Silverlake Axis: Time to cash out
Summary: Silverlake Axis Limited (SAL) has entered into a conditional
agreement to subscribe for a 30% equity interest in Unifisoft Holdings – a
financial services IT provider in China – for up to US$20.4m, or 21x
historical FY06 PER. SAL believes the investment will combine Unifisoft's
in-depth local market expertise and proven systems integration capabilities
with its own comprehensive range of core banking solutions to ride on the
vibrant PRC market. However on its own, potential contribution from
Unifisoft, at the associate level, may not be significant, just about a 4%
boost to our FY08 pre-tax profit estimate. But we think that the main
benefit is likely to come from leveraging on Unifisoft's network and
existing customers, hence we have bumped up our FY08 sales forecast by 7.3%
and our earnings by 9.2%. We are also revising up our fair value from
S$0.84 to S$0.94, now based on 20x FY08 EPS versus blended FY07/08
previously. However, the stock may have captured most of the good news at
current levels, especially after the 46% surge in price since our
initiation report in March. Hence we are downgrading our call to HOLD until
we see more concrete deals. (Carey Wong)
For more information on the above, visit www.ocbcresearch.com for detailed
report.
Genting International Public Ltd: GIL raises more fresh capital cash
Summary: Genting International Public Ltd (GIL) announced that it intends
to raise S$2.0-S$2.3bn in additional equity via a rights issue. The rights
issue is on the basis of 3 new shares for every 5 existing shares held. The
pricing of the rights will be determined after an extraordinary general
meeting to be held at a later date. GIL intends to use the funds raised for
the development of the Sentosa Integrated Resort (IR), repayment of debt
and for working capital. This cash call will be the third since GIL won the
Sentosa IR and if the current rights issue is successful, GIL would have
raised a total of S$3.18bn since January 2007. This means GIL would still
need to raise a further S$2.0bn to finance the Sentosa project which is
expected to cost GIL S$5.2bn in total. However, we expect the balance to be
debt financing. We maintain our S$0.86 fair value and HOLD rating and await
further developments in the U.K. gaming scene to reassess our rating and
fair value. (Winston Liew)
Singapore Press Holdings: Higher valuation for the Paragon
Summary: Singapore Press Holdings (SPH) released its yearly valuation
report for its Paragon property yesterday. Riding the positive sentiments
of the property boom, the Paragon has been revalued up 19.7% by Knight
Frank to S$1.82b. If we take into account this new asset valuation, it
would yield another S$0.19 to our valuation. However, the debt currently
financing the property stands at $594m as reported in SPH's 2Q07 financial
statements. Until we obtain a clearer picture on SPH's level of debt for
this property, we are inclined to maintain our target price of S$4.60 and
our HOLD rating for SPH. Meanwhile, SPH is releasing its 3Q results next
week on 11 July 2007. (Kelly Chia)
Singapore Telecommunications: Acquires another associate
Summary: Singapore Telecommunications Ltd (SingTel) announced that it has
acquired another mobile associate. This time it is Warid Telecom in
Pakistan and its 30% stake will cost US$758m. This is the second
acquisition in the India subcontinent in the last 2 years. The previous
acquisition was a 45% stake in Pacific Bangladesh Telecom for S$204m. Warid
is the third largest mobile operator in Pakistan and is presently loss
making. As such, we do not anticipate Warid to help boost SingTel's
earnings in the short to medium term. Nevertheless, the acquisition is
positive on SingTel and provides it with the additional potential for
growth if it can help to turn around and grow Warid. We retain our fair
value of S$3.32 and HOLD rating for now. (Winston Liew)
NEWS HEADLINES
- A consortium comprising of CapitaLand, Hotel Properties, Wachovia
Development Corporation and possibly a foreign fund is paying S$1.34b for
Farrer Court.
- NOL has ordered 8 large, high-speed container ships, each with a capacity
of 10,000 TEUs, worth US$1b. These ships will have the largest capacity in
their fleet.
- Yellow Pages is seeking for new candidates to serve on its board.
- One unit of SC Global's The Marq on Paterson Hill has been sold for a
record S$5,100.
- HK billionaire Lee Shau Kee, the 3rd largest shareholder in Suntec REIT,
is seeking to sell his entire stake of 75.1m units at S$1.995 to S$2.04
each, or as much as S$153m.
- Keppel Land has signed MOUs to develop a string of mega lifestyle
precinct projects in China.
- Territory Resources, an Australian mining company, may be offering a
takeover of rival Consolidated Minerals for A$849m (S$1b). Noble Group Ltd
has a 13% stake in Territory Resources.
- Scorpio East reported a 67% drop in net profit to S$806,000 for FY2007
(ended 30 April) due to a rise in operating cost.
Please refer to the full report for more information and additional
disclosures.
Singapore Post - We have raised terminal growth rate assumption
The strength of the Singapore stock market could translate to more robust
economic growth and correspondingly raise the volume of mail handled by
SingPost. We are therefore raising our terminal growth rate assumption for
SingPost from our previous 0.5% to the current 0.7%.
We are particularly optimistic on financial services, which recorded a 88.6%
jump in FY07 revenue, and accounted for 3.4% share of FY07 overall revenue.
EzyCash, which accounted for 40% of financial services revenue, is seen to
remain a key driver with continued optimism on the economy. CPF data showed
that 36.7% of CPF contributors have monthly wage of between S$1.5k and
S$3.0k, and this is the target group for EzyCash. We believe the strong
economy will help drive demand for EzyCash loans, more than offsetting the
weakness from the impending opening of the market segment to commercial
banks.
We believe SingPost’s core mail business (77.6% share of overall revenue) will
also show good growth with the more robust economic growth expected. Mail
business expansion will also help to widen mail operating margin, from FY07’s
39.8%.
Based on our new assumptions of 0.7% terminal growth rate, 5.7% WACC
(derived from risk-free rate of 2.8%, market risk premium of 7.9% and cost of
debt after tax of 4.6%), our DCF valuation gives a fair value of S$1.43 per share,
which we adopt as the price target.
SingPost aims for a dividend payout ratio of 80-90% of net profit, or a minimum
of 5¢/share per year. We are forecasting FY08 dividend of 6.5¢, or a payout
ratio of 85%. The resultant 5.2% dividend yield is attractive. The recently
declared 2.5¢ final dividend is going ex-dividend on 3 Jul 07. Maintain BUY on
SingPost.
economic growth and correspondingly raise the volume of mail handled by
SingPost. We are therefore raising our terminal growth rate assumption for
SingPost from our previous 0.5% to the current 0.7%.
We are particularly optimistic on financial services, which recorded a 88.6%
jump in FY07 revenue, and accounted for 3.4% share of FY07 overall revenue.
EzyCash, which accounted for 40% of financial services revenue, is seen to
remain a key driver with continued optimism on the economy. CPF data showed
that 36.7% of CPF contributors have monthly wage of between S$1.5k and
S$3.0k, and this is the target group for EzyCash. We believe the strong
economy will help drive demand for EzyCash loans, more than offsetting the
weakness from the impending opening of the market segment to commercial
banks.
We believe SingPost’s core mail business (77.6% share of overall revenue) will
also show good growth with the more robust economic growth expected. Mail
business expansion will also help to widen mail operating margin, from FY07’s
39.8%.
Based on our new assumptions of 0.7% terminal growth rate, 5.7% WACC
(derived from risk-free rate of 2.8%, market risk premium of 7.9% and cost of
debt after tax of 4.6%), our DCF valuation gives a fair value of S$1.43 per share,
which we adopt as the price target.
SingPost aims for a dividend payout ratio of 80-90% of net profit, or a minimum
of 5¢/share per year. We are forecasting FY08 dividend of 6.5¢, or a payout
ratio of 85%. The resultant 5.2% dividend yield is attractive. The recently
declared 2.5¢ final dividend is going ex-dividend on 3 Jul 07. Maintain BUY on
SingPost.
Neptune Orient Lines -
Rating downgrade from Buy 2 because of valuation
We are downgrading our rating on NOL from Buy 2 to Reduce 2—the share price
is above our 12-month price target of S$4.80. Our price target and earnings
estimates remain unchanged, as we believe there has been little additional news
flow. In a report dated 20 June 2007, we discussed the possibility of OOIL bidding
for NOL. We would not expect any potential offer price to significantly exceed
current price levels.
We expect low profitability in the H107 results
We estimate 55% of revenue is from trans-Pacific trade. New trans-Pacific
contracts were only effective 1 May, so the H107 results will bear the burden of
lower 2006 contracts. A higher base effect is likely to have resulted in the
operating results being down YoY, in our view, although there should have been
an improvement in Q2 from Q1.
Short-term risks are now skewed to the downside
NOL now trades on 1.8x 2008E P/BV and 1.3x if our valuation of port assets is
excluded. We believe this is high, as we forecast just 4% net profit margins for
2007 and have a neutral sector view. We believe regional carriers maintain a
cautious outlook for trans-Pacific trade and that the current share price leaves no
scope for disappointment.
Valuation: S$4.80 unchanged, core liner business valued at S$3.30
We attributed S$1.50 to the value of the US port assets and S$3.30 to the core liner
business. As noted in our report of 25 May 2007, NOL management has not
confirmed any transactions of port assets will occur and does not provide financial
data relating to these assets.
We are downgrading our rating on NOL from Buy 2 to Reduce 2—the share price
is above our 12-month price target of S$4.80. Our price target and earnings
estimates remain unchanged, as we believe there has been little additional news
flow. In a report dated 20 June 2007, we discussed the possibility of OOIL bidding
for NOL. We would not expect any potential offer price to significantly exceed
current price levels.
We expect low profitability in the H107 results
We estimate 55% of revenue is from trans-Pacific trade. New trans-Pacific
contracts were only effective 1 May, so the H107 results will bear the burden of
lower 2006 contracts. A higher base effect is likely to have resulted in the
operating results being down YoY, in our view, although there should have been
an improvement in Q2 from Q1.
Short-term risks are now skewed to the downside
NOL now trades on 1.8x 2008E P/BV and 1.3x if our valuation of port assets is
excluded. We believe this is high, as we forecast just 4% net profit margins for
2007 and have a neutral sector view. We believe regional carriers maintain a
cautious outlook for trans-Pacific trade and that the current share price leaves no
scope for disappointment.
Valuation: S$4.80 unchanged, core liner business valued at S$3.30
We attributed S$1.50 to the value of the US port assets and S$3.30 to the core liner
business. As noted in our report of 25 May 2007, NOL management has not
confirmed any transactions of port assets will occur and does not provide financial
data relating to these assets.
CapitaCommercial Trust - Associate adopting same strategy
CCT's associate grows. CapitaCommercial Trust's (CCT) 30% Malaysian
associate Quill Capita Trust (QCT) recently announced its intention to
acquire 2 properties in Kuala Lumpur for RM215m. This would be QCT's
first acquisition post IPO and is in line with its growth strategy to double
its asset size to RM 560m by end 2007. The acquisition is to be equity
funded and CCT intends to subscribe to its allocation to maintain its
proportionate stake in QCT, and the amount is small at under S$30m.
More importantly, with its gearing standing at 32% and an investment
portfolio value of about S$3.8bn, its balance sheet is well able to support
additional debt of over S$500m.
Divestment gains. One of the assets that QCT is buying is Wisma Technip,
which CCT has an interest via its 100% investment in its junior bonds. The
acquisition price of RM125m will result in CCT recognizing a divestment
gain of RM4.4m (about S$2.0m). As completion is in 4Q07, we will adjust
our forecast upon the release of CCT's 1H07 results expected in late July.
Asset enhancement at Raffles City. Presently, the key development is
the asset enhancement works (AEW) at Raffles City. CCT intends to decant
space currently used for mechanical and engineering equipment. This will
release about 41,000 sq ft of space for retail use. It will be spread over 3
levels and will encompass building a 3-storey island podium. The estimated
cost is S$56m and funding will be via debt. As stated previously, we see
no issues with respect to debt funding. Construction has started and
completion is expected by end 2007. The estimated bottom-line accretion
from this AEW is about S$2.7m, or a DPU of 0.20 cent.
Maintain HOLD. In light of the development and the expected rapid growth
of QCT, we are including QCT's market capitalization into CCT's valuation.
Presently, the effect is small at about S$0.04/CCT unit. However, depending
on how the REIT sector pans out in Malaysia, QCT's valuation to CCT
could be meaningful in the future. More significantly is the expected asset
size growth for CCT, and management has guided on S$5-6.0bn by 2009.
We see this as achievable with the positive outlook for the office sector.
Our valuation has an asset target size of $5.5bn. Finally with the inclusion
of QCT, our fair value estimate is revised up from S$2.58 to S$2.62. We
maintain HOLD rating.
associate Quill Capita Trust (QCT) recently announced its intention to
acquire 2 properties in Kuala Lumpur for RM215m. This would be QCT's
first acquisition post IPO and is in line with its growth strategy to double
its asset size to RM 560m by end 2007. The acquisition is to be equity
funded and CCT intends to subscribe to its allocation to maintain its
proportionate stake in QCT, and the amount is small at under S$30m.
More importantly, with its gearing standing at 32% and an investment
portfolio value of about S$3.8bn, its balance sheet is well able to support
additional debt of over S$500m.
Divestment gains. One of the assets that QCT is buying is Wisma Technip,
which CCT has an interest via its 100% investment in its junior bonds. The
acquisition price of RM125m will result in CCT recognizing a divestment
gain of RM4.4m (about S$2.0m). As completion is in 4Q07, we will adjust
our forecast upon the release of CCT's 1H07 results expected in late July.
Asset enhancement at Raffles City. Presently, the key development is
the asset enhancement works (AEW) at Raffles City. CCT intends to decant
space currently used for mechanical and engineering equipment. This will
release about 41,000 sq ft of space for retail use. It will be spread over 3
levels and will encompass building a 3-storey island podium. The estimated
cost is S$56m and funding will be via debt. As stated previously, we see
no issues with respect to debt funding. Construction has started and
completion is expected by end 2007. The estimated bottom-line accretion
from this AEW is about S$2.7m, or a DPU of 0.20 cent.
Maintain HOLD. In light of the development and the expected rapid growth
of QCT, we are including QCT's market capitalization into CCT's valuation.
Presently, the effect is small at about S$0.04/CCT unit. However, depending
on how the REIT sector pans out in Malaysia, QCT's valuation to CCT
could be meaningful in the future. More significantly is the expected asset
size growth for CCT, and management has guided on S$5-6.0bn by 2009.
We see this as achievable with the positive outlook for the office sector.
Our valuation has an asset target size of $5.5bn. Finally with the inclusion
of QCT, our fair value estimate is revised up from S$2.58 to S$2.62. We
maintain HOLD rating.
Hsu Fu Chi Candy Empire
Story: Hsu Fu Chi (HFC) is a manufacturer and distributor of
confectionery products – namely, candies, cake and cookies and
sachima (a traditional Chinese puff pastry).
Point: The Group is a leading player in China’s candy
industry; according to Euromonitor, it has a sugar confectionery
market share of about 4.1% in 2005. It also manages its own
network of 68 sales offices with over 5,000 sales personnel
throughout China. HFC has over 400 products, which are mainly
marketed under its well-known Hsu Fu Chi (“徐福记”) brand.
Relevance: We project a bottom-line growth of about 15% -
16% for FY08F and FY09F, driven by growing consumer
affluence in China, underpinned by its sales/distribution network
and capacity expansion. We initiate coverage on the counter
with a BUY call and target price set at S$1.41, based on 18x
FY08/09F blended earnings.
The Business
Confectionery business. HFC manufactures and distributes candies, cake
& cookies and sachima (a traditional Chinese sweet puff pastry cake).
Over 400 of its products are marketed under its own brands, namely
Hsu Fu Chi. As of May 2007, we understand that it has a strong sales
network of 68 offices across China, with total sales staff of over 5,000.
Management plans to widen this network to more than 75 offices by
FY08.
Projected growth of 15% in the next two years. Based on our forecast,
we project bottom-line growth for the Group to be about 15% over the
next two years, thanks to its capacity increase and improved utilisation
of the Group’s production facilities. The higher growth projected in
FY07F is largely due to a higher utilisation of its newly added
production capacity and a longer peak season arising from a later
Chinese New Year in 2007 (18 February).
A leader amongst many players. The confectionery industry is
fragmented with low entry barriers. According to Euromonitor, HFC has
a market share of about 4.1% in the sugar confectionery market. HFC’s
key competitive advantage is its sales and distribution network and its
brand name, which is synonymous with Chinese New Year candies.
The Stock
BUY, target price at S$1.41. Based on our valuation, our target price for
this counter is S$1.41, pegged to 18x FY08/09F blended earnings, which
is in line with average Singapore-listed peers’ PE. Our DCF estimates
(WACC 8.8%, terminal growth of 2%) show a valuation of S$1.39,
equating to a PE of 17.2x on FY09F. Given its long history, established
brand as well as strong sales and distribution network, we recommend
BUY.
Risk – sales hinges on Chinese New Year. About two-thirds of annual
sales are from 2Q and 3Q, which is the Chinese New Year season. Any
hiccups during this key season could thwart the Group’s full-year
performance. Other risks include rising cost of raw materials and
competition arising from low entry barriers.
SWOT Analysis
Strengths Weakness
• Centralised control of its extensive sales and
distribution network by Sales Headquarters.
• Experienced management and sales team with
extensive industry experience.
• Strong relationships with customers within the
modern sales channel.
• Strong and popular brand, “Hsu Fu Chi”, built over the
past decade and continual investment in the brand to
retain brand loyalty and increase geographical
coverage.
• Accredited production capabilities with modern
equipment allowing for shorter production
development cycles and lower production costs.
• Wide range of quality confectionery products in varied
packaging forms to suit consumers’ diverse taste and
preference
• Nature of business has high seasonality pattern and sales
are highly concentrated during December to Chinese New
Year period.
• The Group is currently fully reliant on its Dongguan plant.
Even by 2Q08 with the Sichuan plant completed, 95% of
the Group’s capacity will still be situated in Dongguan.
• Sales headquarters solely controls the extensive sales
network from Dongguan. Any adverse impact, such as
retention of key personnel, will affect the workings of the
sales network, in turn, negatively impacting the business.
• The Group’s business is highly dependent on its product
listings and availability in retail stores. Cost of listing and
discount may increase in the future, thereby increasing the
Group’s cost of doing business.
Opportunities Threats
• Low per capita consumption in China compared to
other developed countries and global average.
• Growing affluence of consumers in China.
• Huge geographical expansion still available.
• Larger potential cost savings and higher control of
quality of raw materials and packaging materials
through building production and processing facilities
for such products.
• Modern sales channels playing an increasingly
important role in the retail market. As such channels
expand their geographical reach within the country, it
presents opportunities for the Group to ride on this
trend and expand their retail distribution points.
Opportunities Threats
• Low per capita consumption in China compared to
other developed countries and global average.
• Growing affluence of consumers in China.
• Huge geographical expansion still available.
• Larger potential cost savings and higher control of
quality of raw materials and packaging materials
through building production and processing facilities
for such products.
• Modern sales channels playing an increasingly
important role in the retail market. As such channels
expand their geographical reach within the country, it
presents opportunities for the Group to ride on this
trend and expand their retail distribution points.
