecting higher quota utilization in the following months (8% of 1H quota was used up by March versus about 62% currently), better selling prices for fishmeal (from US$1200-1250 per ton to US$1400-1500 per ton) and better efficiency to be some of the key factors for the coming quarter. For the SCM division, this quarter should also see contribution coming in from Tassal as well as to work on improving the margin from the current 2% to about 2.5-3.0%.
Maintain BUY, fair value estimate of 17.8 cents
Since announcing the recent 1-for-2 rights issues in early March, Pacific Andes shares have been languishing. While this was somewhat a dampener, the overhang is now over. We have adjusted our earnings for a better than expected 2Q, raising our FY12 earnings from HK$731m to HK$791m. Using the same 6.5x earnings peg and adjusting for the rights issue, our fair value estimate for the stock is 17.8 cents. At current price, we maintain our BUY rating.
UOL
OCBC on 14 May 2012
UOL reported 1Q12 PATMI of S$84.0m, down 63% YoY mostly due to reduced profits from the property development segment and from associates (after Nassim Park Residences’ TOP in 1Q11). This was broadly aligned with consensus and our estimates. 1Q12 top-line came in at S$297.7m, down 59% again mainly due to lower sales of development properties. Given limited land-bank, we believe UOL to be relatively sheltered from uncertainties in the domestic residential space ahead. The group’s balance sheet also remains healthy; cash is at S$334.2m and gearing at 33%. Upgrade to BUY with a marginally higher fair estimate of S$4.80 (30% RNAV discount), versus S$4.77 previously, mostly due to higher ASPs for Katong Regency.
Earnings within expectations
UOL reported 1Q12 PATMI of S$84.0m, down 63% YoY mostly due to reduced profits from the property development segment and from associates (after Nassim Park Residences’ TOP in 1Q11). This was broadly aligned with consensus and our estimates. 1Q12 top-line came in at S$297.7m, down 59% again mainly due to lower sales of development properties. Looking ahead, we would continue to see revenue recognition at Double Bay Residences, Waterbank, Terrene and Spottiswoode, while Archipelago is expected to come in over 2H12.
Sharp execution in the domestic residential segment
We saw good execution at UOL’s two main projects – the Archipelago and Katong Regency. The 577-unit Archipelago, which was less than 20% sold as of end FY11, is now more than two-thirds sold at relatively stable price levels (~S$1.0-1.1k psf). In addition, we also saw a strong launch at the 244-unit Katong Regency which is now mostly sold out. In its overseas segment, management indicates that conditions in China remain challenging, and that take-up rates would likely stay subdued with existing purchasing curbs. For the Esplanade in Tianjin, UOL expects to first launch a limited number of condominium units to gauge feedback and gather interest.
Hotel numbers stay strong
RevPar growth, on a blended basis across the portfolio, was around 16% YoY. 1Q12 revenue from the hotel ownership and operations segment increased 22% to S$96.8m, mostly due to the group’s hotels in Singapore, Australia, Malaysia and Yangon and the inclusion of revenues from ParkRoyal Melbourne Airport (acquired Apr 11).
Upgrade to BUY
Given limited land-bank, we believe UOL to be relatively sheltered from uncertainties in the domestic residential space ahead. The group’s balance sheet also remains healthy; cash is at S$334.2m and gearing at 33%. Upgrade to BUY with a marginally higher fair estimate of S$4.80 (30% RNAV discount), versus S$4.77 previously, mostly due to higher ASPs for Katong Regency.
UOL reported 1Q12 PATMI of S$84.0m, down 63% YoY mostly due to reduced profits from the property development segment and from associates (after Nassim Park Residences’ TOP in 1Q11). This was broadly aligned with consensus and our estimates. 1Q12 top-line came in at S$297.7m, down 59% again mainly due to lower sales of development properties. Given limited land-bank, we believe UOL to be relatively sheltered from uncertainties in the domestic residential space ahead. The group’s balance sheet also remains healthy; cash is at S$334.2m and gearing at 33%. Upgrade to BUY with a marginally higher fair estimate of S$4.80 (30% RNAV discount), versus S$4.77 previously, mostly due to higher ASPs for Katong Regency.