Company Background
• Corporate history. In 1992, the executive Chairman, Hsu Chen founded Dongguan Hsu Fu Chi, the first
company in the group with his brothers Hsu Hang (Chief Operating Officer), Hsu Keng (Chief Technology
Officer) and Hsu Pu. Today, it has grown to become a leading candy and confectionery brand in China with
annual revenues of over RMB2bn.
• Hsu Fu Chi owns, manufactures and markets a diverse range of confectionery and bakery products
sold mainly in China. With over 400 products, the Group categorises them into: candy products, cake &
cookie products, and sachima products. Presently, all of the products are produced at its production facility
in Dongguan, Guangzhou Province in China. According to Euromonitor, the Group was ranked first (in
2005) with about 4.1% market share of the Chinese sugar confectionary market.
• Growth in three different phases. The company’s history dates back to 1992, when its Executive
Chairman, Hsu Chen first founded Dongguan Hsu Fu Chi. In the initial phase of entering the China market,
Hsu Fu Chi developed its business by marketing its products via third-party distributors, ensuring good
standard in product quality as well as building its own sales and distribution network to better control
product sales, marketing and pricing. About 95% of the Group’s revenue is from sales of the Group’s
products in China.
confectionery products – namely, candies, cake and cookies and
sachima (a traditional Chinese puff pastry).
Point: The Group is a leading player in China’s candy
industry; according to Euromonitor, it has a sugar confectionery
market share of about 4.1% in 2005. It also manages its own
network of 68 sales offices with over 5,000 sales personnel
throughout China. HFC has over 400 products, which are mainly
marketed under its well-known Hsu Fu Chi (“徐福记”) brand.
Relevance: We project a bottom-line growth of about 15% -
16% for FY08F and FY09F, driven by growing consumer
affluence in China, underpinned by its sales/distribution network
and capacity expansion. We initiate coverage on the counter
with a BUY call and target price set at S$1.41, based on 18x
FY08/09F blended earnings.
The Business
Confectionery business. HFC manufactures and distributes candies, cake
& cookies and sachima (a traditional Chinese sweet puff pastry cake).
Over 400 of its products are marketed under its own brands, namely
Hsu Fu Chi. As of May 2007, we understand that it has a strong sales
network of 68 offices across China, with total sales staff of over 5,000.
Management plans to widen this network to more than 75 offices by
FY08.
Projected growth of 15% in the next two years. Based on our forecast,
we project bottom-line growth for the Group to be about 15% over the
next two years, thanks to its capacity increase and improved utilisation
of the Group’s production facilities. The higher growth projected in
FY07F is largely due to a higher utilisation of its newly added
production capacity and a longer peak season arising from a later
Chinese New Year in 2007 (18 February).
A leader amongst many players. The confectionery industry is
fragmented with low entry barriers. According to Euromonitor, HFC has
a market share of about 4.1% in the sugar confectionery market. HFC’s
key competitive advantage is its sales and distribution network and its
brand name, which is synonymous with Chinese New Year candies.
The Stock
BUY, target price at S$1.41. Based on our valuation, our target price for
this counter is S$1.41, pegged to 18x FY08/09F blended earnings, which
is in line with average Singapore-listed peers’ PE. Our DCF estimates
(WACC 8.8%, terminal growth of 2%) show a valuation of S$1.39,
equating to a PE of 17.2x on FY09F. Given its long history, established
brand as well as strong sales and distribution network, we recommend
BUY.
Risk – sales hinges on Chinese New Year. About two-thirds of annual
sales are from 2Q and 3Q, which is the Chinese New Year season. Any
hiccups during this key season could thwart the Group’s full-year
performance. Other risks include rising cost of raw materials and
competition arising from low entry barriers.
SWOT Analysis
Strengths Weakness
• Centralised control of its extensive sales and
distribution network by Sales Headquarters.
• Experienced management and sales team with
extensive industry experience.
• Strong relationships with customers within the
modern sales channel.
• Strong and popular brand, “Hsu Fu Chi”, built over the
past decade and continual investment in the brand to
retain brand loyalty and increase geographical
coverage.
• Accredited production capabilities with modern
equipment allowing for shorter production
development cycles and lower production costs.
• Wide range of quality confectionery products in varied
packaging forms to suit consumers’ diverse taste and
preference
• Nature of business has high seasonality pattern and sales
are highly concentrated during December to Chinese New
Year period.
• The Group is currently fully reliant on its Dongguan plant.
Even by 2Q08 with the Sichuan plant completed, 95% of
the Group’s capacity will still be situated in Dongguan.
• Sales headquarters solely controls the extensive sales
network from Dongguan. Any adverse impact, such as
retention of key personnel, will affect the workings of the
sales network, in turn, negatively impacting the business.
• The Group’s business is highly dependent on its product
listings and availability in retail stores. Cost of listing and
discount may increase in the future, thereby increasing the
Group’s cost of doing business.
Opportunities Threats
• Low per capita consumption in China compared to
other developed countries and global average.
• Growing affluence of consumers in China.
• Huge geographical expansion still available.
• Larger potential cost savings and higher control of
quality of raw materials and packaging materials
through building production and processing facilities
for such products.
• Modern sales channels playing an increasingly
important role in the retail market. As such channels
expand their geographical reach within the country, it
presents opportunities for the Group to ride on this
trend and expand their retail distribution points.
Opportunities Threats
• Low per capita consumption in China compared to
other developed countries and global average.
• Growing affluence of consumers in China.
• Huge geographical expansion still available.
• Larger potential cost savings and higher control of
quality of raw materials and packaging materials
through building production and processing facilities
for such products.
• Modern sales channels playing an increasingly
important role in the retail market. As such channels
expand their geographical reach within the country, it
presents opportunities for the Group to ride on this
trend and expand their retail distribution points.
Company Background
• Corporate history. In 1992, the executive Chairman, Hsu Chen founded Dongguan Hsu Fu Chi, the first
company in the group with his brothers Hsu Hang (Chief Operating Officer), Hsu Keng (Chief Technology
Officer) and Hsu Pu. Today, it has grown to become a leading candy and confectionery brand in China with
annual revenues of over RMB2bn.
• Hsu Fu Chi owns, manufactures and markets a diverse range of confectionery and bakery products
sold mainly in China. With over 400 products, the Group categorises them into: candy products, cake &
cookie products, and sachima products. Presently, all of the products are produced at its production facility
in Dongguan, Guangzhou Province in China. According to Euromonitor, the Group was ranked first (in
2005) with about 4.1% market share of the Chinese sugar confectionary market.
• Growth in three different phases. The company’s history dates back to 1992, when its Executive
Chairman, Hsu Chen first founded Dongguan Hsu Fu Chi. In the initial phase of entering the China market,
Hsu Fu Chi developed its business by marketing its products via third-party distributors, ensuring good
standard in product quality as well as building its own sales and distribution network to better control
product sales, marketing and pricing. About 95% of the Group’s revenue is from sales of the Group’s
products in China.
SembCorp Marine - Raising TP to S$5.40, Mainatin Bu
¨ Announces new jack-up rig contract
SembCorp Marine's PPL Shipyard has announced a new contract from Offshore
Group to build a Baker Marine Pacific Class 375 Deep Drilling Offshore
Jack-up Rig at a contract value of US$190m. This is the third in a series
of three identical BMC Pacific 375 design jack-up rigs that Offshore has
ordered. The price tag is also higher than the first order from Offshore,
ordered in October for US$155m, but equivalent to the second unit in
January contracted at US$190m. Construction of the jack-up rig is expected
to commence in the third quarter of 2007 with delivery scheduled in
September 2009. This order pushes SMM's net order book to-date to S$9.1
billion with completion and deliveries until 2010. Of this, S$4.5 billion
secured in 2007 alone.
¨ Earnings upgraded on better prospects for CSG
This latest contract is still within our orderbook expectations. However,
we are raising our FY08 forecasts by 18% to S$382.4m and FY09 by 23% to
S$442.3m, mainly on the back of higher associate earnings. SMM owns a 30%
stake in Cosco Shipyard Group (CSG) and a 6% direct stake in Cosco. We had
recently upgraded Cosco Corp's earnings ? up by 14.8%in FY08 and 28% in
FY09 ? as CSG recently secured orders worth US$1.2bn. We also like SMM's
exposure to CSG for the likelihood of more ship newbuild orders from its
parent China Ocean Shipping, and its new capacity which is just coming
onstream which will bolster earnings. Our earnings upgrade is therefore
mainly a reflection of this.
¨ Core earnings supported by expansion
Looking at SMM's core earnings, rig building will continue to drive
profits, with PPL Shipyard having another stellar year. Elsewhere, SMM's
focus into the production side of the offshore oil and gas sector is also
kicking in. We also expect SMM to be able to take on more jack-up and
production jobs as its yard expansions in Sembawang Shipyard and Karimun
come onstream.
¨ Raising target price to S$5.40, but valuations looking relatively
steep
DCF-fair value target is raised to S$5.40 or an 11% upside potential from
its current price ? hence we are maintaining our Buy call. However, with
the 21% surge in SMM's share price in the last month, the stock is trading
at a FY08 PERs of 19x. Our fair value of S$5.40 implies an FY08 PER of 21x,
which is the upper limit of our valuation threshold. Barring any
significant upward earnings revision, SMM therefore falls down on the
pecking order on our picks for the sector due to its higher valuations.
Furthermore, we would prefer an exposure to Cosco's prospects directly
rather than through SMM. Similarly, we also prefer Keppel Corp, as its
shipyard business currently trades at a cheaper FY08 PER of 16x, by our
estimates. We also see better upside potential for Keppel through its
emerging infrastructure business and from higher property selling prices,
both through Keppel Land and Reflections at Keppel Bay.
Europtronic: Recovery taking shape
We recently visited Europtronic Group Ltd's (EGL) operation in China. At
its Suzhou plant, orders have picked up as guided, with utilization now
running at 85%, producing Europtronic-branded and OEM capacitors. EGL
also gave an update on its plan to venture into the lighting industry, where
we understand talks are in advanced stages, and deals could come in late
2H. Its distribution business has also become more focused, with EGL
concentrating on products with better margins. EGL has also been cross
selling its manufacturing and distribution services and has plans to expand
its geographical reach. We have raised our FY07 estimates by 3.4% (FY08
+6.2%) for revenue and 15.5% (FY08 +44.2%) for earnings, driven by the
continued recovery in 2H and new initiatives for 2008. Fair value estimate
also improves from S$0.13 to S$0.16, now based on 1x blended FY07/08
NTA (vs. 0.8x FY07 previously). But due to recent rise in price, the stock
appears to be fairly priced, and hence we retain our HOLD recommendation.
Visit to EGL's China facilities. We visited Europtronic Group Ltd (EGL)
last week at its manufacturing and distribution facilities in China. The factory
in Suzhou manufactures film capacitors and has the capacity to put out
about 876m units annually. EGL has a smaller plant in Shenzhen which
produces about 204m capacitors annually, and one in Hsinchu Taiwan making
about 600m inductors per year. The Shanghai sales office also serves as
the distribution hub for eight other rep offices there.
Manufacturing business buzzing. At its Suzhou plant, we could see that
its manufacturing orders have picked up as guided, with utilization now
running at 85% on two 12-hour shifts six days a week, producing Europtronicbranded
and OEM capacitors. EGL also gave an update on its plan to
venture into the lighting industry, where we understand talks are in advanced
stages, and deals could come in late 2H. In addition, we understand that
new CFO Chan Wah Tiong, an electronics manufacturing industry veteran,
has been reviewing and overhauling its operations over the last two months
to improve efficiency and productivity. Some of these measures involve
streamlining operating processes and installing a new VMI (Vendor Managed
Inventory) warehouse system to lower inventory costs. The review is still
ongoing but we should see some benefits from 2H07 onwards.
Distribution business more focused. Its distribution business has also
become more focused, with EGL concentrating on products with better
margins from principals like AVX, Sharp, Tyco, JST for customers in the
connecting (telecoms), computing, consumer electronics, industrial and
automobile segments. EGL has also been cross selling its manufacturing
and distribution services and has plans to expand its geographical reach. A
sales office will be set up in India in August this year to support existing
customers there. EGL will initially transfer about US$150k of monthly sales
over and slowly grow its business from there. We understand EGL also
plans to do the same in Korea.
2H recovery shaping up. We have raised our FY07 estimates by 3.4%
(FY08 +6.2%) for revenue and 15.5% (FY08 +44.2%) for earnings, driven
by the continued recovery in 2H and new initiatives for 2008. Fair value
estimate also improves from S$0.13 to S$0.16, now based on 1x blended
FY07/08 NTA (vs. 0.8x FY07 previously). But due to recent rise in price, the
stock appears to be fairly priced, and hence we retain our HOLD
recommendation. (Carey Wong)
(OCBC Investment Research Pte Ltd (OIR) produced this report under the
SGX-MAS Research Incentive Scheme. OIR is compensated S$5,000 per
annum for each company covered under the scheme.)
its Suzhou plant, orders have picked up as guided, with utilization now
running at 85%, producing Europtronic-branded and OEM capacitors. EGL
also gave an update on its plan to venture into the lighting industry, where
we understand talks are in advanced stages, and deals could come in late
2H. Its distribution business has also become more focused, with EGL
concentrating on products with better margins. EGL has also been cross
selling its manufacturing and distribution services and has plans to expand
its geographical reach. We have raised our FY07 estimates by 3.4% (FY08
+6.2%) for revenue and 15.5% (FY08 +44.2%) for earnings, driven by the
continued recovery in 2H and new initiatives for 2008. Fair value estimate
also improves from S$0.13 to S$0.16, now based on 1x blended FY07/08
NTA (vs. 0.8x FY07 previously). But due to recent rise in price, the stock
appears to be fairly priced, and hence we retain our HOLD recommendation.
Visit to EGL's China facilities. We visited Europtronic Group Ltd (EGL)
last week at its manufacturing and distribution facilities in China. The factory
in Suzhou manufactures film capacitors and has the capacity to put out
about 876m units annually. EGL has a smaller plant in Shenzhen which
produces about 204m capacitors annually, and one in Hsinchu Taiwan making
about 600m inductors per year. The Shanghai sales office also serves as
the distribution hub for eight other rep offices there.
Manufacturing business buzzing. At its Suzhou plant, we could see that
its manufacturing orders have picked up as guided, with utilization now
running at 85% on two 12-hour shifts six days a week, producing Europtronicbranded
and OEM capacitors. EGL also gave an update on its plan to
venture into the lighting industry, where we understand talks are in advanced
stages, and deals could come in late 2H. In addition, we understand that
new CFO Chan Wah Tiong, an electronics manufacturing industry veteran,
has been reviewing and overhauling its operations over the last two months
to improve efficiency and productivity. Some of these measures involve
streamlining operating processes and installing a new VMI (Vendor Managed
Inventory) warehouse system to lower inventory costs. The review is still
ongoing but we should see some benefits from 2H07 onwards.
Distribution business more focused. Its distribution business has also
become more focused, with EGL concentrating on products with better
margins from principals like AVX, Sharp, Tyco, JST for customers in the
connecting (telecoms), computing, consumer electronics, industrial and
automobile segments. EGL has also been cross selling its manufacturing
and distribution services and has plans to expand its geographical reach. A
sales office will be set up in India in August this year to support existing
customers there. EGL will initially transfer about US$150k of monthly sales
over and slowly grow its business from there. We understand EGL also
plans to do the same in Korea.
2H recovery shaping up. We have raised our FY07 estimates by 3.4%
(FY08 +6.2%) for revenue and 15.5% (FY08 +44.2%) for earnings, driven
by the continued recovery in 2H and new initiatives for 2008. Fair value
estimate also improves from S$0.13 to S$0.16, now based on 1x blended
FY07/08 NTA (vs. 0.8x FY07 previously). But due to recent rise in price, the
stock appears to be fairly priced, and hence we retain our HOLD
recommendation. (Carey Wong)
(OCBC Investment Research Pte Ltd (OIR) produced this report under the
SGX-MAS Research Incentive Scheme. OIR is compensated S$5,000 per
annum for each company covered under the scheme.)
The Ascott Group - Scaling up funds management capability
Business model intact: to manage 30,000 units by 2010
We believe Ascott is on track to manage around 30,000 units by 2010 against
19,000 currently, based on its targets for key markets: China, Europe, Vietnam,
Singapore, India, and the Middle East. Other than building new properties, one
possible way for Ascott to expand quickly could be to acquire smaller operators
with lower PE.
European REIT and development funds
Ascott launched a S$500m China incubator fund in May 2007. We expect Ascott
to inject its S$800m European portfolio into a REIT in 2008, and potentially set up
more development funds for its expansion in Asia. We raise our EPS estimates
from S$0.054 to S$0.094 for 2007, from S$0.064 to S$0.070 for 2008, and from
S$0.077 to S$0.084 for 2009 partly to account for the management fees expected
from these funds.
Divestment gains of around S$116m in 2007, special dividend expected
Ascott continues to realise divestment gains as part of recurring income. In 2007,
we expect Ascott to book profits from the sale of Asia Hotel, Ascott Chancellor
Court, and a golf course in China. We expect Ascott to pay out around six cents per
share in dividends in 2007.
Valuation
We reiterate our Buy 1 rating and raise our price target to S$2.30 from S$2.05,
based on our DCF and blended EV/EBITDA valuations. Our price target implies
2008E PE of 32x, which we believe is reasonable, given our estimate of a 20%
EBITDA CAGR for 2007-10.
We believe Ascott is on track to manage around 30,000 units by 2010 against
19,000 currently, based on its targets for key markets: China, Europe, Vietnam,
Singapore, India, and the Middle East. Other than building new properties, one
possible way for Ascott to expand quickly could be to acquire smaller operators
with lower PE.
European REIT and development funds
Ascott launched a S$500m China incubator fund in May 2007. We expect Ascott
to inject its S$800m European portfolio into a REIT in 2008, and potentially set up
more development funds for its expansion in Asia. We raise our EPS estimates
from S$0.054 to S$0.094 for 2007, from S$0.064 to S$0.070 for 2008, and from
S$0.077 to S$0.084 for 2009 partly to account for the management fees expected
from these funds.
Divestment gains of around S$116m in 2007, special dividend expected
Ascott continues to realise divestment gains as part of recurring income. In 2007,
we expect Ascott to book profits from the sale of Asia Hotel, Ascott Chancellor
Court, and a golf course in China. We expect Ascott to pay out around six cents per
share in dividends in 2007.
Valuation
We reiterate our Buy 1 rating and raise our price target to S$2.30 from S$2.05,
based on our DCF and blended EV/EBITDA valuations. Our price target implies
2008E PE of 32x, which we believe is reasonable, given our estimate of a 20%
EBITDA CAGR for 2007-10.
Banking Sector - Turning of tides
We upgrade the banking sector to Overweight from Neutral
as we believe there’s potential for Singapore banks to
outperform the market, with stronger-than-expected loan
growth in 2H07. We’re projecting 2007 loan growth at 10% y-oy
and earnings to grow 18% y-o-y.
Loan growth momentum has been accelerating over March
and April 07 to the 10% mark y-o-y, and we expect such trends
to continue, particularly in housing and construction. Robust
construction activities and private residential sectors are a boon
to the banking sector.
UOB is our top pick for the sector (Buy, TP $27.50) for better
growth and ROE prospects. Compared to OCBC (Buy, TP $10.20),
it’s more likely to surprise on the upside for dividends and NIM
expansion.
Strong domestic factors underpin loan growth. We note that domestic
construction activities have been accelerating since last year, boosted by
a rebound in the private residential market. On a larger scale, mega
projects like the Integrated Resorts and higher public spending would
increase construction demand and hence flow through to the volume of
construction loans. Up to April 07, construction loans grew at a
stunning rate of 26.7% y-o-y. Separately, private residential activities
are thriving from bullish home sales and en-bloc sales are also expected
boost housing loans. For 1Q07, UOB showed a strong 16% y-o-y growth
in housing loans. Meanwhile, OCBC’s housing loan growth remained
flat, with expectations of further growth by 4Q07. OCBC however,
recorded a strong 38% y-o-y growth in construction loans compared to
UOB’s 5%.
Relative market share growing. Based on 2006 year end financials, we
note that UOB holds the largest loan market share at 21%, while
OCBC’s has 19%. We used the Singapore currency loans as a proxy for
our estimates. In terms of housing and construction loans, using bank
level industry-segmented loans, we note that OCBC holds a larger
market share of 29% compared to UOB’s 26% for construction loans.
OCBC’s market share for housing loans is higher at 27% due to its
dominance in HDB-based loans. While UOB’s housing loan market share
stood lower at 22%, we believe that with the pick-up in the private
housing and the tail end of the deferred payment scheme, UOB would
have strong momentum to show a boost in housing loan growth.
Upgrade sector to Overweight. We upgrade the banking sector to
Overweight from Neutral as we believe there is potential for Singapore
banks to outperform the market, with stronger-than-expected loan
growth in 2H07. While ROEs may remain flat, we expect overall
earnings growth of 18% y-o-y. Our top pick for the sector is UOB for
better growth and ROE prospects. While OCBC is expected to deliver a
set of good earnings, we feel its days of low provisions may be limited.
as we believe there’s potential for Singapore banks to
outperform the market, with stronger-than-expected loan
growth in 2H07. We’re projecting 2007 loan growth at 10% y-oy
and earnings to grow 18% y-o-y.
Loan growth momentum has been accelerating over March
and April 07 to the 10% mark y-o-y, and we expect such trends
to continue, particularly in housing and construction. Robust
construction activities and private residential sectors are a boon
to the banking sector.
UOB is our top pick for the sector (Buy, TP $27.50) for better
growth and ROE prospects. Compared to OCBC (Buy, TP $10.20),
it’s more likely to surprise on the upside for dividends and NIM
expansion.
Strong domestic factors underpin loan growth. We note that domestic
construction activities have been accelerating since last year, boosted by
a rebound in the private residential market. On a larger scale, mega
projects like the Integrated Resorts and higher public spending would
increase construction demand and hence flow through to the volume of
construction loans. Up to April 07, construction loans grew at a
stunning rate of 26.7% y-o-y. Separately, private residential activities
are thriving from bullish home sales and en-bloc sales are also expected
boost housing loans. For 1Q07, UOB showed a strong 16% y-o-y growth
in housing loans. Meanwhile, OCBC’s housing loan growth remained
flat, with expectations of further growth by 4Q07. OCBC however,
recorded a strong 38% y-o-y growth in construction loans compared to
UOB’s 5%.
Relative market share growing. Based on 2006 year end financials, we
note that UOB holds the largest loan market share at 21%, while
OCBC’s has 19%. We used the Singapore currency loans as a proxy for
our estimates. In terms of housing and construction loans, using bank
level industry-segmented loans, we note that OCBC holds a larger
market share of 29% compared to UOB’s 26% for construction loans.
OCBC’s market share for housing loans is higher at 27% due to its
dominance in HDB-based loans. While UOB’s housing loan market share
stood lower at 22%, we believe that with the pick-up in the private
housing and the tail end of the deferred payment scheme, UOB would
have strong momentum to show a boost in housing loan growth.
Upgrade sector to Overweight. We upgrade the banking sector to
Overweight from Neutral as we believe there is potential for Singapore
banks to outperform the market, with stronger-than-expected loan
growth in 2H07. While ROEs may remain flat, we expect overall
earnings growth of 18% y-o-y. Our top pick for the sector is UOB for
better growth and ROE prospects. While OCBC is expected to deliver a
set of good earnings, we feel its days of low provisions may be limited.
Cosco, Reyphon Agriceutica, China Sunsine Chemical Holdings Ltd
Cosco delivers semisub lower pontoons ahead of schedule – Analyst Comments
Cosco has announced that it has successfully delivered pontoons for two semi-submersible rigs to Jurong Shipyard well ahead of schedule. In the process, Cosco says it has passed stringent multi-level quality control checks and a slew of comprehensive safety procedures. Contracted in April 2006, for around US$31m, the project will be significantly recognized in the current quarter. Cosco also says that the effective completion of this project is evidence of the growing technical competence of its shipyard business.
Cosco has seen its stock price surge by 42% since the beginning of the month, on contracts announced worth US$1.2bn as well as a more positive outlook for its overall prospects. Cosco remains our top pick within the shipyard sector, and we believe that its long term prospects remain excellent on the back of its capacity additions at Zhoushan, more shipbuilding contracts from its parent, and potential acquisitions in order to secure more capacity.
Our 3 year forward forecast remains unchanged, where we estimate a 3-yr earnings CAGR of 40% p.a. However, we believe that the stock can be re-rated higher than our current DCF-based target of S$4.05 per share, based on a longer term outlook. We maintain our BUY recommendation on Cosco.
Reyphon Agriceutical – The China-based subsidiary of mainboard-listed water treatment firm Sinomem Technology is seeking its own listing on the SGX mainboard. In its preliminary prospectus, lodged on Thursday with the MAS, Reyphon said that listing proceeds would be used to expand capacity, fund R&D, strengthen its sales network, and as working capital. There is no minimum amount which Reyphon seeks to raise. The company's pre-listing issued and paid-up share capital is $5.9m in 240m shares. Reyphon is located in Xin'gan County, Jiangxi Province. It uses fermentation biotechnology to make gibberellic acids - which regulate plant growth - and validamycin, a plant antibiotic. With an annual gibberellic acid production capacity of 101 tonnes, it is one of China's largest producers. Reyphon's revenue for FY2006 was RMB145.3m (S$29.3m), up from RMB100.6m the year before. Profit after tax was RMB42.3m, up from RMB19.8m.
China Sunsine Chemical Holdings Ltd – Is seeking to list on the SGX and has lodged its preliminary prospectus with the MAS. The company, which has its production facilities in the Shandong Province, produces rubber chemicals such as rubber accelerators and anti-scorching agents. They also source and supply anti-oxidant agents and other types of rubber accelerators. Rubber accelerators contribute to the bulk of the company's total revenue, accounting for around 97.9% in FY2006. According to the preliminary prospectus, its directors believe that it is one of the largest rubber accelerator makers in the world and in the PRC, in terms of production capacity. However, as most of its total revenue come from sales to both domestic and overseas tyre manufacturers, its demand hinges on the growth of the tyre industry. Revenue for FY2005 increased by about 82.2% Y/Y from RMB238.3m (S$48m) to RMB434.1m. In comparison, revenue for FY2006 was RMB474.7m, an increase of around 9.4% from FY2005.
Cosco has announced that it has successfully delivered pontoons for two semi-submersible rigs to Jurong Shipyard well ahead of schedule. In the process, Cosco says it has passed stringent multi-level quality control checks and a slew of comprehensive safety procedures. Contracted in April 2006, for around US$31m, the project will be significantly recognized in the current quarter. Cosco also says that the effective completion of this project is evidence of the growing technical competence of its shipyard business.
Cosco has seen its stock price surge by 42% since the beginning of the month, on contracts announced worth US$1.2bn as well as a more positive outlook for its overall prospects. Cosco remains our top pick within the shipyard sector, and we believe that its long term prospects remain excellent on the back of its capacity additions at Zhoushan, more shipbuilding contracts from its parent, and potential acquisitions in order to secure more capacity.
Our 3 year forward forecast remains unchanged, where we estimate a 3-yr earnings CAGR of 40% p.a. However, we believe that the stock can be re-rated higher than our current DCF-based target of S$4.05 per share, based on a longer term outlook. We maintain our BUY recommendation on Cosco.
Reyphon Agriceutical – The China-based subsidiary of mainboard-listed water treatment firm Sinomem Technology is seeking its own listing on the SGX mainboard. In its preliminary prospectus, lodged on Thursday with the MAS, Reyphon said that listing proceeds would be used to expand capacity, fund R&D, strengthen its sales network, and as working capital. There is no minimum amount which Reyphon seeks to raise. The company's pre-listing issued and paid-up share capital is $5.9m in 240m shares. Reyphon is located in Xin'gan County, Jiangxi Province. It uses fermentation biotechnology to make gibberellic acids - which regulate plant growth - and validamycin, a plant antibiotic. With an annual gibberellic acid production capacity of 101 tonnes, it is one of China's largest producers. Reyphon's revenue for FY2006 was RMB145.3m (S$29.3m), up from RMB100.6m the year before. Profit after tax was RMB42.3m, up from RMB19.8m.
China Sunsine Chemical Holdings Ltd – Is seeking to list on the SGX and has lodged its preliminary prospectus with the MAS. The company, which has its production facilities in the Shandong Province, produces rubber chemicals such as rubber accelerators and anti-scorching agents. They also source and supply anti-oxidant agents and other types of rubber accelerators. Rubber accelerators contribute to the bulk of the company's total revenue, accounting for around 97.9% in FY2006. According to the preliminary prospectus, its directors believe that it is one of the largest rubber accelerator makers in the world and in the PRC, in terms of production capacity. However, as most of its total revenue come from sales to both domestic and overseas tyre manufacturers, its demand hinges on the growth of the tyre industry. Revenue for FY2005 increased by about 82.2% Y/Y from RMB238.3m (S$48m) to RMB434.1m. In comparison, revenue for FY2006 was RMB474.7m, an increase of around 9.4% from FY2005.
SC Global Developments Limited -Even rival wants a stake in it
Wheelock Properties bought 10% stake in SC Global. On 22 June, Wheelock Properties (Singapore) Ltd announced that it has acquired 18,682,000 ordinary shares in SC Global from Simon Cheong, the Chairman and CEO of SC Global. This represents a 10% interest in the Company. The shares were transacted at S$6.00 per share, which works out to a total consideration of S$112.1 million. Wheelock’s acquisition is intended to be for long-term investment in a well managed and respected Singapore property company.
Valuations look very attractive. SC Global has one of the highest historical P/Es among the Singapore-listed developers, which is approximately 71.2x (FY06). However, a zoom into its future earnings reveal that its forward P/E valuation looks very attractive. Based on our estimations, FY07, FY08 and FY09 forward P/Es are respectively 8.2x, 2.0x and 2.3x. Theoretically, the company is way under-valued. Big part of the earnings will come from the two prestigious developments – The Marq on Paterson Hill and Hilltops. Note that we have not priced in the earnings to be contributed by the redevelopment of its latest acquired land bank – The Ardmore.
Reiterate BUY with fair value at S$7.55; strong potential for upward revision. Our fair value remains unchanged at S$7.55 per share based on parity to its RNAV. We are bullish on the Company and reiterate our BUY for the third time in a week.
Valuations look very attractive. SC Global has one of the highest historical P/Es among the Singapore-listed developers, which is approximately 71.2x (FY06). However, a zoom into its future earnings reveal that its forward P/E valuation looks very attractive. Based on our estimations, FY07, FY08 and FY09 forward P/Es are respectively 8.2x, 2.0x and 2.3x. Theoretically, the company is way under-valued. Big part of the earnings will come from the two prestigious developments – The Marq on Paterson Hill and Hilltops. Note that we have not priced in the earnings to be contributed by the redevelopment of its latest acquired land bank – The Ardmore.
Reiterate BUY with fair value at S$7.55; strong potential for upward revision. Our fair value remains unchanged at S$7.55 per share based on parity to its RNAV. We are bullish on the Company and reiterate our BUY for the third time in a week.
Stamford Tyres Corporation - Earnings bogged down by lower margins
FY07 results below expectation. Stamford Tyres Corporation (“STC”) posted higher revenue of S$296.0 million (+17% YoY) in FY07, driven by the continued growth of its major brands - Falken, Dunlop and Continental tyres, and increased sales of its proprietary brands - Sumo Firenza tyres and SSW wheels. Net profit, however, fell by a steeper than expected 25% YoY to S$11.6 million (17% below our estimate), due mainly to lower gross margin of 23.9% (-4.7 ppt YoY) in the face of rising raw material costs. While STC seeks to adjust selling prices on a semi-annual basis to mitigate margin pressure, the competitive environment in the tyre distribution business limits its ability to fully pass on the cost increases to its customers. STC has declared a net dividend per share of 1.64 cents.
Revenue should continue to grow on healthy demand and higher capacity. STC continues to see healthy demand for its range of products and aims to improve revenue and earnings in FY08. It has already secured greater allocation of its Sumo Firenza tyres for FY08 and FY09 through its outsource contract manufacturing arrangements. In addition, its second wheel plant in Thailand will commence operations in early 2008. These should underpin our expectation of double-digit revenue growth in FY08 and FY09.
Volatility in raw material prices remains a concern; maintain HOLD. We have lowered our net profit forecast for FY08 by 24% on lower gross margin assumptions and introduced FY09 estimates. Based on our forecasts, we expect STC to resume earnings growth (albeit from a lower base) at a CAGR of 21% in FY08 and FY09, on the assumption that raw material costs remain stable. A stronger than expected take-up of STC’s proprietary brands and easing raw material prices could provide upside surprises to our estimates.
Although we continue to rate management highly, we think that the share price is fully valued at current levels. We marginally raise our Fair Value Estimate from S$0.525 to S$0.53, based on a relative valuation of 8x blended FY08/09 PER. We peg our Fair Value Estimate to a higher earnings multiple of 8x (instead of 7.5x) to reflect a slightly more positive view of STC’s medium term outlook. Maintain HOLD.
Revenue should continue to grow on healthy demand and higher capacity. STC continues to see healthy demand for its range of products and aims to improve revenue and earnings in FY08. It has already secured greater allocation of its Sumo Firenza tyres for FY08 and FY09 through its outsource contract manufacturing arrangements. In addition, its second wheel plant in Thailand will commence operations in early 2008. These should underpin our expectation of double-digit revenue growth in FY08 and FY09.
Volatility in raw material prices remains a concern; maintain HOLD. We have lowered our net profit forecast for FY08 by 24% on lower gross margin assumptions and introduced FY09 estimates. Based on our forecasts, we expect STC to resume earnings growth (albeit from a lower base) at a CAGR of 21% in FY08 and FY09, on the assumption that raw material costs remain stable. A stronger than expected take-up of STC’s proprietary brands and easing raw material prices could provide upside surprises to our estimates.
Although we continue to rate management highly, we think that the share price is fully valued at current levels. We marginally raise our Fair Value Estimate from S$0.525 to S$0.53, based on a relative valuation of 8x blended FY08/09 PER. We peg our Fair Value Estimate to a higher earnings multiple of 8x (instead of 7.5x) to reflect a slightly more positive view of STC’s medium term outlook. Maintain HOLD.
China Dairy Group Ltd: Milking more value
China Dairy Group Ltd: Milking more value
Strong growth in China's dairy industry. Between 2000 and 2005, China's
dairy industry saw revenues almost doubled from RMB47.9b to RMB89.8b.
Growth for the industry is estimated at 95% to RMB175b between 2006
and 2010, according to a study done by McKinsey. With the increasing
affluence among the Chinese population and the growing pool of working
mothers opting for milk powder as an alternative to breast-feeding, demand
for milk products is expected to soar in the coming years. China's dairy
industry is at the growing stage of its product life cycle.
Well-positioned to ride China's booming economy. China Diary Group
(CDG) is the best performer among the middle-tiered players in China's
dairy industry. CDG targets consumers in the middle-income group and in
rural cities, which are the main sources of China's growth in consumption.
With this market positioning, we expect CDG to be in a good position to
ride China's booming economy and rising demand for more consumer
products.
Stronger performance expected in FY07. CDG posted muted FY06
profits despite strong growth in revenue. This was largely due to a reduction
in the average selling price of its products and an increase in promotional
spending due to competitive forces. With the tightening of regulations in
the dairy industry, we expect weaker players to be weeded out, leaving the
stronger players to potentially increase their market shares. Together with
the focus on the quality of milk products, we foresee a recovery in average
selling prices across the industry.
Initiate with BUY. CDG's liquid milk segment has been doing well. In
FY06, CDG's liquid milk revenue grew 34% YoY to S$136m. In FY07, we
forecast reasonable revenue growth of 22% to S$166m for the liquid milk
segment and a stable 2% growth to S$64.6m for the milk powder segment.
Overall, we forecast a 16% growth in FY07 net profits to S$16.1m. Since
the beginning of the year, the PrimePartners China Index has risen by
around 48% while CDG has fallen by around 8%. We feel this differential is
not warranted. Based on a substantial discount to its Hong Kong and China
listed peers, which are trading at around 60X PER, we derive a fair value of
S$0.59 for CDG based on a blended FY07/08 PER of 15x. We initiate
coverage on China Dairy Group with a BUY rating. (Carmen Lee & Research
Team)
(OCBC Investment Research Pte Ltd (OIR) produced this report under the
SGX-MAS Research Incentive Scheme. OIR is compensated S$5,000 per
annum for each company covered under the scheme.)
Strong growth in China's dairy industry. Between 2000 and 2005, China's
dairy industry saw revenues almost doubled from RMB47.9b to RMB89.8b.
Growth for the industry is estimated at 95% to RMB175b between 2006
and 2010, according to a study done by McKinsey. With the increasing
affluence among the Chinese population and the growing pool of working
mothers opting for milk powder as an alternative to breast-feeding, demand
for milk products is expected to soar in the coming years. China's dairy
industry is at the growing stage of its product life cycle.
Well-positioned to ride China's booming economy. China Diary Group
(CDG) is the best performer among the middle-tiered players in China's
dairy industry. CDG targets consumers in the middle-income group and in
rural cities, which are the main sources of China's growth in consumption.
With this market positioning, we expect CDG to be in a good position to
ride China's booming economy and rising demand for more consumer
products.
Stronger performance expected in FY07. CDG posted muted FY06
profits despite strong growth in revenue. This was largely due to a reduction
in the average selling price of its products and an increase in promotional
spending due to competitive forces. With the tightening of regulations in
the dairy industry, we expect weaker players to be weeded out, leaving the
stronger players to potentially increase their market shares. Together with
the focus on the quality of milk products, we foresee a recovery in average
selling prices across the industry.
Initiate with BUY. CDG's liquid milk segment has been doing well. In
FY06, CDG's liquid milk revenue grew 34% YoY to S$136m. In FY07, we
forecast reasonable revenue growth of 22% to S$166m for the liquid milk
segment and a stable 2% growth to S$64.6m for the milk powder segment.
Overall, we forecast a 16% growth in FY07 net profits to S$16.1m. Since
the beginning of the year, the PrimePartners China Index has risen by
around 48% while CDG has fallen by around 8%. We feel this differential is
not warranted. Based on a substantial discount to its Hong Kong and China
listed peers, which are trading at around 60X PER, we derive a fair value of
S$0.59 for CDG based on a blended FY07/08 PER of 15x. We initiate
coverage on China Dairy Group with a BUY rating. (Carmen Lee & Research
Team)
(OCBC Investment Research Pte Ltd (OIR) produced this report under the
SGX-MAS Research Incentive Scheme. OIR is compensated S$5,000 per
annum for each company covered under the scheme.)