Earnings within expectations
UOL reported 1Q12 PATMI of S$84.0m, down 63% YoY mostly due to reduced profits from the property development segment and from associates (after Nassim Park Residences’ TOP in 1Q11). This was broadly aligned with consensus and our estimates. 1Q12 top-line came in at S$297.7m, down 59% again mainly due to lower sales of development properties. Looking ahead, we would continue to see revenue recognition at Double Bay Residences, Waterbank, Terrene and Spottiswoode, while Archipelago is expected to come in over 2H12.
Sharp execution in the domestic residential segment
We saw good execution at UOL’s two main projects – the Archipelago and Katong Regency. The 577-unit Archipelago, which was less than 20% sold as of end FY11, is now more than two-thirds sold at relatively stable price levels (~S$1.0-1.1k psf). In addition, we also saw a strong launch at the 244-unit Katong Regency which is now mostly sold out. In its overseas segment, management indicates that conditions in China remain challenging, and that take-up rates would likely stay subdued with existing purchasing curbs. For the Esplanade in Tianjin, UOL expects to first launch a limited number of condominium units to gauge feedback and gather interest.
Hotel numbers stay strong
RevPar growth, on a blended basis across the portfolio, was around 16% YoY. 1Q12 revenue from the hotel ownership and operations segment increased 22% to S$96.8m, mostly due to the group’s hotels in Singapore, Australia, Malaysia and Yangon and the inclusion of revenues from ParkRoyal Melbourne Airport (acquired Apr 11).
Upgrade to BUY
Given limited land-bank, we believe UOL to be relatively sheltered from uncertainties in the domestic residential space ahead. The group’s balance sheet also remains healthy; cash is at S$334.2m and gearing at 33%. Upgrade to BUY with a marginally higher fair estimate of S$4.80 (30% RNAV discount), versus S$4.77 previously, mostly due to higher ASPs for Katong Regency.
Goodpack
OCBC on 14 May 2012
Goodpack’s 3QFY12 revenue grew 4.2% YoY (-0.1% QoQ) to US$43.5m following increased contribution from its newly-won automotive business and higher prices charged on existing customers while a 1.5% YoY (+2.2% QoQ) reduction in logistic and handling costs pushed PATMI higher by 8.6% YoY (+8.0% YoY) to US$11.5m. For 9M12, Goodpack’s revenue and PATMI constituted 75.6% and 75.9% of our FY12 projections, falling within our overall expectations. Going forward, we expect Goodpack to close out FY12 well with demand of its IBCs holding up well in the face of automotive industry support, and further reductions in operating expenses with its cost control initiatives. Following our 15 March take-profit call on Goodpack, the counter has since retreated by more than 13% and we deem the sell-downs to be over. As its results were largely in-line with our expectations, we leave our FY12 and FY13 projections and corresponding fair value estimate of S$1.70 unchanged. Upgrade our rating to HOLD on valuation grounds.
Decent set of results
Goodpack reported a 4.2% YoY (-0.1% QoQ) increase in 3Q12 revenue to US$43.5m following increased contribution from its newly-won automotive business and higher prices charged on existing customers while a 1.5% YoY (+2.2% QoQ) reduction in logistic and handling costs pushed PATMI higher by 8.6% YoY (+8.0% YoY) to US$11.5m. Its 3Q12 revenue was within 0.6% of our projections but the earlier than anticipated inclusion of IBC leasing expenses caused our bottom-line to deviate by 27.2%. However, for the 9M12, Goodpack’s revenue and PATMI constituted 75.6% and 75.9% of our FY12 projections, falling within our overall expectations.
Cost control initiatives paying off
On the cost front, overall 3Q12 operating expenses have come off 12% YoY (-6.8% QoQ) to US$27.2m, which indicates the successful implementation of cost control initiatives by management. Although operating expenses are still higher on a 9M12 basis – due in part to the increase in IBC leasing expenses – we view this quarterly reduction as a positive step in improving operating margin and anticipate a further uptick in 4Q12.
Last quarter to close out well
Going forward, demand for Goodpack’s IBCs in 4Q12 should remain stable at current levels with support for their main revenue segments (the natural and synthetic rubber businesses) coming from the automotive industry as global motor sales maintain their upwards momentum. Coupled with management’s effective control over operating expenses, we expect Goodpack to close out FY12 on a good note.
Upgrade to HOLD on valuation grounds
Following our 15 March take-profit call on Goodpack, the counter has since retreated by more than 13% and has since stabilized over the past two weeks. At this juncture, we view the sell-downs and profit-taking actions to be over, and Goodpack’s decent 3Q12 results could inspire some buyers to return on recent weakness. However, as its results were largely in-line with our expectations, we leave our FY12 and FY13 projections and corresponding fair value estimate of S$1.70 unchanged. Upgrade our rating to HOLD on valuation grounds.