Tee International: Prospects improving, but looking fairly valued for now
Construction growth to continue this year. TEE International (TEE) should
continue to benefit from the continued growth in the construction industry in
Singapore, through the mechanical and engineering services it provides as
well as its recent venture into property development. Figures released by the
Ministry of Trade and Industry (MTI) showed that the construction sector grew
by 9.7% in 1Q 2007 and MTI expects construction demand to expand 12% this
year. Meanwhile, the number of construction contracts awarded in 2006 grew
40%, according to the Building and Construction Authority, and we expect the
contract pipeline to remain strong in view of the recent en-bloc sales and the
construction of the two massive integrated resorts.
Property development and acquisition strategy. TEE recently acquired
properties at Thomson Road, Cairnhill Circle and Rambai Road. The former
was a freehold land which TEE plans to redevelop into luxury apartments.
Construction is commencing in July 2007 and completion is expected in one
year. Management guided on an approximate profit margin of 18% on the
12,380 sf plot, with a planned launch in Sept 07. The Cairnhill Circle and Rambai
Road sites are residential properties with a collective purchase price of
$15.51m. Management has not confirmed the costing for these 2 properties,
but based on recent transacted prices within the vicinity in the past few months,
margin is likely to be higher at more than 50%, and these projects are likely to
be launched between 4Q07-1H08. We expect the above to boost TEE's
earnings in FY08. TEE expects to fund 90% of these acquisitions through
borrowings, and this would increase its gross gearing to 2.3x in FY08, which
could put a short-term strain on TEE's operating cash flow. TEE is transferring
its development skills from industrial projects to residential projects and is likely
to acquire more development properties in the future.
Outlook remains positive, but share price is fairly valued. We estimate
net profit of S$2.2m for FY08 due to an increase in its order book and sales
from its property developments. We are raising TEE's fair value estimate from
19 cents to 21 cents per dilutive share for FY08, based on 11x PER. As TEE
has already gained 43% since the start of the year and is currently trading
close to our fair value estimate, we downgrade our rating on TEE to a
HOLD.
continue to benefit from the continued growth in the construction industry in
Singapore, through the mechanical and engineering services it provides as
well as its recent venture into property development. Figures released by the
Ministry of Trade and Industry (MTI) showed that the construction sector grew
by 9.7% in 1Q 2007 and MTI expects construction demand to expand 12% this
year. Meanwhile, the number of construction contracts awarded in 2006 grew
40%, according to the Building and Construction Authority, and we expect the
contract pipeline to remain strong in view of the recent en-bloc sales and the
construction of the two massive integrated resorts.
Property development and acquisition strategy. TEE recently acquired
properties at Thomson Road, Cairnhill Circle and Rambai Road. The former
was a freehold land which TEE plans to redevelop into luxury apartments.
Construction is commencing in July 2007 and completion is expected in one
year. Management guided on an approximate profit margin of 18% on the
12,380 sf plot, with a planned launch in Sept 07. The Cairnhill Circle and Rambai
Road sites are residential properties with a collective purchase price of
$15.51m. Management has not confirmed the costing for these 2 properties,
but based on recent transacted prices within the vicinity in the past few months,
margin is likely to be higher at more than 50%, and these projects are likely to
be launched between 4Q07-1H08. We expect the above to boost TEE's
earnings in FY08. TEE expects to fund 90% of these acquisitions through
borrowings, and this would increase its gross gearing to 2.3x in FY08, which
could put a short-term strain on TEE's operating cash flow. TEE is transferring
its development skills from industrial projects to residential projects and is likely
to acquire more development properties in the future.
Outlook remains positive, but share price is fairly valued. We estimate
net profit of S$2.2m for FY08 due to an increase in its order book and sales
from its property developments. We are raising TEE's fair value estimate from
19 cents to 21 cents per dilutive share for FY08, based on 11x PER. As TEE
has already gained 43% since the start of the year and is currently trading
close to our fair value estimate, we downgrade our rating on TEE to a
HOLD.
Capitaland - Real estate globetrotters
Story: Capitaland has been actively seeking development
projects outside of the traditional markets, shifting the focus
to increase its presence in the emerging markets.
Point: With ventures and projects being secured in emerging
countries like 2nd/3rd tier cities in China, Russia, and GCC region
of Bahrain and Abu Dhabi, Capitaland can capitalise on its
project management experience and exploit its first-mover
advantage over the competition.
Relevance: We expect the company will benefit from the
geographical diversification, as well as first-mover advantage.
Their long-term asset allocation objective for mature markets,
namely Australia, New Zealand and Singapore, is to gradually
reduce it to about 60% of its total assets. Maintain Buy and
target price increased marginally to S$9.60 with a 20%
premium. The upgrade is mainly due to the inclusion of new
Singapore project and increase in value for its listed entities.
Recent initiatives in Abu Dhabi, Bahrain to export expertise to the GCC
region. CapitaLand has entered into a JV with Mubadala Development
Company to build an integrated residential development in Abu Dhabi.
The 140ha site development is planned to include residential, retail,
state-of-the-art sporting, hotel and serviced apartment components to
be completed by 2011 at a cost of about US$4-5b. This project,
together with the previously announced Raffles City Bahrain, allows
Capitaland to establish a long-term strategic relationship with the local
governments to make ways for future projects in Abu Dhabi and
around the Gulf Cooperation Council region.
Tapping into Russia with local tie-ups. The group has also set up
partnerships with local associates in the emerging Russia market. In
April, they signed an agreement worth up to US$3 billion with Russia's
Eurasia Logistics Ltd. to build warehouses in key cities in Russia,
Kazakhstan, and Ukraine. CapitaLand's serviced apartment arm, The
Ascott Group, and Russia's Amtel Properties Development set up a
US$100 million fund in February 2007 to buy and develop serviced
residences in St Petersburg and Moscow. They are also interested to go
into office and residential sectors that they can provide ideas and
expertise to complement the local products and take advantage of the
oil-driven economic boom to achieve higher profit.
Maintain Buy, TP increased marginally to S$9.60. We expect the
company will benefit from the geographical diversification, as well as
first-mover advantage in 2nd/3rd tier cities in China and niche segment
such as serviced apartment sector. Their long-term asset allocation
objective for mature markets, namely Australia, New Zealand and
Singapore, is to gradually reduce it to about 60% of its total assets
from the current 66%. We have updated our RNAV with the inclusion
of the new Singapore acquisition, namely Char Yong Gardens, as well
as increase in value for the listed entities. Maintain Buy, target price
adjusted slightly to S$9.60 with a 20% premium.
Continued regional expansion to propel growth. They have formulated a growth strategy by investing in
places where there is a sizable market potential and opportunities to add value onto the real estate sectors
over existing players. With continued investment in new and emerging markets like China, Russia and the
GCC region, they aim to have the capital allocation for mature markets in Australia/ New Zealand and
Singapore lowered to the 60% from the current 66% range. They will also benefit from the first mover
advantage in certain niche segments where they have strong branding and experience, such as The Ascott
Group for the serviced apartment sector.
Expansion in China continues. Capitaland China has recently purchased a residential site in Chengdu for
RMB 1.17bn, or S$233.5m. The site at Guanghua Avenue has an area of almost 1.2m sq ft and potential
GFA of over 4.4m sq ft. A total of 3,800 homes and retail facilities will be built and is expected to
complete by 2012. This is Capitaland’s 2nd site acquisition in Chengdu, after their purchase of Raffles City
Chengdu complex late last year. This is in line with its strategy of expanding its presence in key gateway
cities in Bohai, Yangtze River Delta and Pearl River Delta and to the second- and third-tier cities in the
central and western regions of China.
First project launches in Vietnam achieved positive sales results. The company’s Hanoi residential project
achieved good sales result in its median launch. Phase 1 of 273 units in The Vista are fully booked. The
project sits on a large 23,000 sq m site, with 750 units, some retail facilities and a commercial block. The
Vista is a 28-storey development with five towers. The project has a selection of 2,3,and 4-bedroom
apartment types, with sizes ranging from 101 sq m to 472 sq m. They have achieved the price of US$1,200
to US$1,600 per sq m or S$170 to S$230 per sq ft. The site is strategically located along the Hanoi Highway
in the prime residential An Phu ward in District 2, close to the Metro Hypermarket and British International
School. The company has an indirect majority stake of 80% in the joint venture with the remaining 20%
held by local partners. With high demand for quality housing in Hanoi, we also expect the remaining
phases and the other residential project in An Phu Ward, Hanoi, to be well received by buyers.
Continue expansion in Singapore with strategic residential en-bloc purchases. Capitaland buys Char Yong
Garden for S$420m, including a S$47m development charge. It works out to S$1,788 psf per plot ratio.
Char Yong Gardens is located near to prime Orchard Road area. It sits on a 93,274 sq ft freehold site with a
gross plot ratio of 2.8. CapitaLand plans to build a luxurious 20-storey condominium with approximately
130 large-sized apartments. They are in talks with Wachovia Development Corporation, to develop the site
through a 50:50 joint venture. Previously they had purchased the adjacent Silver Tower site for S$161m or
S$1,107 psf in end September 2006. The two purchases will provide synergy with the overall lower land
cost as well as offer flexibility in concept design of the new development. The continued buoyant market
in Singapore should support the good margin when the project is to be launch by end-2008.
Largest ever bond issue in Singapore. Capitaland raised the largest ever S$1bn, 15yr bonds which are
convertible into new Capitaland ordinary shares at a conversion price of S$13.8871 per new share. The
bonds will bear a coupon rate of 2.95% p.a., payable semi annually. The bonds will mature on June 22,
2022 with a put option at the end of year 10 and year 12. This issue will potentially add 72,009,275 new
shares after full convertion, representing about 2.59% of the existing shares in issue, based on the
conversion price with no adjustments to the conversion price. Capitaland’s aim is to take advantage of the
low interest rate environment and the cheaper form of financing by tapping into the bond market for
more funding for their future expansion plans.
projects outside of the traditional markets, shifting the focus
to increase its presence in the emerging markets.
Point: With ventures and projects being secured in emerging
countries like 2nd/3rd tier cities in China, Russia, and GCC region
of Bahrain and Abu Dhabi, Capitaland can capitalise on its
project management experience and exploit its first-mover
advantage over the competition.
Relevance: We expect the company will benefit from the
geographical diversification, as well as first-mover advantage.
Their long-term asset allocation objective for mature markets,
namely Australia, New Zealand and Singapore, is to gradually
reduce it to about 60% of its total assets. Maintain Buy and
target price increased marginally to S$9.60 with a 20%
premium. The upgrade is mainly due to the inclusion of new
Singapore project and increase in value for its listed entities.
Recent initiatives in Abu Dhabi, Bahrain to export expertise to the GCC
region. CapitaLand has entered into a JV with Mubadala Development
Company to build an integrated residential development in Abu Dhabi.
The 140ha site development is planned to include residential, retail,
state-of-the-art sporting, hotel and serviced apartment components to
be completed by 2011 at a cost of about US$4-5b. This project,
together with the previously announced Raffles City Bahrain, allows
Capitaland to establish a long-term strategic relationship with the local
governments to make ways for future projects in Abu Dhabi and
around the Gulf Cooperation Council region.
Tapping into Russia with local tie-ups. The group has also set up
partnerships with local associates in the emerging Russia market. In
April, they signed an agreement worth up to US$3 billion with Russia's
Eurasia Logistics Ltd. to build warehouses in key cities in Russia,
Kazakhstan, and Ukraine. CapitaLand's serviced apartment arm, The
Ascott Group, and Russia's Amtel Properties Development set up a
US$100 million fund in February 2007 to buy and develop serviced
residences in St Petersburg and Moscow. They are also interested to go
into office and residential sectors that they can provide ideas and
expertise to complement the local products and take advantage of the
oil-driven economic boom to achieve higher profit.
Maintain Buy, TP increased marginally to S$9.60. We expect the
company will benefit from the geographical diversification, as well as
first-mover advantage in 2nd/3rd tier cities in China and niche segment
such as serviced apartment sector. Their long-term asset allocation
objective for mature markets, namely Australia, New Zealand and
Singapore, is to gradually reduce it to about 60% of its total assets
from the current 66%. We have updated our RNAV with the inclusion
of the new Singapore acquisition, namely Char Yong Gardens, as well
as increase in value for the listed entities. Maintain Buy, target price
adjusted slightly to S$9.60 with a 20% premium.
Continued regional expansion to propel growth. They have formulated a growth strategy by investing in
places where there is a sizable market potential and opportunities to add value onto the real estate sectors
over existing players. With continued investment in new and emerging markets like China, Russia and the
GCC region, they aim to have the capital allocation for mature markets in Australia/ New Zealand and
Singapore lowered to the 60% from the current 66% range. They will also benefit from the first mover
advantage in certain niche segments where they have strong branding and experience, such as The Ascott
Group for the serviced apartment sector.
Expansion in China continues. Capitaland China has recently purchased a residential site in Chengdu for
RMB 1.17bn, or S$233.5m. The site at Guanghua Avenue has an area of almost 1.2m sq ft and potential
GFA of over 4.4m sq ft. A total of 3,800 homes and retail facilities will be built and is expected to
complete by 2012. This is Capitaland’s 2nd site acquisition in Chengdu, after their purchase of Raffles City
Chengdu complex late last year. This is in line with its strategy of expanding its presence in key gateway
cities in Bohai, Yangtze River Delta and Pearl River Delta and to the second- and third-tier cities in the
central and western regions of China.
First project launches in Vietnam achieved positive sales results. The company’s Hanoi residential project
achieved good sales result in its median launch. Phase 1 of 273 units in The Vista are fully booked. The
project sits on a large 23,000 sq m site, with 750 units, some retail facilities and a commercial block. The
Vista is a 28-storey development with five towers. The project has a selection of 2,3,and 4-bedroom
apartment types, with sizes ranging from 101 sq m to 472 sq m. They have achieved the price of US$1,200
to US$1,600 per sq m or S$170 to S$230 per sq ft. The site is strategically located along the Hanoi Highway
in the prime residential An Phu ward in District 2, close to the Metro Hypermarket and British International
School. The company has an indirect majority stake of 80% in the joint venture with the remaining 20%
held by local partners. With high demand for quality housing in Hanoi, we also expect the remaining
phases and the other residential project in An Phu Ward, Hanoi, to be well received by buyers.
Continue expansion in Singapore with strategic residential en-bloc purchases. Capitaland buys Char Yong
Garden for S$420m, including a S$47m development charge. It works out to S$1,788 psf per plot ratio.
Char Yong Gardens is located near to prime Orchard Road area. It sits on a 93,274 sq ft freehold site with a
gross plot ratio of 2.8. CapitaLand plans to build a luxurious 20-storey condominium with approximately
130 large-sized apartments. They are in talks with Wachovia Development Corporation, to develop the site
through a 50:50 joint venture. Previously they had purchased the adjacent Silver Tower site for S$161m or
S$1,107 psf in end September 2006. The two purchases will provide synergy with the overall lower land
cost as well as offer flexibility in concept design of the new development. The continued buoyant market
in Singapore should support the good margin when the project is to be launch by end-2008.
Largest ever bond issue in Singapore. Capitaland raised the largest ever S$1bn, 15yr bonds which are
convertible into new Capitaland ordinary shares at a conversion price of S$13.8871 per new share. The
bonds will bear a coupon rate of 2.95% p.a., payable semi annually. The bonds will mature on June 22,
2022 with a put option at the end of year 10 and year 12. This issue will potentially add 72,009,275 new
shares after full convertion, representing about 2.59% of the existing shares in issue, based on the
conversion price with no adjustments to the conversion price. Capitaland’s aim is to take advantage of the
low interest rate environment and the cheaper form of financing by tapping into the bond market for
more funding for their future expansion plans.
Full Apex - Positive on vertical integration
Full Apex (FA) is transforming itself from a pure downstream PET bottles maker
to a one-stop packaging service provider through moving upstream to PET chips
operation. Its primary businesses include PET chips, PET bottles, shrink film and
corrugated paper packaging. We are positive on its vertical integration move,
which we believe will reduce FA’s operating risk, improve operation efficiency
and enhance its margins in the long run.
The 200k/p.a PET chips plant is set to commence operation in 2H07. Given that,
we expect both sales and net profit of the company will increase substantially in
FY07-09. We raise our net profit estimate by 8% and 24% for FY08 and FY09
respectively. Based on a DCF model, we raise our 12-mth target price to S$0.55
from previous S$0.38, which represents 9.4x and 7.6x FY08 and FY09 earnings.
Maintain Buy.
Positive on vertical integration. Since it was listed, FA mainly focused on PET
bottle business in FY04-06. Yet, the margins have kept falling. This is primarily
because the company had no control of PET chips, which price is correlated to
crude oil price. Entering into PET chips operation will allow FA to smooth
margins yoy and improve its operating efficiency.
PET chips segment—engine for further growth. The 200kt/p.a. PET chips
plant will commence operation in July 07. Management indicated that it has
received orders from a variety of clients, not only from PET bottle makers, but
also from construction material producers. Given the wide usage of PET chips,
we are optimistic about its long-term prospects. In FY07-09, we expect the
utilization will reach 70%, 80% and 85% respectively. Gross margin will remain
low at 7% in FY07, and gradually rise to 10% in FY09. We expect PET chips
segment would contribute 1/3 of total gross profit in FY09.
PET bottles segment—capacity and utilization expansion. FA’s Hangzhou
PET bottle plant would commence operation 3Q07, which will add another 400m
capacity to the portfolio. By end-07, the total bottle production capacity will reach
2,031m, which has already doubled that of FY04. The utilization will increase as
well, we expect it to reach 67% in FY09 from 51% and 60% in FY07 and FY08
respectively.
Our optimistic estimate of FA’s bottles utilization improvement is attributable to
the strong demand of PRC soft drink market. According to China Soft Drink
Association, the total output of China soft drink reached 42.2mt, a 21.5% yoy
growth. And the Association expects the similar growth in 2007-09. FA, as the
3rd largest PET bottles maker, should grow in line with the industry growth, in our
view. Currently, FA has secured the orders by signing 5-yr supply agreement
with Pepsi in Tianjin, Shenzhen, Jiedong and Zhejiang. In the meantime, It also
develops new products, such as beer bottles, to solicit new clients.
Attractive valuation. We expect FA’s earnings to grow a CAGR of 28% in
FY07-09. For FY07 and FY08, the earnings drivers are PET chips capacity
release and PET bottles utilization improvement. While for FY09, the catalyst
would be operating margin increase. As such, we raise our net profit forecast by
8% and 24% correspondingly. Dased on a DCF model(cost of equity of 15%,
and terminal growth of 2.5%), we derive our price target of S$0.55. This
represents 9.4x and 7.6x for FY08 and FY09 earnings. We believe our target
price is undemanding given its 28% net profit growth in FY07-09. The target
price offers 46% upside from current level, which looks very attractive. Reiterate
BUY.
to a one-stop packaging service provider through moving upstream to PET chips
operation. Its primary businesses include PET chips, PET bottles, shrink film and
corrugated paper packaging. We are positive on its vertical integration move,
which we believe will reduce FA’s operating risk, improve operation efficiency
and enhance its margins in the long run.
The 200k/p.a PET chips plant is set to commence operation in 2H07. Given that,
we expect both sales and net profit of the company will increase substantially in
FY07-09. We raise our net profit estimate by 8% and 24% for FY08 and FY09
respectively. Based on a DCF model, we raise our 12-mth target price to S$0.55
from previous S$0.38, which represents 9.4x and 7.6x FY08 and FY09 earnings.
Maintain Buy.
Positive on vertical integration. Since it was listed, FA mainly focused on PET
bottle business in FY04-06. Yet, the margins have kept falling. This is primarily
because the company had no control of PET chips, which price is correlated to
crude oil price. Entering into PET chips operation will allow FA to smooth
margins yoy and improve its operating efficiency.
PET chips segment—engine for further growth. The 200kt/p.a. PET chips
plant will commence operation in July 07. Management indicated that it has
received orders from a variety of clients, not only from PET bottle makers, but
also from construction material producers. Given the wide usage of PET chips,
we are optimistic about its long-term prospects. In FY07-09, we expect the
utilization will reach 70%, 80% and 85% respectively. Gross margin will remain
low at 7% in FY07, and gradually rise to 10% in FY09. We expect PET chips
segment would contribute 1/3 of total gross profit in FY09.
PET bottles segment—capacity and utilization expansion. FA’s Hangzhou
PET bottle plant would commence operation 3Q07, which will add another 400m
capacity to the portfolio. By end-07, the total bottle production capacity will reach
2,031m, which has already doubled that of FY04. The utilization will increase as
well, we expect it to reach 67% in FY09 from 51% and 60% in FY07 and FY08
respectively.
Our optimistic estimate of FA’s bottles utilization improvement is attributable to
the strong demand of PRC soft drink market. According to China Soft Drink
Association, the total output of China soft drink reached 42.2mt, a 21.5% yoy
growth. And the Association expects the similar growth in 2007-09. FA, as the
3rd largest PET bottles maker, should grow in line with the industry growth, in our
view. Currently, FA has secured the orders by signing 5-yr supply agreement
with Pepsi in Tianjin, Shenzhen, Jiedong and Zhejiang. In the meantime, It also
develops new products, such as beer bottles, to solicit new clients.
Attractive valuation. We expect FA’s earnings to grow a CAGR of 28% in
FY07-09. For FY07 and FY08, the earnings drivers are PET chips capacity
release and PET bottles utilization improvement. While for FY09, the catalyst
would be operating margin increase. As such, we raise our net profit forecast by
8% and 24% correspondingly. Dased on a DCF model(cost of equity of 15%,
and terminal growth of 2.5%), we derive our price target of S$0.55. This
represents 9.4x and 7.6x for FY08 and FY09 earnings. We believe our target
price is undemanding given its 28% net profit growth in FY07-09. The target
price offers 46% upside from current level, which looks very attractive. Reiterate
BUY.
Del Monte Pacific Ltd: A turn around story?
Turn around seen from 3Q06. Del Monte Pacific Limited (DELM) reported
its 1Q07 results recently with topline growth of 2.4% YoY to US$47.9m but net
profit sky rocketed 50.1% YoY to S$5.1m, primarily due to better manufacturing
cost controls and stronger selling prices. 1Q07 net margins improved to 10.6%,
up from 7.3% in 1Q06. This was a continuation of the strong turn around in
2H06 when turnover grew 19% YoY to US$142.8m and net profit grew 66%
YoY to US$14m as compared to a 31% YoY fall in net profit in 1H06 to US$7.1m.
Test of effective execution. In FY06, 50% and 70% of its revenue and net
profit respectively came from the Philippines and we continue to expect this
market to be its main contributor. However, newly negotiated long term contracts
in EU and US are currently being executed and it remains to be seen if various
cost control measures and yearly price increases by DELM will yield better
margins from these two markets. In China, DELM is starting to market apple
related products and is scaling up to increase market share domestically.
Metal prices and weather hazards. DELM's biggest contributor, pineapple
processed products in tin cans, may come under margin pressure as tin prices
have escalated, rising by 51% since 3Q06. It remains to be seen what the net
effect of passing tin costs on to customers, better operational efficiency and
better long term contracts will yield for DELM. As with all crop related
businesses, unpredictable weather hazards can also pose a problem.
Key initiatives. Management's dual initiatives in FY06 for cost reduction and
volume generation has yielded good fruits and we expect better operational
efficiencies in FY07. We are also hopeful that new alternatives to tin cans like
PET and Tetra packs will mitigate the rise in tin costs.
Growth strategies. DELM will capitalise on its newly negotiated contract terms
to be able to bypass current distributors to privately market its products. It will
also be focusing on growing and shipping its premium "Gold pineapples" to
obtain better selling prices. We do not have a rating for DELM.
its 1Q07 results recently with topline growth of 2.4% YoY to US$47.9m but net
profit sky rocketed 50.1% YoY to S$5.1m, primarily due to better manufacturing
cost controls and stronger selling prices. 1Q07 net margins improved to 10.6%,
up from 7.3% in 1Q06. This was a continuation of the strong turn around in
2H06 when turnover grew 19% YoY to US$142.8m and net profit grew 66%
YoY to US$14m as compared to a 31% YoY fall in net profit in 1H06 to US$7.1m.
Test of effective execution. In FY06, 50% and 70% of its revenue and net
profit respectively came from the Philippines and we continue to expect this
market to be its main contributor. However, newly negotiated long term contracts
in EU and US are currently being executed and it remains to be seen if various
cost control measures and yearly price increases by DELM will yield better
margins from these two markets. In China, DELM is starting to market apple
related products and is scaling up to increase market share domestically.
Metal prices and weather hazards. DELM's biggest contributor, pineapple
processed products in tin cans, may come under margin pressure as tin prices
have escalated, rising by 51% since 3Q06. It remains to be seen what the net
effect of passing tin costs on to customers, better operational efficiency and
better long term contracts will yield for DELM. As with all crop related
businesses, unpredictable weather hazards can also pose a problem.
Key initiatives. Management's dual initiatives in FY06 for cost reduction and
volume generation has yielded good fruits and we expect better operational
efficiencies in FY07. We are also hopeful that new alternatives to tin cans like
PET and Tetra packs will mitigate the rise in tin costs.
Growth strategies. DELM will capitalise on its newly negotiated contract terms
to be able to bypass current distributors to privately market its products. It will
also be focusing on growing and shipping its premium "Gold pineapples" to
obtain better selling prices. We do not have a rating for DELM.
UOB - Growth plus regional expansion
Story: Stronger earnings growth plus ROE expansion coupled
with dividend yield. Regional expansion could provide a further
boost in earnings.
Point: We expect NIM to improve for the rest of the year, mainly
from organic growth while non-interest income is expected to pick
up. UOB made further inroads regionally with a 10% stake in
Southern Commercial Joint Stock Bank in Vietnam, and has started
negotiations for a strategic investment in China’s Evergrowing Bank.
Relevance: We raise our recommendation to a Buy (from Hold)
and target price to $27.50 (from $22.00) based on the Gordon
Growth Model. UOB’s growth and ROE prospects appear relatively
more exciting with earnings driven mainly from Singapore and
Malaysia.
Earnings expansion driven by topline growth. We understand UOB’s
earnings model is driven mainly by margins rather than volume. We note its
NIM has been expanding healthily. Recall in 1QFY07, NIM stood at 2.10% (ex-
recoveries), which increased by 6bps y-o-y and 10bps q-o-q. We expect NIM to
improve for the rest of the year, mainly from organic growth and non-
interest income to pick up for the rest of the year.
Loan growth picks up, especially for housing. We estimate UOB’s total loans
market share at 21% using Singapore currency loans as a proxy. We believe
UOB’s consumer segment focus lies in housing loans and credit cards. SME
segments, mainly building and construction, are equally crucial. We
understand UOB aims to maintain and build customer relationships, the
essence of its growth strength.
Regional expansion. Currently, UOB is active in Singapore and Malaysia. In
Indonesia, via Bank Buana, we understand competition is intense, so margins
may be reduced. Meanwhile, in Thailand, growth is still sluggish. UOB has
recently opened its China branch in Shenyang to leverage on developments
in northeast China. UOB made further inroads regionally with a 10% stake in
Southern Commercial Joint Stock Bank in Vietnam, and has started
negotiations for a strategic investment in China’s Evergrowing Bank.
Dividend yield appeal. Based on our dividend payout assumption of 55%, we
arrive at net DPS of $0.66 and dividend yield of 3%. We do not discount
another round of special dividend - although not as high as previously -
should it continue to dispose its non-core assets.
Raise to Buy with TP at $27.50. We raise our recommendation to a Buy (from
Hold) and revise our target price to $27.50 (from $22.00) based on the
Gordon Growth Model. This translates to 2.1x FY08 adjusted book value,
based on peak valuations.
Earnings expansion driven by topline growth. We understand that UOB’s earnings model is driven mainly by
margins rather than volume. We note that UOB’s NIM has been expanding on a healthy trend. Recall in 1QFY07,
NIM stood at 2.10% (ex-recoveries), which has increased by 6bps y-o-y and 10bps q-o-q. We expect NIM to
remain strong for the rest of the year, mainly from organic growth while non-interest income is expected to
pick up for the rest of the year. However, we note that non-interest income is typically stronger in 4Q of each
financial year - quite common across Singapore banks.
Loan growth picks up, especially for housing. We estimate UOB’s market share in total loans at 21%, higher
than DBS (18%) and OCBC (19%) as at end-December 2007, using Singapore currency loans as a proxy. Housing
loans comprise 25% of UOB’s total while, building and construction loans comprise 11%. We believe UOB’s
consumer segment focus lies in housing loans (more on private rather than public housing projects although
done selectively) and credit cards. UOB is also building its merchant base and replacement card base. With its
credit card base expanding, UOB is able to secure recurring income through fees and commissions. Expansion
for enblock development is expected to drive construction and housing loans further, benefitting UOB. We
understand UOB aims to maintain and build customer relationships, the essence of its strength in this area of
growth. But it’s also cautious not to be too aggressive in its growth for loans as it monitors NPL trends closely
for each sector. Currently, NPL ratios for housing and construction loans are 1.5% and 4.7% respectively.
Deposit growth still burgeoning. Despite the situation of excess deposit in the system, we note that UOB’s
deposit base is still growing. However, we gather that deposits are growing to enhance profitability via cheaper
cost of funds. In addition, we understand UOB actively monitors its balance sheet to ensure healthier yields.
UOB invests in higher duration government bonds and private debt securities to fund its lending business to
ensure better yields.
NPL ratios are generally sticky downwards. As UOB runs on customer relationship, it generally maintains
customer relationships through thick and thin. In bad times, UOB continues to service its customers, which is the
reason why its NPL ratios do not show a significant downtrend. In its recent 1QFY07 results, UOB announced the
sale of NPLs for its Thailand bank, UOB Thailand (previously Bank of Asia, which UOB acquired in Sept 2005).
Provisions were accelerated for this portfolio of NPLs, which was the reason behind the weaker 1Q results vis-à-
vis the two other local banks. However, in 2Q, we understand that the impact of the NPL sale would be visible
and its NPL ratio is expected to reduce to c. 3%. We gather that there would be another round of NPL sale but
smaller in scale compared to that incurred in 1Q and is expected to impact NPL ratios positively by less than
50bps.
Non-core assets cleared up. With its sale of Overseas Union Enterprise and Hotel Negara in 2Q06, UOB is almost
done in clearing up non-core assets in its books. It currently has $1.5bn in its revaluation surplus which it could
dispose of at a later date. We believe that surplus funds from the proceeds of its sale of non-core assets would
be better used to garner yields in its business operations as well as paying special dividends to shareholders (as it
did in 2Q06). A special dividend of $0.20 and $0.10 was paid in 2Q06 and 4Q06 from proceeds of the sale of
$689m.
Dividend yields are appealing. Based on our dividend payout assumption of 55%, we arrive at net DPS of $0.66
and dividend yields of 3% for FY07. In addition, we do not discount the possibility of another round of special
dividend, although not as high as before, should it continue to dispose its non-core assets. However, we are not
incorporating any special dividend payout in our assumptions. We understand that there is still a small portion
of s.44 tax credits which have not been utilised. This could provide an upside surprise to our dividend
assumptions.
Maintaining Tier-1 CAR above 9%. We understand UOB would maintain its Tier-1 CAR above 9% (MAS’ min of
6%). As at end-1Q07, UOB’s CAR was 11.1%. We understand it would need the additional capital to build
infrastructure for its Indonesia and Thailand operations as well as its soon-to-be locally incorporated subsidiary
in China. UOB’s CAR stood at 16.2% as at end-1Q07 above MAS’ minimum of 10%
with dividend yield. Regional expansion could provide a further
boost in earnings.
Point: We expect NIM to improve for the rest of the year, mainly
from organic growth while non-interest income is expected to pick
up. UOB made further inroads regionally with a 10% stake in
Southern Commercial Joint Stock Bank in Vietnam, and has started
negotiations for a strategic investment in China’s Evergrowing Bank.
Relevance: We raise our recommendation to a Buy (from Hold)
and target price to $27.50 (from $22.00) based on the Gordon
Growth Model. UOB’s growth and ROE prospects appear relatively
more exciting with earnings driven mainly from Singapore and
Malaysia.
Earnings expansion driven by topline growth. We understand UOB’s
earnings model is driven mainly by margins rather than volume. We note its
NIM has been expanding healthily. Recall in 1QFY07, NIM stood at 2.10% (ex-
recoveries), which increased by 6bps y-o-y and 10bps q-o-q. We expect NIM to
improve for the rest of the year, mainly from organic growth and non-
interest income to pick up for the rest of the year.
Loan growth picks up, especially for housing. We estimate UOB’s total loans
market share at 21% using Singapore currency loans as a proxy. We believe
UOB’s consumer segment focus lies in housing loans and credit cards. SME
segments, mainly building and construction, are equally crucial. We
understand UOB aims to maintain and build customer relationships, the
essence of its growth strength.
Regional expansion. Currently, UOB is active in Singapore and Malaysia. In
Indonesia, via Bank Buana, we understand competition is intense, so margins
may be reduced. Meanwhile, in Thailand, growth is still sluggish. UOB has
recently opened its China branch in Shenyang to leverage on developments
in northeast China. UOB made further inroads regionally with a 10% stake in
Southern Commercial Joint Stock Bank in Vietnam, and has started
negotiations for a strategic investment in China’s Evergrowing Bank.
Dividend yield appeal. Based on our dividend payout assumption of 55%, we
arrive at net DPS of $0.66 and dividend yield of 3%. We do not discount
another round of special dividend - although not as high as previously -
should it continue to dispose its non-core assets.
Raise to Buy with TP at $27.50. We raise our recommendation to a Buy (from
Hold) and revise our target price to $27.50 (from $22.00) based on the
Gordon Growth Model. This translates to 2.1x FY08 adjusted book value,
based on peak valuations.
Earnings expansion driven by topline growth. We understand that UOB’s earnings model is driven mainly by
margins rather than volume. We note that UOB’s NIM has been expanding on a healthy trend. Recall in 1QFY07,
NIM stood at 2.10% (ex-recoveries), which has increased by 6bps y-o-y and 10bps q-o-q. We expect NIM to
remain strong for the rest of the year, mainly from organic growth while non-interest income is expected to
pick up for the rest of the year. However, we note that non-interest income is typically stronger in 4Q of each
financial year - quite common across Singapore banks.
Loan growth picks up, especially for housing. We estimate UOB’s market share in total loans at 21%, higher
than DBS (18%) and OCBC (19%) as at end-December 2007, using Singapore currency loans as a proxy. Housing
loans comprise 25% of UOB’s total while, building and construction loans comprise 11%. We believe UOB’s
consumer segment focus lies in housing loans (more on private rather than public housing projects although
done selectively) and credit cards. UOB is also building its merchant base and replacement card base. With its
credit card base expanding, UOB is able to secure recurring income through fees and commissions. Expansion
for enblock development is expected to drive construction and housing loans further, benefitting UOB. We
understand UOB aims to maintain and build customer relationships, the essence of its strength in this area of
growth. But it’s also cautious not to be too aggressive in its growth for loans as it monitors NPL trends closely
for each sector. Currently, NPL ratios for housing and construction loans are 1.5% and 4.7% respectively.
Deposit growth still burgeoning. Despite the situation of excess deposit in the system, we note that UOB’s
deposit base is still growing. However, we gather that deposits are growing to enhance profitability via cheaper
cost of funds. In addition, we understand UOB actively monitors its balance sheet to ensure healthier yields.
UOB invests in higher duration government bonds and private debt securities to fund its lending business to
ensure better yields.
NPL ratios are generally sticky downwards. As UOB runs on customer relationship, it generally maintains
customer relationships through thick and thin. In bad times, UOB continues to service its customers, which is the
reason why its NPL ratios do not show a significant downtrend. In its recent 1QFY07 results, UOB announced the
sale of NPLs for its Thailand bank, UOB Thailand (previously Bank of Asia, which UOB acquired in Sept 2005).
Provisions were accelerated for this portfolio of NPLs, which was the reason behind the weaker 1Q results vis-à-
vis the two other local banks. However, in 2Q, we understand that the impact of the NPL sale would be visible
and its NPL ratio is expected to reduce to c. 3%. We gather that there would be another round of NPL sale but
smaller in scale compared to that incurred in 1Q and is expected to impact NPL ratios positively by less than
50bps.
Non-core assets cleared up. With its sale of Overseas Union Enterprise and Hotel Negara in 2Q06, UOB is almost
done in clearing up non-core assets in its books. It currently has $1.5bn in its revaluation surplus which it could
dispose of at a later date. We believe that surplus funds from the proceeds of its sale of non-core assets would
be better used to garner yields in its business operations as well as paying special dividends to shareholders (as it
did in 2Q06). A special dividend of $0.20 and $0.10 was paid in 2Q06 and 4Q06 from proceeds of the sale of
$689m.
Dividend yields are appealing. Based on our dividend payout assumption of 55%, we arrive at net DPS of $0.66
and dividend yields of 3% for FY07. In addition, we do not discount the possibility of another round of special
dividend, although not as high as before, should it continue to dispose its non-core assets. However, we are not
incorporating any special dividend payout in our assumptions. We understand that there is still a small portion
of s.44 tax credits which have not been utilised. This could provide an upside surprise to our dividend
assumptions.
Maintaining Tier-1 CAR above 9%. We understand UOB would maintain its Tier-1 CAR above 9% (MAS’ min of
6%). As at end-1Q07, UOB’s CAR was 11.1%. We understand it would need the additional capital to build
infrastructure for its Indonesia and Thailand operations as well as its soon-to-be locally incorporated subsidiary
in China. UOB’s CAR stood at 16.2% as at end-1Q07 above MAS’ minimum of 10%
Macarthurcook Industrial REIT: Ideal candidate for takeover
Summary: We visited Macarthurcook Industrial REIT and were impressed by management's ambition to grow its assets from S$316m by $500m and within current FY ending Mar 2008. However as these acquisitions are likely to be from third party, MI-REIT is likely to face severe competition from other industrial REITs. Hence we anticipate property yields in the industrial sector to continue to compress. But in MI-REIT's favour is its low gearing and low cost of debt. This means that it will be able to pay above the current property yields and still be accretive to its unitholders. Finally, MI-REIT has a fairly fragmented shareholding structure with many shareholders holding around 5% stake each. Its largest shareholders have a stake of about 12.9%. The implication of this loose shareholding structure is that it is vulnerable to be taken over. Furthermore with a price to book of about 1.3 times, it remains fairly cheap relative to its larger REIT rivals. We thus see MI-REIT to be an ideal takeover candidate. We do not have a rating on MI-REIT.