Goodpack’s 3QFY12 revenue grew 4.2% YoY (-0.1% QoQ) to US$43.5m following increased contribution from its newly-won automotive business and higher prices charged on existing customers while a 1.5% YoY (+2.2% QoQ) reduction in logistic and handling costs pushed PATMI higher by 8.6% YoY (+8.0% YoY) to US$11.5m. For 9M12, Goodpack’s revenue and PATMI constituted 75.6% and 75.9% of our FY12 projections, falling within our overall expectations. Going forward, we expect Goodpack to close out FY12 well with demand of its IBCs holding up well in the face of automotive industry support, and further reductions in operating expenses with its cost control initiatives. Following our 15 March take-profit call on Goodpack, the counter has since retreated by more than 13% and we deem the sell-downs to be over. As its results were largely in-line with our expectations, we leave our FY12 and FY13 projections and corresponding fair value estimate of S$1.70 unchanged. Upgrade our rating to HOLD on valuation grounds.
Decent set of results
Goodpack reported a 4.2% YoY (-0.1% QoQ) increase in 3Q12 revenue to US$43.5m following increased contribution from its newly-won automotive business and higher prices charged on existing customers while a 1.5% YoY (+2.2% QoQ) reduction in logistic and handling costs pushed PATMI higher by 8.6% YoY (+8.0% YoY) to US$11.5m. Its 3Q12 revenue was within 0.6% of our projections but the earlier than anticipated inclusion of IBC leasing expenses caused our bottom-line to deviate by 27.2%. However, for the 9M12, Goodpack’s revenue and PATMI constituted 75.6% and 75.9% of our FY12 projections, falling within our overall expectations.
Cost control initiatives paying off
On the cost front, overall 3Q12 operating expenses have come off 12% YoY (-6.8% QoQ) to US$27.2m, which indicates the successful implementation of cost control initiatives by management. Although operating expenses are still higher on a 9M12 basis – due in part to the increase in IBC leasing expenses – we view this quarterly reduction as a positive step in improving operating margin and anticipate a further uptick in 4Q12.
Last quarter to close out well
Going forward, demand for Goodpack’s IBCs in 4Q12 should remain stable at current levels with support for their main revenue segments (the natural and synthetic rubber businesses) coming from the automotive industry as global motor sales maintain their upwards momentum. Coupled with management’s effective control over operating expenses, we expect Goodpack to close out FY12 on a good note.
Upgrade to HOLD on valuation grounds
Following our 15 March take-profit call on Goodpack, the counter has since retreated by more than 13% and has since stabilized over the past two weeks. At this juncture, we view the sell-downs and profit-taking actions to be over, and Goodpack’s decent 3Q12 results could inspire some buyers to return on recent weakness. However, as its results were largely in-line with our expectations, we leave our FY12 and FY13 projections and corresponding fair value estimate of S$1.70 unchanged. Upgrade our rating to HOLD on valuation grounds.
SATS
Kim Eng on 15 May 2012
Good results, bumper dividend. SATS reported FY12 results that were in line with expectations at SGD 171 mil. As a more meaningful comparison, its 4Q12 Net Profit from continuing operations of SGD 48 mil was flat YoY, while on a full-year basis, profit declined marginally by 4% to SGD 178 mil, which was a creditable performance against the year’s challenging operating environment. Bumper dividends were also declared (final plus special) of SG 21 cts/sh, as a disbursement from their sale of the Daniels group. Together with the interim dividend of SG 5 cts/sh, total dividend yield of 10% is rather attractive.
The worst seemingly over in Japan. TFK has seemingly turned a corner after the Japanese earthquake disaster in Mar 2011 which severely affected its operations. TFK has shown 4 consecutive quarters of improvement since then, culminating in a turnaround from an SGD 1.6 mil loss in FY11 to a SGD 0.3 mil profit in FY12. Also, from a geographical standpoint, Figure 1 shows the increased contribution from Japan to Group revenue. We expect further recovery in TFK’s performance as a key growth driver for the Group going forward.