New kid on the block. We met up with Macarthur Industrial REIT (MI-REIT)
management yesterday, the new kid on the block. MI-REIT became the fourth
listed industrial REIT on SGX in April 2007 with 12 industrial assets all located
in Singapore. At listing, MI-REIT has a portfolio worth S$316m with an initial
FY07/08 annualized yield of 6.18% (based on DPU of 7.41 cents and IPO
price of S$1.20/unit). In terms of organic growth, there is some potential. MI-
REIT's portfolio has an average rental rate of S$0.92 psf/month, and with passing
rates at about S$1.0 psf/month, there is the possibility of positive rental
reversion. However as the average lease expiry is only in 3 years time, we do
not anticipate any meaningful organic growth in the immediate future.
Management expects S$500m of acquisitions by Mar 08. Even though
MI-REIT's current asset size is small at S$316m, management has ambitious
growth plans. It sees S$500m of possible acquisitions by end Mar 08.
Furthermore, it expects the bulk of these acquisitions to be from third party and
not from the exercising of its first right of first refusal with its sponsor. This
means its acquisition will likely be in direct competition with the 3 other REIT
rivals in the industrial space. As we see little differentiating factors between all
the REITs' acquisition strategies, the only way we see MI-REIT to be able to
achieve this target is via pricing. In that context, MI-REIT can afford to be very
aggressive. Its gearing remains low at about 8%, meaning any acquisition is
likely to be debt funded. We estimate MI-REIT has a debt capacity of about
S$117m. More importantly, with its cost of debt at about 3.5%, and with market
property being offered at just below 7.0%, MI-REIT has about 350bp to play.
However, we do not see MI-REIT to be willing to use up all its ammunition in the
short term. Acquisitions at property yields of about 6.0-6.5% are the more likely
scenario.
Ideal candidate for takeover. MI-REIT has a fairly fragmented shareholding
structure. Its largest shareholders have a stake of about 12.9% but with the
majority in 5% range. Its sponsor Macarthurcook only has a 2.3% stake and
the vendors collectively own a further 2.7% of the issued units. The implication
of this loose shareholding structure is that if the right offer comes along, the
possibility of shareholders taking profit is very high. Furthermore with a price
to book of about 1.3 times, it remains fairly cheap relative to its larger rivals.
We thus see MI-REIT to be an ideal takeover candidate. We do not have a
rating on MI-REIT.
New kid on the block. We met up with Macarthur Industrial REIT (MI-REIT)
management yesterday, the new kid on the block. MI-REIT became the fourth
listed industrial REIT on SGX in April 2007 with 12 industrial assets all located
in Singapore. At listing, MI-REIT has a portfolio worth S$316m with an initial
FY07/08 annualized yield of 6.18% (based on DPU of 7.41 cents and IPO
price of S$1.20/unit). In terms of organic growth, there is some potential. MI-
REIT's portfolio has an average rental rate of S$0.92 psf/month, and with passing
rates at about S$1.0 psf/month, there is the possibility of positive rental
reversion. However as the average lease expiry is only in 3 years time, we do
not anticipate any meaningful organic growth in the immediate future.
Management expects S$500m of acquisitions by Mar 08. Even though
MI-REIT's current asset size is small at S$316m, management has ambitious
growth plans. It sees S$500m of possible acquisitions by end Mar 08.
Furthermore, it expects the bulk of these acquisitions to be from third party and
not from the exercising of its first right of first refusal with its sponsor. This
means its acquisition will likely be in direct competition with the 3 other REIT
rivals in the industrial space. As we see little differentiating factors between all
the REITs' acquisition strategies, the only way we see MI-REIT to be able to
achieve this target is via pricing. In that context, MI-REIT can afford to be very
aggressive. Its gearing remains low at about 8%, meaning any acquisition is
likely to be debt funded. We estimate MI-REIT has a debt capacity of about
S$117m. More importantly, with its cost of debt at about 3.5%, and with market
property being offered at just below 7.0%, MI-REIT has about 350bp to play.
However, we do not see MI-REIT to be willing to use up all its ammunition in the
short term. Acquisitions at property yields of about 6.0-6.5% are the more likely
scenario.
Ideal candidate for takeover. MI-REIT has a fairly fragmented shareholding
structure. Its largest shareholders have a stake of about 12.9% but with the
majority in 5% range. Its sponsor Macarthurcook only has a 2.3% stake and
the vendors collectively own a further 2.7% of the issued units. The implication
of this loose shareholding structure is that if the right offer comes along, the
possibility of shareholders taking profit is very high. Furthermore with a price
to book of about 1.3 times, it remains fairly cheap relative to its larger rivals.
We thus see MI-REIT to be an ideal takeover candidate. We do not have a
rating on MI-REIT.
Federal Int'l: Turns On 1st Power Project
Federal International's move to diversify into the energy sector has been
powered on. Its 60%-owned JV, Banyan Utilities (BU), has just signed a contract
with ASX-listed Natural Fuel's Singapore subsidiary (NFS) for a BOT (Build-
Operate-Transfer) energy plant to supply both electricity and steam. The plant,
which will cost BU around S$20m and generate around 5.5 megawatts of
electricity, will bring in revenue worth a minimum of S$54m for a period of 12
years starting in Dec 2007, with an extension option of 5+5 years. The reason
for Federal to plug into the energy sector is to secure more recurring income
and the NFS project will bring in at least S$2.7m revenue per annum for the
next 12 years. Despite the diversification, Federal has not neglected its
mainstay trading business. It has been expanding its geographical reach and
we understand it has been making good progress in the Middle East and
Vietnam. And with all four engines all ramping up, Federal is in a good shape
to achieve its S$1b sales target within the next five years. We do not have a
rating on the stock.
Energy sector push switched on. Federal International's move to diversify
into the energy sector has been powered on. Its 60%-owned JV, Banyan Utilities
(BU), has just signed a contract with ASX-listed Natural Fuel's Singapore
subsidiary (NFS) for a BOT (Build-Operate-Transfer) bio-diesel energy plant
to supply both electricity and steam. The plant, which will cost BU around S$20m
and generate around 5.5 megawatts of electricity, will bring in revenue worth a
minimum of S$54m over 12 years starting in Dec 2007, with an extension
option of 5+5 years. BU is also in the process of obtaining a wholesale license
to sell any surplus output from its Co-Generation facility to third parties.
Another plant in the works. We understand that BU is in discussions with
NFS to build a second Co-Gen plant to support the latter's Jurong Island facility
and this could happen over the next 3 - 5 years. In total, BU plans to generate
some 25 megawatts of electricity so that it could participate in the wholesale
market. BU believes it could potentially achieve S$300m in revenue over a 12-
year period. In addition BU, as a CDM (Clean Development Mechanism)
developer, hopes to generate some 10,000 tons of Carbon Credits, which in
turn could potentially be sold and generate additional revenue to the group. BU
has taken steps to qualify the project(s) under the scheme. Over the longer
term, BU intends to diversify into district cooling plants and water desalination
plants.
Bigger recurring income base. The reason for Federal to plug into the energy
sector is to secure more recurring income. The initial NFS project will provide
BU with an attributable revenue of at least S$2.7m per annum for 12 years,
and if BU can achieve its S$300m target, the recurring stream could swell to
S$15m per year. This will add positively to the other recurring revenue of at
least US$15m per annum from the lease of its FSO vessel and its Indonesian
oil & gas BOT project.
Energized growth prospects. Despite the diversification, Federal has not
neglected its mainstay trading business. It has been expanding its geographical
reach and we understand it has been making good progress in the Middle
East and Vietnam. And with all four engines all ramping up, Federal is in a
good shape to achieve its S$1b sales target within the next five years. We do
not have a rating on the stock. (
powered on. Its 60%-owned JV, Banyan Utilities (BU), has just signed a contract
with ASX-listed Natural Fuel's Singapore subsidiary (NFS) for a BOT (Build-
Operate-Transfer) energy plant to supply both electricity and steam. The plant,
which will cost BU around S$20m and generate around 5.5 megawatts of
electricity, will bring in revenue worth a minimum of S$54m for a period of 12
years starting in Dec 2007, with an extension option of 5+5 years. The reason
for Federal to plug into the energy sector is to secure more recurring income
and the NFS project will bring in at least S$2.7m revenue per annum for the
next 12 years. Despite the diversification, Federal has not neglected its
mainstay trading business. It has been expanding its geographical reach and
we understand it has been making good progress in the Middle East and
Vietnam. And with all four engines all ramping up, Federal is in a good shape
to achieve its S$1b sales target within the next five years. We do not have a
rating on the stock.
Energy sector push switched on. Federal International's move to diversify
into the energy sector has been powered on. Its 60%-owned JV, Banyan Utilities
(BU), has just signed a contract with ASX-listed Natural Fuel's Singapore
subsidiary (NFS) for a BOT (Build-Operate-Transfer) bio-diesel energy plant
to supply both electricity and steam. The plant, which will cost BU around S$20m
and generate around 5.5 megawatts of electricity, will bring in revenue worth a
minimum of S$54m over 12 years starting in Dec 2007, with an extension
option of 5+5 years. BU is also in the process of obtaining a wholesale license
to sell any surplus output from its Co-Generation facility to third parties.
Another plant in the works. We understand that BU is in discussions with
NFS to build a second Co-Gen plant to support the latter's Jurong Island facility
and this could happen over the next 3 - 5 years. In total, BU plans to generate
some 25 megawatts of electricity so that it could participate in the wholesale
market. BU believes it could potentially achieve S$300m in revenue over a 12-
year period. In addition BU, as a CDM (Clean Development Mechanism)
developer, hopes to generate some 10,000 tons of Carbon Credits, which in
turn could potentially be sold and generate additional revenue to the group. BU
has taken steps to qualify the project(s) under the scheme. Over the longer
term, BU intends to diversify into district cooling plants and water desalination
plants.
Bigger recurring income base. The reason for Federal to plug into the energy
sector is to secure more recurring income. The initial NFS project will provide
BU with an attributable revenue of at least S$2.7m per annum for 12 years,
and if BU can achieve its S$300m target, the recurring stream could swell to
S$15m per year. This will add positively to the other recurring revenue of at
least US$15m per annum from the lease of its FSO vessel and its Indonesian
oil & gas BOT project.
Energized growth prospects. Despite the diversification, Federal has not
neglected its mainstay trading business. It has been expanding its geographical
reach and we understand it has been making good progress in the Middle
East and Vietnam. And with all four engines all ramping up, Federal is in a
good shape to achieve its S$1b sales target within the next five years. We do
not have a rating on the stock. (
Advance SCT - On track for supernormal growth
Our latest visit to Advance SCT (ASCT) indicates that its transformation into an
integrated copper supply chain manager is well on track:
Copper smelter up and running. 80%-owned TTM Industries operate a copper
smelter with production capacity of 60,000MT/year in Port Klang, Malaysia. The
first furnace commenced production of 3mm and 8mm copper coil in Mar 07 and
capacity utilisation hit 80% in Jun 07. The second furnace will ramp up
production in Aug 07 and capacity utilisation is expected to reach 80% in Sep 07
due to experience gained from the first furnace.
Progress at the copper smelting plant was better than anticipated. Advance SCT
is already shipping copper coils to large multinational customers such as Mitsui,
Nanya and Chang Chun, who are major suppliers for copper foil used by the
PCB industry. The company has also secured Tai Sin Electric Cable as a new
customer. Management is confident that TTM Industries will be able to achieve
guaranteed net profit of S$8m for the 12-month period ending Mar 08.
TTM Industries was awarded pioneer status for five years. Subsidiary Tsing Yi
Enterprises was also awarded Global Traders Programme from IE Singapore,
which provides concessionary tax rate of 10% for offshore trading income.
Warrants provide leveraged play. Advance SCT has proposed a renounceable
rights issue of up to 79.3m warrants at issue price of S$0.08 on the basis of
three warrants for every ten existing shares. Each warrant can be converted to
one Advance SCT share at exercise price of S$0.87 within three years.
Proceeds from the exercise of warrants will be utilised for repayment of its
S$60m transferable loan facility.
Insider buying. Mr Seah Hock Thiam, Executive Director of Advance SCT and
founder of Green World Holdings, bought 450,000 shares on 7 Jun and another
500,000 shares on 11 Jun. This indicates that the management team has great
confidence in future prospects for Advance SCT.
Unique integrated business model. Advance SCT captures the full value chain
from recycling, smelting, refining and production of copper-based products. Its
business model is similar to Belgium-based Cumerio (mkt cap: €602.2m, FY07
PE: 12.5x). Cumerio sources copper from concentrates, anodes, scrap and
cathodes. It operates an integrated copper smelter and refinery in Bulgaria and
a refinery and copper product facility in Belgium.
We have raised our FY07 and FY08 net profit forecast by 5.6% and 28.2%
respectively due to strong demand for copper coils at TTM Industries. Reiterate
BUY with target price at S$1.50 based on FY08 PE of 12.5x.
integrated copper supply chain manager is well on track:
Copper smelter up and running. 80%-owned TTM Industries operate a copper
smelter with production capacity of 60,000MT/year in Port Klang, Malaysia. The
first furnace commenced production of 3mm and 8mm copper coil in Mar 07 and
capacity utilisation hit 80% in Jun 07. The second furnace will ramp up
production in Aug 07 and capacity utilisation is expected to reach 80% in Sep 07
due to experience gained from the first furnace.
Progress at the copper smelting plant was better than anticipated. Advance SCT
is already shipping copper coils to large multinational customers such as Mitsui,
Nanya and Chang Chun, who are major suppliers for copper foil used by the
PCB industry. The company has also secured Tai Sin Electric Cable as a new
customer. Management is confident that TTM Industries will be able to achieve
guaranteed net profit of S$8m for the 12-month period ending Mar 08.
TTM Industries was awarded pioneer status for five years. Subsidiary Tsing Yi
Enterprises was also awarded Global Traders Programme from IE Singapore,
which provides concessionary tax rate of 10% for offshore trading income.
Warrants provide leveraged play. Advance SCT has proposed a renounceable
rights issue of up to 79.3m warrants at issue price of S$0.08 on the basis of
three warrants for every ten existing shares. Each warrant can be converted to
one Advance SCT share at exercise price of S$0.87 within three years.
Proceeds from the exercise of warrants will be utilised for repayment of its
S$60m transferable loan facility.
Insider buying. Mr Seah Hock Thiam, Executive Director of Advance SCT and
founder of Green World Holdings, bought 450,000 shares on 7 Jun and another
500,000 shares on 11 Jun. This indicates that the management team has great
confidence in future prospects for Advance SCT.
Unique integrated business model. Advance SCT captures the full value chain
from recycling, smelting, refining and production of copper-based products. Its
business model is similar to Belgium-based Cumerio (mkt cap: €602.2m, FY07
PE: 12.5x). Cumerio sources copper from concentrates, anodes, scrap and
cathodes. It operates an integrated copper smelter and refinery in Bulgaria and
a refinery and copper product facility in Belgium.
We have raised our FY07 and FY08 net profit forecast by 5.6% and 28.2%
respectively due to strong demand for copper coils at TTM Industries. Reiterate
BUY with target price at S$1.50 based on FY08 PE of 12.5x.
Sembawang Kimtrans- General offer by Toll
Story: SBKT announced that Toll Holdings has made a
general offer for the remaining 74% of shares that it does not
already own at 70cts per share, rising to 80cts per share if it
receives acceptances up to 90%, allowing privatization of SBKT.
Point: Although the first-tier offer of 70cts per share is
unattractive (20% lower than our target price of S$0.88), two
major shareholders controlling a total of 31.2% of SBKT have
given an irrevocable undertaking to accept Toll’s offer, which
gives a boost to Toll’s chances of achieving the necessary 90%
stake to take the company private, which would then raise the
offer price for SBKT to 80cts per share for share-holders.
Relevance: We believe that investors who see more value in
SBKT could hold on against the offer and could benefit if a) Toll
raises their offer if they were serious about privatizing the
company or b) Toll helps to raise SBKT’s value via business
synergies with itself or further restructuring of its Asian assets
into SBKT e.g. the old Semblog businesses.
General offer for Sembawang Kimtrans by Toll Holdings. Australialisted
Toll Holdings, has via its subsidiary Toll Express (Asia) Pte Ltd,
announced its intention to make a voluntary cash offer for all the
remaining ordinary shares in SBKT that it does not already own. Toll has
already received undertakings by Kimtrans Singapore (22.17%) and Tan
Choon Hock (8.96%) to accept their offer, which means the first tier
offer of 70cts is unconditional, as Toll would have more than 50% of
SBKT.
1st tier offer of S$0.70 is unattractive vis-à-vis SBKT’s growth prospects.
We find Toll’s first-tier offer price of S$0.70 unattractive, as we believe
that it does not fully reflect the Group’s earnings prospects or a control
premium. The offer price of 70cts works out to be undemanding 10.8x
FY08 PER and at the second-tier price of 80cts, it works out to be 12.3x
FY08 PER. The S$0.70 offer on offer pales on further comparison to the
last close of S$0.74 per share – shareholders are better off selling in the
market.
Difficult to tell if the offer can attain a 90% acceptance level. Investors
may wish to take profit if SBKT trades up to or close to 80cts, as there is
no guarantee that Toll would receive the required 90% acceptance rate
and the offer may close at only 70cts per share.
general offer for the remaining 74% of shares that it does not
already own at 70cts per share, rising to 80cts per share if it
receives acceptances up to 90%, allowing privatization of SBKT.
Point: Although the first-tier offer of 70cts per share is
unattractive (20% lower than our target price of S$0.88), two
major shareholders controlling a total of 31.2% of SBKT have
given an irrevocable undertaking to accept Toll’s offer, which
gives a boost to Toll’s chances of achieving the necessary 90%
stake to take the company private, which would then raise the
offer price for SBKT to 80cts per share for share-holders.
Relevance: We believe that investors who see more value in
SBKT could hold on against the offer and could benefit if a) Toll
raises their offer if they were serious about privatizing the
company or b) Toll helps to raise SBKT’s value via business
synergies with itself or further restructuring of its Asian assets
into SBKT e.g. the old Semblog businesses.
General offer for Sembawang Kimtrans by Toll Holdings. Australialisted
Toll Holdings, has via its subsidiary Toll Express (Asia) Pte Ltd,
announced its intention to make a voluntary cash offer for all the
remaining ordinary shares in SBKT that it does not already own. Toll has
already received undertakings by Kimtrans Singapore (22.17%) and Tan
Choon Hock (8.96%) to accept their offer, which means the first tier
offer of 70cts is unconditional, as Toll would have more than 50% of
SBKT.
1st tier offer of S$0.70 is unattractive vis-à-vis SBKT’s growth prospects.
We find Toll’s first-tier offer price of S$0.70 unattractive, as we believe
that it does not fully reflect the Group’s earnings prospects or a control
premium. The offer price of 70cts works out to be undemanding 10.8x
FY08 PER and at the second-tier price of 80cts, it works out to be 12.3x
FY08 PER. The S$0.70 offer on offer pales on further comparison to the
last close of S$0.74 per share – shareholders are better off selling in the
market.
Difficult to tell if the offer can attain a 90% acceptance level. Investors
may wish to take profit if SBKT trades up to or close to 80cts, as there is
no guarantee that Toll would receive the required 90% acceptance rate
and the offer may close at only 70cts per share.