Bumper dividends to be the norm? SATS has historically been sitting on a healthy net cash position. Figure 2 shows that SATS has a 5-year ordinary dividend payout ratio of 70%. We think that based on its strong cashflow and large net cash position, there is justification for a payout ratio closer to 100%, which would still leave sufficient cash for potential acquisitions in the non-aviation-related space.
On solid ground, Maintain BUY. SATS continues to remain a company with solid fundamentals, with growth drivers largely intact. We believe that its resilient earnings amidst a volatile economic climate and possibly higher dividend payouts justify a valuation upgrade to 17x FY13 PER, based on 1 standard deviation above its mean. Maintain BUY, with target price increased to $3.04.
Good results, bumper dividend. SATS reported FY12 results that were in line with expectations at SGD 171 mil. As a more meaningful comparison, its 4Q12 Net Profit from continuing operations of SGD 48 mil was flat YoY, while on a full-year basis, profit declined marginally by 4% to SGD 178 mil, which was a creditable performance against the year’s challenging operating environment. Bumper dividends were also declared (final plus special) of SG 21 cts/sh, as a disbursement from their sale of the Daniels group. Together with the interim dividend of SG 5 cts/sh, total dividend yield of 10% is rather attractive.
The worst seemingly over in Japan. TFK has seemingly turned a corner after the Japanese earthquake disaster in Mar 2011 which severely affected its operations. TFK has shown 4 consecutive quarters of improvement since then, culminating in a turnaround from an SGD 1.6 mil loss in FY11 to a SGD 0.3 mil profit in FY12. Also, from a geographical standpoint, Figure 1 shows the increased contribution from Japan to Group revenue. We expect further recovery in TFK’s performance as a key growth driver for the Group going forward.
Bumper dividends to be the norm? SATS has historically been sitting on a healthy net cash position. Figure 2 shows that SATS has a 5-year ordinary dividend payout ratio of 70%. We think that based on its strong cashflow and large net cash position, there is justification for a payout ratio closer to 100%, which would still leave sufficient cash for potential acquisitions in the non-aviation-related space.
On solid ground, Maintain BUY. SATS continues to remain a company with solid fundamentals, with growth drivers largely intact. We believe that its resilient earnings amidst a volatile economic climate and possibly higher dividend payouts justify a valuation upgrade to 17x FY13 PER, based on 1 standard deviation above its mean. Maintain BUY, with target price increased to $3.04.
ComfortDelGro
Kim Eng on 15 May 2012
Decent set of 1Q results. ComfortDelGro’s (CDG) 1Q12 earnings of SGD 54 mil were in line with forecasts, given that this was a seasonally weak quarter. Encouragingly, revenue was 7% higher YoY due to growth from almost every business segment. It was also commendable that CDG managed to achieve a 7% higher operating profit YoY despite pressures of staff and fuel cost. We maintain our BUY recommendation, with Target Price unchanged based on its diversified business model which enables it to benefit from growth markets overseas.
Almost 50% of operating profit from overseas. Earnings derived from overseas operations comprised 49% of total operating profit (Figure 1), up from 41%, partially caused by the fact that its Singapore bus operations (SBS Transit) made an operating loss of SGD 4 mil excluding advertising and rental revenue. Despite challenges faced within the local public transport scene, especially with no mandated fare increases for 2012, we believe that its overseas operations can more than pick up the slack, as evidenced by current 1Q12 results.
Still buses and taxis leading the way. Figure 2 clearly shows that buses and taxi operations remain the key component of revenue growth, with revenue increases of 5% and 9% YoY respectively. On the profitability front, CDG’s bus profit growth was derived primarily from the UK (+SGD 4.9 mil) and Australia (+SGD 4.3 mil). In contrast, Taxi profitability improvement was derived mainly from China (+SGD 1.7 mil). From this perspective, CDG’s strategy of geographical diversification across its business segments seems to be paying off.
Multi-national transport operator - reiterate BUY. As a global transport operator within multiple modes of land transport, we believe that CDG will be one of the few transport operators with the ability to emerge profitably amidst the backdrop of escalating operating costs. Its near-term growth will likely be spearheaded by its overseas operations. Maintain BUY, with TP unchanged at SGD 1.85, pegged at 16x FY12 PER, 1 standard deviation above its historical mean.
Decent set of 1Q results. ComfortDelGro’s (CDG) 1Q12 earnings of SGD 54 mil were in line with forecasts, given that this was a seasonally weak quarter. Encouragingly, revenue was 7% higher YoY due to growth from almost every business segment. It was also commendable that CDG managed to achieve a 7% higher operating profit YoY despite pressures of staff and fuel cost. We maintain our BUY recommendation, with Target Price unchanged based on its diversified business model which enables it to benefit from growth markets overseas.
Almost 50% of operating profit from overseas. Earnings derived from overseas operations comprised 49% of total operating profit (Figure 1), up from 41%, partially caused by the fact that its Singapore bus operations (SBS Transit) made an operating loss of SGD 4 mil excluding advertising and rental revenue. Despite challenges faced within the local public transport scene, especially with no mandated fare increases for 2012, we believe that its overseas operations can more than pick up the slack, as evidenced by current 1Q12 results.
Still buses and taxis leading the way. Figure 2 clearly shows that buses and taxi operations remain the key component of revenue growth, with revenue increases of 5% and 9% YoY respectively. On the profitability front, CDG’s bus profit growth was derived primarily from the UK (+SGD 4.9 mil) and Australia (+SGD 4.3 mil). In contrast, Taxi profitability improvement was derived mainly from China (+SGD 1.7 mil). From this perspective, CDG’s strategy of geographical diversification across its business segments seems to be paying off.
Multi-national transport operator - reiterate BUY. As a global transport operator within multiple modes of land transport, we believe that CDG will be one of the few transport operators with the ability to emerge profitably amidst the backdrop of escalating operating costs. Its near-term growth will likely be spearheaded by its overseas operations. Maintain BUY, with TP unchanged at SGD 1.85, pegged at 16x FY12 PER, 1 standard deviation above its historical mean.
BreadTalk Group
OCBC on 14 May 2012
BreadTalk Group’s (BTG) reported slight improvements in its 1Q12 results that were well within our expectations. Revenue grew 27.4% YoY (+5.6% QoQ) to S$106.1m on the back of stronger sales in China’s bakery division, and gross profit margin improved by 0.5 percentage points YoY (-0.5 ppt QoQ) to 54.3%. Net profit climbed 15.1% YoY to S$1.4m – although it fell 64.3% QoQ on seasonality factors (4Q is typically the strongest quarter) – following higher contributions from the Bakery and Restaurant segments. Going forward, we expect BTG’s revenue growth to persist as the growth in Asia maintains its upward push. While operating margin may remain depressed, as is typical of a company undergoing an expansion phase, we retain our confidence in management’s ability in controlling costs and highlight the general stability in gross profit margins over the years. With BTG’s results in-line with our expectations, we keep our FY12 projections unchanged and reaffirm our HOLD rating with an unchanged fair value estimate of S$0.57.
Slight improvement in 1Q
BreadTalk Group (BTG) reported slight improvements in its 1Q12 results as revenue grew 27.4% YoY (+5.6% QoQ) to S$106.1m on the back of stronger sales in China’s bakery division while gross profit margins improved by 0.5 percentage points YoY (-0.5 ppt QoQ) to 54.3%. In terms of its operating profit margins, BTG performed slightly better (2.4% vs. 1Q11: 2.3%) as higher contributions from the Bakery and Restaurant segments – boosted by China sales and Din Tai Fung (DTF) operations respectively – helped to offset weaker results from the Food court division, which was dragged lower by the Chinese and Singaporean locations. As a result, 1Q12 net profit climbed 15.1% YoY to S$1.4m although it fell -64.3% QoQ on seasonality factors (4Q is typically the strongest quarter). BTG’s top and bottom-line came in at 25.4% and 10.7% respectively, falling well within our expectations.
Improving outlook but rising costs exists
With growth in Asia remaining the bright spark of the global economy, BTG’s revenue growth should persist over the next three quarters as consumer demand continues picking up. As of 1Q12, the number of its outlets has grown 19.9% YoY (+3.7% QoQ) to 554. While it faces rising cost pressures – especially as it maintains its expansion phase – we believe that the development of additional revenue streams via a greater network of stores and brand offerings will minimize the negative impacts. In addition, BTG should start to see some trickle down benefits from cost rationalization and economies of scale and scope.
Maintain HOLD
While operating margins may seem depressed, it is typical of a company undergoing an expansion phase. However, we retain our confidence in management’s ability in controlling costs and highlight the general stability in gross profit margins, which indicates that BTG’s management is effective in their cost control initiatives i.e. inventory control, purchasing ability etc. With BTG’s results in-line with our expectations, we keep our FY12 projections unchanged and reaffirm our HOLD rating with an unchanged fair value estimate of S$0.57.