COSCO Corporation - Strong Growth In Contracts Awarded
COSCO Corporation (COS (S)) recently secured shipbuilding contracts worth
US$1.2b, propelling its contracts awarded ytd to S$4.4b. COS (S)’s ability to
continue to secure contracts is astounding and reaffirms our belief that COS (S)
will be able to substantially grow its shipyard business in the coming years.
Raising our contract award estimates for FY07. Ytd, COS (S) has secured
S$4.4b in contracts, surpassing the S$800m which it secured in 2006. This also
exceeds our assumption of S$3.0b worth of contracts awarded in 2007. As
such, we are raising our assumptions for contracts awarded for 2007 to S$6b
Better visibility equals higher earnings growth and higher valuation. We
are raising our 2007, 2008 and 2009 earnings estimates by 2.4%, 8.6% and
11.2% respectively on the back of new contract wins and better freight rates.
We maintain our BUY recommendation and raise our target price to S$4.12
(previously S$3.50) based on sum-of-the-parts valuation.
US$1.2b, propelling its contracts awarded ytd to S$4.4b. COS (S)’s ability to
continue to secure contracts is astounding and reaffirms our belief that COS (S)
will be able to substantially grow its shipyard business in the coming years.
Raising our contract award estimates for FY07. Ytd, COS (S) has secured
S$4.4b in contracts, surpassing the S$800m which it secured in 2006. This also
exceeds our assumption of S$3.0b worth of contracts awarded in 2007. As
such, we are raising our assumptions for contracts awarded for 2007 to S$6b
Better visibility equals higher earnings growth and higher valuation. We
are raising our 2007, 2008 and 2009 earnings estimates by 2.4%, 8.6% and
11.2% respectively on the back of new contract wins and better freight rates.
We maintain our BUY recommendation and raise our target price to S$4.12
(previously S$3.50) based on sum-of-the-parts valuation.
Land Transport Sector -
Crude oil price firmness to have limited earnings impact on land
transport companies
Since hitting a low in early 2007, crude oil prices have trended up. As seen from
the chart below, Brent Crude has risen from the low US$50s per barrel (in Jan
07) to the current level of close to US$70 per barrel. However, it should be
noted that the average price of US$63 YTD for 2007 is still lower than 2006’s
US$66.
CD has, in the early part of 2007, already hedged its fuel requirements for 1H07
(at as low as US$50/bbl). For 3Q07, Metroline (CD’s London bus operations)
fuel requirements are half hedged, whilst Singapore requirements are totally
unhedged. Overall, we believe CD could record lower fuel and energy expenses
of S$193.5m for FY07 (versus FY06’s S$196m), with increased volume partly
offsetting the positives from yoy lower crude oil prices.
SMRT, on the other hand, recorded a 21.8% yoy rise in electricity and diesel
costs for the period Jan-Mar07 (4QFY07) due to higher electricity prices. SMRT
has a one-year fixed price contract for electricity which will end in Sep 07.
Hence, we expect electricity costs to remain flat sequentially till then.
In the meantime, we continue to be positive on the Singapore land transport
sector. CD & SMRT are both BUYs. CD’s target price is S$2.91 and SMRT’s
is S$2.10 – these are based on the assumption that the land transport review by
the government will lead to only one operator in Singapore operating all the rail
and bus services. If one assumes the model of one operator running all rail
services in Singapore and another operator running all bus services, there will
be less cost synergies versus the former model and CD’s target price would be
a lower S$2.80 and SMRT’s S$1.91.
ComfortDelgro (CD SP)
BUY
Current Price: S$2.21
Target Price: S$2.91
SMRT Corp (MRT SP)
BUY
Current Price: S$1.91
Target Price: S$2.10
transport companies
Since hitting a low in early 2007, crude oil prices have trended up. As seen from
the chart below, Brent Crude has risen from the low US$50s per barrel (in Jan
07) to the current level of close to US$70 per barrel. However, it should be
noted that the average price of US$63 YTD for 2007 is still lower than 2006’s
US$66.
CD has, in the early part of 2007, already hedged its fuel requirements for 1H07
(at as low as US$50/bbl). For 3Q07, Metroline (CD’s London bus operations)
fuel requirements are half hedged, whilst Singapore requirements are totally
unhedged. Overall, we believe CD could record lower fuel and energy expenses
of S$193.5m for FY07 (versus FY06’s S$196m), with increased volume partly
offsetting the positives from yoy lower crude oil prices.
SMRT, on the other hand, recorded a 21.8% yoy rise in electricity and diesel
costs for the period Jan-Mar07 (4QFY07) due to higher electricity prices. SMRT
has a one-year fixed price contract for electricity which will end in Sep 07.
Hence, we expect electricity costs to remain flat sequentially till then.
In the meantime, we continue to be positive on the Singapore land transport
sector. CD & SMRT are both BUYs. CD’s target price is S$2.91 and SMRT’s
is S$2.10 – these are based on the assumption that the land transport review by
the government will lead to only one operator in Singapore operating all the rail
and bus services. If one assumes the model of one operator running all rail
services in Singapore and another operator running all bus services, there will
be less cost synergies versus the former model and CD’s target price would be
a lower S$2.80 and SMRT’s S$1.91.
ComfortDelgro (CD SP)
BUY
Current Price: S$2.21
Target Price: S$2.91
SMRT Corp (MRT SP)
BUY
Current Price: S$1.91
Target Price: S$2.10
Neptune Orient Lines (NOL) Competitive advantage undervalued
• Assume coverage with OW: We are assuming coverage of
Neptune Orient Lines (NOL) with an Overweight rating. We
believe the market is undervaluing NOL’s significant cost
advantage and strong Trans-Pacific market share. We view this
combination of strengths as a potential protection of earnings
during a slowdown in global trade or excess capacity supply.
• Compellingly cheap: NOL’s valuation is compellingly cheap,
which reflects the market’s bias against the company due to its
limited capacity growth over recent years, in our view. NOL has
15 vessels on order for 2008, which should rectify this constraint.
In the interim, NOL’s slow growth has driven superior yield
increases, which can extend further, especially while it maintains
structurally lower cost than its peers. This cost advantage arises
from its US railway contracts, which expire in 2012, while other
carriers are suffering 20-30% cost increase every three years.
• Additional catalysts for the share: These could be any asset
disposals, M&A stories, or a privatization bid from its principal
shareholder, Temasek.
• PT and risks: Notwithstanding a 105% increase in the share price
since January 3, 2007, NOL is trading at a 50% discount to its
2007E EV/EBITDA multiple compared to its peers, which, in our
view, is unjustified. Our Dec-07 PT of S$5.50 is based on 4.7x
Dec-07E EV/EBITDA multiple. The risks to our PT include a
slowdown in the US economy.
Investment thesis
Positives
Industry leadership
NOL is the eighth-largest carrier in the world in terms of volume. It has a strong
brand associated with quality service and IT innovation. NOL is widely viewed as
having the best logistics capability among its peers, which helps it to secure a huge
market share of a large group of top customers, such as Target Store and Nike. NOL
also has a strong intra-Asia market share based on its original business—before the
APL acquisition. The company ranks third in our KPI scorecard.
Cost advantage in US Intermodal
The company’s US railway contract runs through to 2012, which is something of a
legacy issue for NOL. This gives the company a major cost advantage over its peers,
which are being hit with 20-30% cost hikes on their US inland freight contracts every
three years. In our view, NOL’s cost advantage, coupled with its premium service on
the Trans-Pacific trade, should be more than enough to overcome the relatively
slower growth in the Trans-Pacific trade.
High-margin business
Importantly, NOL has the highest revenue per TEU among our peer group, with a
gross profit margin that is second only to OOIL. As a result, NOL can generate
amongst the highest profit per TEU.
Negatives
High overheads
In 2006, NOL’s overheads amounted to 10% of revenues, second only to OOIL in
terms of high overhead costs in our coverage universe. We note that OOIL, Wan Hai,
and NOL have relatively the highest fixed overhead costs and conclude that good
management resources do not come cheap.
High off-balance-sheet items not really a concern
NOL has 58% of its tonnage on charter, which along with its attractive, long-term
terminal leases, constitutes 91% of its US$5.7-billion non-cancelable lease
obligations outstanding at end-2006. The market is currently strong for shipping
services and we remain confident that NOL should be able to trade out of these
future obligations at zero cost to the company, if not on a favorable net basis. We do
not believe that this risk exposure should be included in deriving NOL’s fair
valuation.
This risk would only really become a concern in the next major downturn. Having
said that, NOL’s level of chartered-in capacity is not materially different from the
majority of companies in our coverage universe. Hence, we do not see this factor as a
competitive disadvantage for the company.
Ambiguous objectives for its logistics business
NOL has always wanted to be a global logistics giant but we are not convinced that
management has put in sufficient resources to let this division develop beyond an
experimental venture. The balance sheet of the logistics business shows total assets
of US$297 million with US$46 million as equity, which is far from comparable to
any of NOL’s global logistics peers.
Neptune Orient Lines (NOL) with an Overweight rating. We
believe the market is undervaluing NOL’s significant cost
advantage and strong Trans-Pacific market share. We view this
combination of strengths as a potential protection of earnings
during a slowdown in global trade or excess capacity supply.
• Compellingly cheap: NOL’s valuation is compellingly cheap,
which reflects the market’s bias against the company due to its
limited capacity growth over recent years, in our view. NOL has
15 vessels on order for 2008, which should rectify this constraint.
In the interim, NOL’s slow growth has driven superior yield
increases, which can extend further, especially while it maintains
structurally lower cost than its peers. This cost advantage arises
from its US railway contracts, which expire in 2012, while other
carriers are suffering 20-30% cost increase every three years.
• Additional catalysts for the share: These could be any asset
disposals, M&A stories, or a privatization bid from its principal
shareholder, Temasek.
• PT and risks: Notwithstanding a 105% increase in the share price
since January 3, 2007, NOL is trading at a 50% discount to its
2007E EV/EBITDA multiple compared to its peers, which, in our
view, is unjustified. Our Dec-07 PT of S$5.50 is based on 4.7x
Dec-07E EV/EBITDA multiple. The risks to our PT include a
slowdown in the US economy.
Investment thesis
Positives
Industry leadership
NOL is the eighth-largest carrier in the world in terms of volume. It has a strong
brand associated with quality service and IT innovation. NOL is widely viewed as
having the best logistics capability among its peers, which helps it to secure a huge
market share of a large group of top customers, such as Target Store and Nike. NOL
also has a strong intra-Asia market share based on its original business—before the
APL acquisition. The company ranks third in our KPI scorecard.
Cost advantage in US Intermodal
The company’s US railway contract runs through to 2012, which is something of a
legacy issue for NOL. This gives the company a major cost advantage over its peers,
which are being hit with 20-30% cost hikes on their US inland freight contracts every
three years. In our view, NOL’s cost advantage, coupled with its premium service on
the Trans-Pacific trade, should be more than enough to overcome the relatively
slower growth in the Trans-Pacific trade.
High-margin business
Importantly, NOL has the highest revenue per TEU among our peer group, with a
gross profit margin that is second only to OOIL. As a result, NOL can generate
amongst the highest profit per TEU.
Negatives
High overheads
In 2006, NOL’s overheads amounted to 10% of revenues, second only to OOIL in
terms of high overhead costs in our coverage universe. We note that OOIL, Wan Hai,
and NOL have relatively the highest fixed overhead costs and conclude that good
management resources do not come cheap.
High off-balance-sheet items not really a concern
NOL has 58% of its tonnage on charter, which along with its attractive, long-term
terminal leases, constitutes 91% of its US$5.7-billion non-cancelable lease
obligations outstanding at end-2006. The market is currently strong for shipping
services and we remain confident that NOL should be able to trade out of these
future obligations at zero cost to the company, if not on a favorable net basis. We do
not believe that this risk exposure should be included in deriving NOL’s fair
valuation.
This risk would only really become a concern in the next major downturn. Having
said that, NOL’s level of chartered-in capacity is not materially different from the
majority of companies in our coverage universe. Hence, we do not see this factor as a
competitive disadvantage for the company.
Ambiguous objectives for its logistics business
NOL has always wanted to be a global logistics giant but we are not convinced that
management has put in sufficient resources to let this division develop beyond an
experimental venture. The balance sheet of the logistics business shows total assets
of US$297 million with US$46 million as equity, which is far from comparable to
any of NOL’s global logistics peers.
HLN Technologies -Multiple growth engines firing away
driven by successful penetration into the defense sector and ahead of
the launch of a revolutionary smartphone that a new customer is
bringing to market soon.
Point: Based on shipments booked year to date and accelerating
contract flow, we estimate HLN can pull in all of last year’s profit with
just six months of contributions from these two new business lines.
More importantly, outlook for the next few years is promising, with
growth supported by 1) huge business potential of new customers -
notable MNC leaders in their fields and 2) great cross-selling
opportunities and synergies between the three business units.
Relevance: Despite the stock rally in the past few weeks, there’s
still 30% upside to our target price of S$1.21 based on 12x FY08
earnings. We believe short-term share price catalyst will be contract
announcements confirming market’s expectations and possibly,
earnings upgrade. Initiate coverage with a Buy recommendation.
A banner year. HLN Technologies manufactures metallic, elastomeric (i.e.
rubber) and polymeric (such as paper, felt, foam, cork, film or none-woven
material etc) components for office automation equipment, consumer
electronics and defense vehicles. It is primed for strong top and bottomline
growth this year.
Record growth from defense and consumer electronics. We project 97%
overall net profit CAGR in 2006-2008, driven by accelerating contracts from
military vehicles and machined weaponry customers. Near term, orders from
ThyssenKrupp could easily double. We are very positive on future potential
given rising defense spending globally and ongoing replacement and
upgrading of old military vehicles. In addition, HLN is well poised to grow its
market share for components used in a new smartphone as customer is
approving the company’s proprietary chemical formulations and have
deployed that in a couple of key components.
Initiate coverage with Buy. Despite recent rally, HLN’s valuations of 9.2X FY08
earnings are still lower than sector average of 12x PER although HLN’s growth
momentum is much stronger than peers in the metal stamping or polymeric
industry. Our target valuation multiple of 12x earnings translates to a PEG
ratio of only 0.14 against HLN’s EPS CAGR of 87% over FY06-FY08F.
the launch of a revolutionary smartphone that a new customer is
bringing to market soon.
Point: Based on shipments booked year to date and accelerating
contract flow, we estimate HLN can pull in all of last year’s profit with
just six months of contributions from these two new business lines.
More importantly, outlook for the next few years is promising, with
growth supported by 1) huge business potential of new customers -
notable MNC leaders in their fields and 2) great cross-selling
opportunities and synergies between the three business units.
Relevance: Despite the stock rally in the past few weeks, there’s
still 30% upside to our target price of S$1.21 based on 12x FY08
earnings. We believe short-term share price catalyst will be contract
announcements confirming market’s expectations and possibly,
earnings upgrade. Initiate coverage with a Buy recommendation.
A banner year. HLN Technologies manufactures metallic, elastomeric (i.e.
rubber) and polymeric (such as paper, felt, foam, cork, film or none-woven
material etc) components for office automation equipment, consumer
electronics and defense vehicles. It is primed for strong top and bottomline
growth this year.
Record growth from defense and consumer electronics. We project 97%
overall net profit CAGR in 2006-2008, driven by accelerating contracts from
military vehicles and machined weaponry customers. Near term, orders from
ThyssenKrupp could easily double. We are very positive on future potential
given rising defense spending globally and ongoing replacement and
upgrading of old military vehicles. In addition, HLN is well poised to grow its
market share for components used in a new smartphone as customer is
approving the company’s proprietary chemical formulations and have
deployed that in a couple of key components.
Initiate coverage with Buy. Despite recent rally, HLN’s valuations of 9.2X FY08
earnings are still lower than sector average of 12x PER although HLN’s growth
momentum is much stronger than peers in the metal stamping or polymeric
industry. Our target valuation multiple of 12x earnings translates to a PEG
ratio of only 0.14 against HLN’s EPS CAGR of 87% over FY06-FY08F.
SIA Engineering Company: Good margins, but muted FY08
We recently visited SIA Engineering Company (SIE) to get an insight on its
prospects. SIE recently reported its FY07 results and topline grew 1.9% to
S$977.4m with a star showing from its Fleet Management Program segment
which grew 65.8% to S$76.1m. However, operating profit dove 24.3% to
S$102m primarily due to a large bonus payout. Eventually, strong contributions
from its JVs (32.1% YoY increase to S$139.5m) enabled net profit to grow 5%
to S$242.1m. Net profit margins remained stable at 24.8%. SIE's new hangar
will only be available in early 2008 indicating muted organic MRO growth as
its current capacity is fully utilised. SIE is seeking longer term growth strategies
via international expansion to key booming markets like China and India to
capture the MRO work migrating from US and EU to Asia's lower cost centres.
We do not have a rating on SIE.
Flattish FY07 results. SIA Engineering Company (SIE) recently reported its
FY07 results with topline inching up 1.9% to S$977.4m, but operating profit
dove 24.3% YoY to S$102m primarily due to large bonus payout (pegged to
SIA) of S$29.1m, weaker US dollar and stock option expenses. However, net
profit grew 5% YoY to S$242.1m due to strong contributions from its share of
associated and JVs. Net profit margins remained stable at 24.8%.
Stifled organic growth for this year. SIE currently has a total of 8 hangars
with a capacity of 3.19m man hours/year. SIE has been operating at full capacity
with SIA's 100+ wide body planes (70% of SIE's work) and third party work for
the past few years. Recognising that organic growth comes from capacity
expansion, SIE is currently building Hangar 6 (compatible for A380) that will be
operational in early 2008 and has plans for more in the next 3-5 years. Until the
new hangars come online, organic growth is expected to be muted as current
capacity is fully utilised.
Growth likely from engine JVs. SIE's 19 JVs and associates increased their
contributions by 32.1% YoY to S$139.5m in FY07. Most of these JVs are with
engine manufacturers in order to acquire a slice of this lucrative yet protected
market where Rolls-Royce, General Electric and Pratt & Whitney are dominant
players. O&M Magazine has forecasted that the fastest growth segment in
worldwide MRO will come from the engine overhaul segment, growing from
US$13.5b in 2006 to US$19.2b in 2011.
Riding the Low Cost Carrier (LCC) wave. The advent of the LCC has brought
a new dimension into MRO services as LCCs outsource most of their support
services. SIE has managed to effectively tap this market, evidenced by its
Fleet Management Program's revenue (catering to LCCs) growth of 65.8% to
S$76.1m in FY07.
International growth strategies. SIE will likely grow faster than the forecasted
4.7% CAGR (2006-2011) growth in value of global MRO services to US$48.8b,
as we see a continued migration of MRO work from the US and EU to Asia's
lower cost centres. SIE is keen to start up MRO facilities in China and India to
get part of the pie while lowering costs in a labour intensive industry. We do not
have a rating on SIE.
prospects. SIE recently reported its FY07 results and topline grew 1.9% to
S$977.4m with a star showing from its Fleet Management Program segment
which grew 65.8% to S$76.1m. However, operating profit dove 24.3% to
S$102m primarily due to a large bonus payout. Eventually, strong contributions
from its JVs (32.1% YoY increase to S$139.5m) enabled net profit to grow 5%
to S$242.1m. Net profit margins remained stable at 24.8%. SIE's new hangar
will only be available in early 2008 indicating muted organic MRO growth as
its current capacity is fully utilised. SIE is seeking longer term growth strategies
via international expansion to key booming markets like China and India to
capture the MRO work migrating from US and EU to Asia's lower cost centres.