BreadTalk Group’s (BTG) reported slight improvements in its 1Q12 results that were well within our expectations. Revenue grew 27.4% YoY (+5.6% QoQ) to S$106.1m on the back of stronger sales in China’s bakery division, and gross profit margin improved by 0.5 percentage points YoY (-0.5 ppt QoQ) to 54.3%. Net profit climbed 15.1% YoY to S$1.4m – although it fell 64.3% QoQ on seasonality factors (4Q is typically the strongest quarter) – following higher contributions from the Bakery and Restaurant segments. Going forward, we expect BTG’s revenue growth to persist as the growth in Asia maintains its upward push. While operating margin may remain depressed, as is typical of a company undergoing an expansion phase, we retain our confidence in management’s ability in controlling costs and highlight the general stability in gross profit margins over the years. With BTG’s results in-line with our expectations, we keep our FY12 projections unchanged and reaffirm our HOLD rating with an unchanged fair value estimate of S$0.57.
Slight improvement in 1Q
BreadTalk Group (BTG) reported slight improvements in its 1Q12 results as revenue grew 27.4% YoY (+5.6% QoQ) to S$106.1m on the back of stronger sales in China’s bakery division while gross profit margins improved by 0.5 percentage points YoY (-0.5 ppt QoQ) to 54.3%. In terms of its operating profit margins, BTG performed slightly better (2.4% vs. 1Q11: 2.3%) as higher contributions from the Bakery and Restaurant segments – boosted by China sales and Din Tai Fung (DTF) operations respectively – helped to offset weaker results from the Food court division, which was dragged lower by the Chinese and Singaporean locations. As a result, 1Q12 net profit climbed 15.1% YoY to S$1.4m although it fell -64.3% QoQ on seasonality factors (4Q is typically the strongest quarter). BTG’s top and bottom-line came in at 25.4% and 10.7% respectively, falling well within our expectations.
Improving outlook but rising costs exists
With growth in Asia remaining the bright spark of the global economy, BTG’s revenue growth should persist over the next three quarters as consumer demand continues picking up. As of 1Q12, the number of its outlets has grown 19.9% YoY (+3.7% QoQ) to 554. While it faces rising cost pressures – especially as it maintains its expansion phase – we believe that the development of additional revenue streams via a greater network of stores and brand offerings will minimize the negative impacts. In addition, BTG should start to see some trickle down benefits from cost rationalization and economies of scale and scope.
Maintain HOLD
While operating margins may seem depressed, it is typical of a company undergoing an expansion phase. However, we retain our confidence in management’s ability in controlling costs and highlight the general stability in gross profit margins, which indicates that BTG’s management is effective in their cost control initiatives i.e. inventory control, purchasing ability etc. With BTG’s results in-line with our expectations, we keep our FY12 projections unchanged and reaffirm our HOLD rating with an unchanged fair value estimate of S$0.57.
Monday 14 May 2012
CSE Global
OCBC on 14 May 2012
CSE Global (CSE)’s 1Q results came in broadly in line within our and the street’s expectations. 1Q12 revenue increased by 31% to S$134.7m (1Q11: S$102.6m), while net profit was flat at S$12.6m (1Q11: S$12.5m). Gross margin declined to 31.4% (1Q11: 40.9%), on (i) additional work incurred on its telecom projects, (ii) higher proportion of greenfield projects and (iii) lower license contribution from the UK healthcare sector. After three consecutive quarters of operating cash deficits, CSE reverted back to a positive operating cashflow (S$8m) in 1Q12 and lowered its net gearing to 30.4% (end Dec-11: 34.6%). With improvements seen in its cash-flow and gearing level, we upgrade our rating to BUY with unchanged fair value estimate of S$0.80.
1Q results within expectations
CSE Global (CSE)’s 1Q results came in broadly in line within our and the street’s expectations. 1Q12 revenue increased by 31% to S$134.7m (1Q11: S$102.6m), while net profit was flat at S$12.6m (1Q11: S$12.5m). Gross margin declined to 31.4% (1Q11: 40.9%; FY11: 31.6%), on (i) additional work incurred on its telecom projects, (ii) higher proportion of greenfield projects and (iii) lower license contribution from the UK healthcare sector. After three consecutive quarters of operating cash deficits, CSE reverted back to a positive operating cashflow (S$8m) in 1Q12 and lowered its net gearing to 30.4% (end Dec-11: 34.6%).
Working through legacy projects
CSE’s telecom division, which had encounter cost over-run issues in FY11, broke even during the quarter. The division also booked in S$9.0m of additional work (‘zero margin revenue’) for the legacy projects. Management expects a similar figure in 2Q12 and lower amounts in 2H12. As it works through the outstanding projects and secures new projects at better margins, its gross margins should revert towards the typical 35-37% levels.
Mixed performance and outlook
CSE is seeing strong business activity in the Americas, mainly due to strong growth in the greenfield onshore work. However, as onshore work typically commands a lower margin, the group’s gross margin was dragged down by 2.2%. Outlook for Europe and Asia remains lackluster. In Australia, its latest acquisition – Astib Group – performed well with 1Q12 operating profit of S$2.1m (1Q11: S$0.5m).
Upgrade to BUY
Although CSE’s margins have yet to recover, we are now seeing improvements in its cash-flows and gearing level. With the S$10.3m one-off gain from sale of eBworx shares, we also think there is a higher probability that the group will revert to a 4 Sct dividend for FY12. Upgrade to BUYwith unchanged fair value estimate of S$0.80.
CSE Global (CSE)’s 1Q results came in broadly in line within our and the street’s expectations. 1Q12 revenue increased by 31% to S$134.7m (1Q11: S$102.6m), while net profit was flat at S$12.6m (1Q11: S$12.5m). Gross margin declined to 31.4% (1Q11: 40.9%), on (i) additional work incurred on its telecom projects, (ii) higher proportion of greenfield projects and (iii) lower license contribution from the UK healthcare sector. After three consecutive quarters of operating cash deficits, CSE reverted back to a positive operating cashflow (S$8m) in 1Q12 and lowered its net gearing to 30.4% (end Dec-11: 34.6%). With improvements seen in its cash-flow and gearing level, we upgrade our rating to BUY with unchanged fair value estimate of S$0.80.
1Q results within expectations
CSE Global (CSE)’s 1Q results came in broadly in line within our and the street’s expectations. 1Q12 revenue increased by 31% to S$134.7m (1Q11: S$102.6m), while net profit was flat at S$12.6m (1Q11: S$12.5m). Gross margin declined to 31.4% (1Q11: 40.9%; FY11: 31.6%), on (i) additional work incurred on its telecom projects, (ii) higher proportion of greenfield projects and (iii) lower license contribution from the UK healthcare sector. After three consecutive quarters of operating cash deficits, CSE reverted back to a positive operating cashflow (S$8m) in 1Q12 and lowered its net gearing to 30.4% (end Dec-11: 34.6%).
Working through legacy projects
CSE’s telecom division, which had encounter cost over-run issues in FY11, broke even during the quarter. The division also booked in S$9.0m of additional work (‘zero margin revenue’) for the legacy projects. Management expects a similar figure in 2Q12 and lower amounts in 2H12. As it works through the outstanding projects and secures new projects at better margins, its gross margins should revert towards the typical 35-37% levels.
Mixed performance and outlook
CSE is seeing strong business activity in the Americas, mainly due to strong growth in the greenfield onshore work. However, as onshore work typically commands a lower margin, the group’s gross margin was dragged down by 2.2%. Outlook for Europe and Asia remains lackluster. In Australia, its latest acquisition – Astib Group – performed well with 1Q12 operating profit of S$2.1m (1Q11: S$0.5m).
Upgrade to BUY
Although CSE’s margins have yet to recover, we are now seeing improvements in its cash-flows and gearing level. With the S$10.3m one-off gain from sale of eBworx shares, we also think there is a higher probability that the group will revert to a 4 Sct dividend for FY12. Upgrade to BUYwith unchanged fair value estimate of S$0.80.
Wilmar International
OCBC on 11 May 2012
In react to its poor 1Q12 results, Wilmar International Limited’s (WIL) share price took a massive 9.1% tumble yesterday. As we had articulated in our 4Q11 results report (22 Feb), the market appears to be anticipating a much stronger recovery, but not supported by the 4Q11 results and its outlook. True enough, our view was reinforced by the 1Q12 results. In any case, we are paring our FY12 earnings forecast by 18% (FY13 by 12%). While we are keeping our valuation peg at 15x (one SD below its 3-year mean), our fair value drops to S$4.30. Maintain HOLD. We would be buyers closer to $4.00.