We do not have a rating on SIE.
Flattish FY07 results. SIA Engineering Company (SIE) recently reported its
FY07 results with topline inching up 1.9% to S$977.4m, but operating profit
dove 24.3% YoY to S$102m primarily due to large bonus payout (pegged to
SIA) of S$29.1m, weaker US dollar and stock option expenses. However, net
profit grew 5% YoY to S$242.1m due to strong contributions from its share of
associated and JVs. Net profit margins remained stable at 24.8%.
Stifled organic growth for this year. SIE currently has a total of 8 hangars
with a capacity of 3.19m man hours/year. SIE has been operating at full capacity
with SIA's 100+ wide body planes (70% of SIE's work) and third party work for
the past few years. Recognising that organic growth comes from capacity
expansion, SIE is currently building Hangar 6 (compatible for A380) that will be
operational in early 2008 and has plans for more in the next 3-5 years. Until the
new hangars come online, organic growth is expected to be muted as current
capacity is fully utilised.
Growth likely from engine JVs. SIE's 19 JVs and associates increased their
contributions by 32.1% YoY to S$139.5m in FY07. Most of these JVs are with
engine manufacturers in order to acquire a slice of this lucrative yet protected
market where Rolls-Royce, General Electric and Pratt & Whitney are dominant
players. O&M Magazine has forecasted that the fastest growth segment in
worldwide MRO will come from the engine overhaul segment, growing from
US$13.5b in 2006 to US$19.2b in 2011.
Riding the Low Cost Carrier (LCC) wave. The advent of the LCC has brought
a new dimension into MRO services as LCCs outsource most of their support
services. SIE has managed to effectively tap this market, evidenced by its
Fleet Management Program's revenue (catering to LCCs) growth of 65.8% to
S$76.1m in FY07.
International growth strategies. SIE will likely grow faster than the forecasted
4.7% CAGR (2006-2011) growth in value of global MRO services to US$48.8b,
as we see a continued migration of MRO work from the US and EU to Asia's
lower cost centres. SIE is keen to start up MRO facilities in China and India to
get part of the pie while lowering costs in a labour intensive industry. We do not
have a rating on SIE.
Sentosa land prices on the rise Property - Residential
Sources have told business times that the Land prices for the four seafront
bungalow plots released for sale in march hit a new high of S$1472 psf with an
average selling price of S$1300 psf. This will have positive impact on the newly
launched beachfront collection condominium site by Sentosa Cove. The 113797
sqf site which is the only beachfront residential apartment site can be built into
4 storey condominium housing 88 units. Considering that the lastest
condominium site (Seaview collection) purchased by Hobee and IOI Land
fetched 1361 psf ppr and land prices on the rise, the beachfront collection is
expected to fetch around 1400 psf ppr – 1600 psf ppr. The breakeven for the
project is estimated around 2000 psf. As this would be only beachfront
residential apartment site and the second last condominum site, we expect the
average selling prices to exceed 2400 mark adding in the land scarcity premium.
Hobee (target S$3.00) is the key beneficiary from this uptrend in the Sentosa
land prices as it is yet to launch its Waterfront and Seaview collection. We have
estimated average selling prices of S$2400 psf for the Waterfront collection and
S$2600 psf for the Seaview collection.
bungalow plots released for sale in march hit a new high of S$1472 psf with an
average selling price of S$1300 psf. This will have positive impact on the newly
launched beachfront collection condominium site by Sentosa Cove. The 113797
sqf site which is the only beachfront residential apartment site can be built into
4 storey condominium housing 88 units. Considering that the lastest
condominium site (Seaview collection) purchased by Hobee and IOI Land
fetched 1361 psf ppr and land prices on the rise, the beachfront collection is
expected to fetch around 1400 psf ppr – 1600 psf ppr. The breakeven for the
project is estimated around 2000 psf. As this would be only beachfront
residential apartment site and the second last condominum site, we expect the
average selling prices to exceed 2400 mark adding in the land scarcity premium.
Hobee (target S$3.00) is the key beneficiary from this uptrend in the Sentosa
land prices as it is yet to launch its Waterfront and Seaview collection. We have
estimated average selling prices of S$2400 psf for the Waterfront collection and
S$2600 psf for the Seaview collection.
China Milk Products Group - Better execution needed
Global milk price has been rising due to strong demand growth from China
and India. As a reference for milk prices, fluid milk future on the Chicago
Mercantile Exchange has risen 60% over the past year. On the supply side,
production growth has not kept up with demand. Farmers have been reluctant
to increase their herd size due to high feed costs. The main sources of dairy
feed - corn and soy bean - have seen prices rise more than 50% over the past
year with increasing demand from ethanol production. Also, bad weather
conditions in dairy countries such as Australia and US have also reduced supply.
C Milk is beneficiary of high milk prices and high feed costs as farmers have
every reason to get more milk out of their cows. Sales of C Milk’s pedigree bull
semen and cow embryos have been enjoying strong growth under the breedimprovement
programmes. The Chinese government has been promoting the
use of pedigree bull semen and embryo to raise the milk yield and productivity
of the dairy farms. In China, raw milk price is on an uptrend and major dairy
companies such as China Mengniu is expecting another 2-3% increase in
average market prices for 2007. C Milk is seeing high milk prices as its ASP
increased from Rmb1.8/kg to Rmb2.1/kg in FY07. On the hand, feed costs
remain manageable as the company grows a portion of its feed requirements and
has its own feed processing factory.
Investor sentiment likely to be cautious. While the Mar FY07 results met
market expectation, it was disappointing in terms of operational performance.
Raw milk production was below our expectation and the company was not able
to conclude a dairy processing contract with its customer. The company has
missed its guidance twice regarding the commencement of its dairy processing
plant. While there is no significant impact for FY07 results, we believe4 the
creditability of management is dented and investors are likely to be cautious
about the new guidance from the company. In addition, the lack of disclosure
regarding the use of its huge cash balance, more than Rmb1.7b as at Mar 07,
has further damped confidence in the company.
We do not expect any significant development from the company until the
announcement of the dairy processing contract. The next milestones are the
import of Australian cows in October and the commencement of the milk
production plant in November. We will be watching these developments closely.
Higher-than-expected financing costs. From the financing costs and the
additional disclosure from C Milk, we estimate the effective borrowing cost of C
Milk’s convertible bond is about 10% vs our initial estimate of 5.5%. Hence, we
adjust our forecasts and target price to factor in the higher finance costs.
Cheaper way to milk China dairy theme. Compared with other listed dairy
companies, C Milk is a cheaper way to ride on the rising dairy consumption
trend in China, trading at 10x FY08 PE vs 30x for other major listed Chinese
dairy companies. With C Milk’s positive industry dynamics, strong growth and
leading position in the pedigree bull semen business, the current disparity is too
wide even after taking into account the fact that C Milk is not a consumer stock.
and India. As a reference for milk prices, fluid milk future on the Chicago
Mercantile Exchange has risen 60% over the past year. On the supply side,
production growth has not kept up with demand. Farmers have been reluctant
to increase their herd size due to high feed costs. The main sources of dairy
feed - corn and soy bean - have seen prices rise more than 50% over the past
year with increasing demand from ethanol production. Also, bad weather
conditions in dairy countries such as Australia and US have also reduced supply.
C Milk is beneficiary of high milk prices and high feed costs as farmers have
every reason to get more milk out of their cows. Sales of C Milk’s pedigree bull
semen and cow embryos have been enjoying strong growth under the breedimprovement
programmes. The Chinese government has been promoting the
use of pedigree bull semen and embryo to raise the milk yield and productivity
of the dairy farms. In China, raw milk price is on an uptrend and major dairy
companies such as China Mengniu is expecting another 2-3% increase in
average market prices for 2007. C Milk is seeing high milk prices as its ASP
increased from Rmb1.8/kg to Rmb2.1/kg in FY07. On the hand, feed costs
remain manageable as the company grows a portion of its feed requirements and
has its own feed processing factory.
Investor sentiment likely to be cautious. While the Mar FY07 results met
market expectation, it was disappointing in terms of operational performance.
Raw milk production was below our expectation and the company was not able
to conclude a dairy processing contract with its customer. The company has
missed its guidance twice regarding the commencement of its dairy processing
plant. While there is no significant impact for FY07 results, we believe4 the
creditability of management is dented and investors are likely to be cautious
about the new guidance from the company. In addition, the lack of disclosure
regarding the use of its huge cash balance, more than Rmb1.7b as at Mar 07,
has further damped confidence in the company.
We do not expect any significant development from the company until the
announcement of the dairy processing contract. The next milestones are the
import of Australian cows in October and the commencement of the milk
production plant in November. We will be watching these developments closely.
Higher-than-expected financing costs. From the financing costs and the
additional disclosure from C Milk, we estimate the effective borrowing cost of C
Milk’s convertible bond is about 10% vs our initial estimate of 5.5%. Hence, we
adjust our forecasts and target price to factor in the higher finance costs.
Cheaper way to milk China dairy theme. Compared with other listed dairy
companies, C Milk is a cheaper way to ride on the rising dairy consumption
trend in China, trading at 10x FY08 PE vs 30x for other major listed Chinese
dairy companies. With C Milk’s positive industry dynamics, strong growth and
leading position in the pedigree bull semen business, the current disparity is too
wide even after taking into account the fact that C Milk is not a consumer stock.
Cosco Corporation - Soaring on the powerful wings of its parent
Story: Cosco Corp has secured its largest shipbuilding order todate,
worth a total of US$1.2bn from Cosco International Ship
Trading, its sister company, as well as third party shipowners. The
vessels will be delivered between Dec 2008 and Mar 2010.
Point: With these contracts, Cosco Corp is now in the lead
among SGX-listed firms, in terms of contract wins this year. This
will boost its forward order book(excluding 1Q07 sales) by 70% to
US$2.9bn. As delivery of the US$1.2bn shipbuilding orders are
staggered over Dec 2008 to 2010, we expect the bulk of these
contracts to contribute in FY09. With this order, earnings visibility
for the group is further strengthened into FY09.
Relevance: The stock is trading at P/E of 23.7x(FY07F) and
15.4x(FY08F), undemanding vs industry peers in China trading at
>25x on FY08 earnings, and against its 3-year EPS CAGR of 38%.
Maintain BUY, target price maintained at $3.45.
13% rise in vessel price over the last order. Based on our estimates, the
latest bulk carriers were concluded at US$38.5m for Cosco International
Ship Trading Co Ltd and US$37.5m for external parties The
variance(although the vessels are of similar sizes) is caused by different
specifications and requirements by the shipowners. The latest contract
prices represent an increase of 13% in the vessel prices over the last bulk
carrier order from the Cosco Group at US$34m. This is due to adjustment
for higher steel prices and higher cost arising from IMO requirements for
additional protective coatings on these vessels for building orders signed
after Dec 2006.
Riding on its strong parentage – potential replacement orders from
parent. The Cosco group owns a fleet of 650 vessels, of which 250 are
bulk carriers. With an average age of 10 to 15 years for the bulk carrier
fleet, there is potential for more replacement and new orders from its
sister companies, in the region of 10 to 20 vessels per year. Cosco Corp
has a total of 46 vessels under construction, of which more than half or
26 are from the Cosco group, the balance from external parties.
Shipyard business growing firmly on 3 legs. Based on its current order
book of US$2.9bn, 60% are for shipbuilding and the balance for offshore
projects. On the back of this, Cosco Shipyard Group’s revenue profile will
be transformed from primarily a shiprepair group into one with a
diversified mix of 40% in shiprepair, 30% in shipbuilding and 30% in
offshore projects. While most shipyards in China are either shipbuilding or
shiprepair yards, Cosco Corp, which owns seven shipyards along the coast
of China, offers investors a unique play into shiprepair, shipbuilding and
rigbuilding. The new shipbuilding, offshore conversions and rigbuilding
businesses provides an additional platform for growth, while shiprepair
provides a growing recurrent base of earnings.
worth a total of US$1.2bn from Cosco International Ship
Trading, its sister company, as well as third party shipowners. The
vessels will be delivered between Dec 2008 and Mar 2010.
Point: With these contracts, Cosco Corp is now in the lead
among SGX-listed firms, in terms of contract wins this year. This
will boost its forward order book(excluding 1Q07 sales) by 70% to
US$2.9bn. As delivery of the US$1.2bn shipbuilding orders are
staggered over Dec 2008 to 2010, we expect the bulk of these
contracts to contribute in FY09. With this order, earnings visibility
for the group is further strengthened into FY09.
Relevance: The stock is trading at P/E of 23.7x(FY07F) and
15.4x(FY08F), undemanding vs industry peers in China trading at
>25x on FY08 earnings, and against its 3-year EPS CAGR of 38%.
Maintain BUY, target price maintained at $3.45.
13% rise in vessel price over the last order. Based on our estimates, the
latest bulk carriers were concluded at US$38.5m for Cosco International
Ship Trading Co Ltd and US$37.5m for external parties The
variance(although the vessels are of similar sizes) is caused by different
specifications and requirements by the shipowners. The latest contract
prices represent an increase of 13% in the vessel prices over the last bulk
carrier order from the Cosco Group at US$34m. This is due to adjustment
for higher steel prices and higher cost arising from IMO requirements for
additional protective coatings on these vessels for building orders signed
after Dec 2006.
Riding on its strong parentage – potential replacement orders from
parent. The Cosco group owns a fleet of 650 vessels, of which 250 are
bulk carriers. With an average age of 10 to 15 years for the bulk carrier
fleet, there is potential for more replacement and new orders from its
sister companies, in the region of 10 to 20 vessels per year. Cosco Corp
has a total of 46 vessels under construction, of which more than half or
26 are from the Cosco group, the balance from external parties.
Shipyard business growing firmly on 3 legs. Based on its current order
book of US$2.9bn, 60% are for shipbuilding and the balance for offshore
projects. On the back of this, Cosco Shipyard Group’s revenue profile will
be transformed from primarily a shiprepair group into one with a
diversified mix of 40% in shiprepair, 30% in shipbuilding and 30% in
offshore projects. While most shipyards in China are either shipbuilding or
shiprepair yards, Cosco Corp, which owns seven shipyards along the coast
of China, offers investors a unique play into shiprepair, shipbuilding and
rigbuilding. The new shipbuilding, offshore conversions and rigbuilding
businesses provides an additional platform for growth, while shiprepair
provides a growing recurrent base of earnings.
Singapore REIT: Our view on M&A theme now a possibility
In our 2007 strategy report we had postulated the possibility of M&A in SREIT
sector. This is becoming a possibility with the Securities Industry
Council's (SIC) surprise announcement on Friday that it will extend the
Singapore Code of Takeover & Mergers to REITs. This move is significant
as it means that there is now clarity on M&A rules for S-REITs. We see
the REITs that will benefit from the rule change to be those REITs that are
potential targets for acquisition. These will be REITs trading with low price
to book and high trading yield relative to their peers in the same sector.
We identify these REITs to be Allco, Cambridge, Macarthur, MM Prime
and First REIT
Surprise rule change on REIT M&A. In our 2007 strategy report dated 11
Dec 2006 "M&A theme a strong possibility in 2007/08", we had articulated
that M&A could be another avenue for growth. This scenario is now coming
closer to reality with the Securities Industry Council's (SIC) surprise
announcement on Friday that it will extend the Singapore Code of Takeover
& Mergers to REITs. This move is significant as it means that there is now
clarity on M&A rules for S-REITs. Now anyone who acquires 30% or more
of any REIT must make a general offer (GO) for the remaining units.
Furthermore, anyone who owns 30%-50% of any REIT and acquires a further
1% of the units must also make a GO for the rest of the units.
Market getting more competitive. The key issue with the high-beta REITs
such as CCT, MLT, CMT, ART, AREIT is the ability of the managers to meet
market growth expectation. This is particularly so in a property up-cycle
where fewer properties are available to be acquired. Some are venturing
overseas, while others remain domestic focus (AREIT, Cambridge). Another
avenue for asset size growth is via own development (AREIT, CMT), but
this is a riskier strategy and is constrained by REIT guidelines. However
with the SIC rule change on M&A, the REIT manager has another avenue to
meet market's growth expectations
A function of risk appetite. In our opinion, the market has segmented SREITs
into two camps, i.e. REITs with high and low growth expectations.
The key differentiating factor is the P/B ratio. We see potential for both
camps, and the choice for investors for either is a function of their risk
appetite. The high-beta REITs are those with high P/B ratio. As the market
has already priced in growth, the risks are higher. On the other hand lowbeta
REITs, we see minimal downside risks. In fact with them now being
eyed as targets for acquisitions, we see a strong upside possibilities.
Potential winners in M&A. We see the likely winners in the new M&A
rules to be those trading with higher yield and low price to book relative to
their peers in the same sector. We see these REITs to be Allco, Cambridge,
Macarthur, MM Prime and First REIT.
sector. This is becoming a possibility with the Securities Industry
Council's (SIC) surprise announcement on Friday that it will extend the
Singapore Code of Takeover & Mergers to REITs. This move is significant
as it means that there is now clarity on M&A rules for S-REITs. We see
the REITs that will benefit from the rule change to be those REITs that are
potential targets for acquisition. These will be REITs trading with low price
to book and high trading yield relative to their peers in the same sector.
We identify these REITs to be Allco, Cambridge, Macarthur, MM Prime
and First REIT
Surprise rule change on REIT M&A. In our 2007 strategy report dated 11
Dec 2006 "M&A theme a strong possibility in 2007/08", we had articulated
that M&A could be another avenue for growth. This scenario is now coming
closer to reality with the Securities Industry Council's (SIC) surprise
announcement on Friday that it will extend the Singapore Code of Takeover
& Mergers to REITs. This move is significant as it means that there is now
clarity on M&A rules for S-REITs. Now anyone who acquires 30% or more
of any REIT must make a general offer (GO) for the remaining units.
Furthermore, anyone who owns 30%-50% of any REIT and acquires a further
1% of the units must also make a GO for the rest of the units.
Market getting more competitive. The key issue with the high-beta REITs
such as CCT, MLT, CMT, ART, AREIT is the ability of the managers to meet
market growth expectation. This is particularly so in a property up-cycle
where fewer properties are available to be acquired. Some are venturing
overseas, while others remain domestic focus (AREIT, Cambridge). Another
avenue for asset size growth is via own development (AREIT, CMT), but
this is a riskier strategy and is constrained by REIT guidelines. However
with the SIC rule change on M&A, the REIT manager has another avenue to
meet market's growth expectations
A function of risk appetite. In our opinion, the market has segmented SREITs
into two camps, i.e. REITs with high and low growth expectations.
The key differentiating factor is the P/B ratio. We see potential for both
camps, and the choice for investors for either is a function of their risk
appetite. The high-beta REITs are those with high P/B ratio. As the market
has already priced in growth, the risks are higher. On the other hand lowbeta
REITs, we see minimal downside risks. In fact with them now being
eyed as targets for acquisitions, we see a strong upside possibilities.
Potential winners in M&A. We see the likely winners in the new M&A
rules to be those trading with higher yield and low price to book relative to
their peers in the same sector. We see these REITs to be Allco, Cambridge,
Macarthur, MM Prime and First REIT.
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