Dismal 1Q12 results
Wilmar International Limited’s (WIL) 1Q12 revenue grew 9.8% YoY (but fell 9.1% QoQ) to US$10,470.9m, meeting 20.4% of our full-year forecast. But net profit tumbled 33.8%% YoY and 48.8% QoQ to US$255.9m; core profit fell by a larger 51% YoY to US$206m, meeting just 12% of our FY12 forecast. While volumes have increased in 1Q12, we note that WIL saw weaker margins in oilseeds & grains (which turned in a loss-before-tax of US$52.5m); sugar also posted a larger loss of US$47.9m before tax versus US$7.2m in 1Q11, which WIL attributed to slightly higher costs in off-season maintenance program in sugar milling. On the bright side, WIL mentioned that it saw improved margins from Consumer Products segment; it also benefited from the revised Indonesian export duty structure.
Oilseeds&Grains still biggest drag
As mentioned earlier, Oilseed & Grains segment turned in a very poor quarter, hit by both depressed crushing margins as well as untimely purchases of raw materials. According to management, if it had made timely purchases of raw materials, the division would have profitable. Nevertheless, management continues to see surplus crushing capacity in China, which may take as long as three years to clear, suggesting that depressed margins may persist; in any case, it continues to remain upbeat about the demand for crushed meal (for animal feed) for the next 10 years.
Market too optimistic about recovery
As we had articulated in our 4Q11 results report (22 Feb), the market appears to be anticipating a much stronger recovery, but not supported by the 4Q11 results and its outlook. True enough, our view was reinforced by the 1Q12 results. Hence it was not surprising to see the stock suffer a massive 9.1% tumble yesterday. In any case, we are paring our FY12 earnings forecast by 18% (FY13 by 12%). While we are keeping our valuation peg at 15x (one SD below 3-year mean), our fair value drops to S$4.30. Maintain HOLD.
In react to its poor 1Q12 results, Wilmar International Limited’s (WIL) share price took a massive 9.1% tumble yesterday. As we had articulated in our 4Q11 results report (22 Feb), the market appears to be anticipating a much stronger recovery, but not supported by the 4Q11 results and its outlook. True enough, our view was reinforced by the 1Q12 results. In any case, we are paring our FY12 earnings forecast by 18% (FY13 by 12%). While we are keeping our valuation peg at 15x (one SD below its 3-year mean), our fair value drops to S$4.30. Maintain HOLD. We would be buyers closer to $4.00.
Dismal 1Q12 results
Wilmar International Limited’s (WIL) 1Q12 revenue grew 9.8% YoY (but fell 9.1% QoQ) to US$10,470.9m, meeting 20.4% of our full-year forecast. But net profit tumbled 33.8%% YoY and 48.8% QoQ to US$255.9m; core profit fell by a larger 51% YoY to US$206m, meeting just 12% of our FY12 forecast. While volumes have increased in 1Q12, we note that WIL saw weaker margins in oilseeds & grains (which turned in a loss-before-tax of US$52.5m); sugar also posted a larger loss of US$47.9m before tax versus US$7.2m in 1Q11, which WIL attributed to slightly higher costs in off-season maintenance program in sugar milling. On the bright side, WIL mentioned that it saw improved margins from Consumer Products segment; it also benefited from the revised Indonesian export duty structure.
Oilseeds&Grains still biggest drag
As mentioned earlier, Oilseed & Grains segment turned in a very poor quarter, hit by both depressed crushing margins as well as untimely purchases of raw materials. According to management, if it had made timely purchases of raw materials, the division would have profitable. Nevertheless, management continues to see surplus crushing capacity in China, which may take as long as three years to clear, suggesting that depressed margins may persist; in any case, it continues to remain upbeat about the demand for crushed meal (for animal feed) for the next 10 years.
Market too optimistic about recovery
As we had articulated in our 4Q11 results report (22 Feb), the market appears to be anticipating a much stronger recovery, but not supported by the 4Q11 results and its outlook. True enough, our view was reinforced by the 1Q12 results. Hence it was not surprising to see the stock suffer a massive 9.1% tumble yesterday. In any case, we are paring our FY12 earnings forecast by 18% (FY13 by 12%). While we are keeping our valuation peg at 15x (one SD below 3-year mean), our fair value drops to S$4.30. Maintain HOLD.
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