BUY
Price $3.07
Target $4.14
Coming together at the Gateway
Event:
A consortium comprising CapitaMalls Asia (CMA), CapitaMall Trust (CMT) and CapitaLand has secured a White Site at Boon Lay Way for $969m, or $1,012 psf ppr. CapitaLand will lend its expertise on the office component while CMA will lead the design for the retail portion. With this acquisition, the CapitaLand group of companies will have a strong foothold in Jurong Gateway, right in the commercial heart of the Jurong Lake District. Maintain BUY.
Our View
The Jurong Gateway (JG) site will have a total GFA of 957,781 sq ft, 40% of which will be for office use and 60% for retail. The stakes held by CMA, CMT and CapitaLand are 50%, 30% and 20%, respectively. The total development cost is estimated to be around $1.5b.
At first glance, the bid appears aggressive, as it is nearly 55% higher than the psf price paid for the adjacent site in June last year. A closer analysis, however, shows the JG site to be superior in location and with fewer site constraints. The consortium is targeting retail rents of $16‐18 psf pm and office rents of around $7‐8 psf pm. This should translate to yield on cost of about 6% for both components.
With the acquisition, the CapitaLand group of companies will have its foothold strengthened, not just in the Jurong Lake District, but also in western Singapore. In addition, it will gain exposure to quality office space in Jurong, which will be sought after in the future when the district matures as a regional commercial hub.
Action & Recommendation
While the targeted 6% yield on cost for the JG site is attractive, the actual impact on CapitaLand’s RNAV is minimal. The asset, when completed, is likely to be eventually monetised and sold to CMT and CCT. We have trimmed our target price to $4.14, pegged at par to RNAV after adjusting for the share prices of the listed subsidiaries. Maintain BUY
The price for success
The Jurong Lake District has been earmarked by the Urban Redevelopment Authority (URA) as the largest commercial hub outside the city centre, 2.5x the size of Tampines Regional Centre. To kick‐start the development, the URA tendered out the first White Site beside Jurong East MRT station in April last year. Australian group Lend Lease secured the site with a top bid of $788.9m ($645 psf ppr), while CapitaMalls Asia narrowly lost out with a bid of $728.8m ($632 psf ppr).
Nearly a year later, the adjacent site was put up for tender. This time round, the consortium comprising CMA, CMT and CapitaLand won with a top bid of $969m ($1,012 psf ppr). The price suggested to us the consortium’s determination to secure the site, despite it being a 55% premium over the price Lend Lease paid for the earlier site. That said, we note it was just 5.7% higher than the second‐highest bid jointly submitted by United Engineers and Singapore Press Holdings.
The expertise to make things work
Based on the tender conditions, at least 40% of the GFA at the Jurong Gateway (JG) site has to be for office use and the rest can be devoted to commercial, hotel or residential purposes, either solely or in combination. The consortium will allocate 40% for office use and the remaining 60% for retail use. Structurally, the combination of stakeholders allows each party to leverage on its expertise, eventhough they hold proportional stakes in both the retail and office components.
For example, CMA and CMT together have a wealth of expertise in developing and managing retail malls in Singapore. In addition, CMT already has two other malls in the vicinity, namely, IMM and JCube. The latter is undergoing redevelopment. Together with the new mall on the JG site, the three malls have an NLA of 1m sq ft, each positioned to capture a different market segment. With more than 1m residents in the western region, there will be a steady catchment area for the malls. All three malls are close to each other, which means CMA can leverage on economies of scale for both tenant and property management.
For the office component, CapitaLand Commercial Ltd (CCL) will lead in the design and leasing. According to the design scheme, the development will provide office space with typical floor plates of about 15,000 sq ft. Given the dearth of quality office supply in Jurong, CCL believes that demand will be robust, particularly from medical and pharmaceutical companies keen to be located near the upcoming Ng Teng Fong Hospital, as well as MNCs in the oil and gas and marine sectors wishing to be close to their operations in Jurong Island and Tuas.
JG site vs Lend Lease site
Besides the aforementioned attributes brought to the table by the CapitaLand group of companies, one other factor puts the JG site in a more favourable position than the Lend Lease site (Site 1 in Figures 2 and 3) – location.
The JG site provides five seamless connections to the main transport nodes (bus interchange and Jurong East MRT Station) and other nearby amenities, including the upcoming Ng Teng Fong Hospital and Site 1 itself. The JG site’s central location means that human traffic flow will inevitably be channelled through it. In addition, due to site constraints, the mall on Site 1 will be configured as a six‐storey development with about 550,000‐560,000 sq ft of NLA. The new mall on the JG site is expected to have five storeys. As retail rents flow with gravity, ie, rents decrease the higher one moves up the mall, the average rent for a six‐storey mall will be lower than that for a five‐storey mall.
In addition, Lend Lease has roped in a number of major anchor tenants, such as Robinsons department store, NTUC FairPrice Xtra hypermarket and Cathay Cinema. The mall on JG site can do away with anchors, which will be replaced by specialties and mini‐anchors instead. This will allow the average retail rent achievable on the JG site to approach the targeted $16‐18 psf.
Likely pipeline asset for CMT and CCT
Based on our estimates, the total development costs leave little upside for CapitaLand in terms of RNAV accretion. Instead, we think CMT and CCT will likely be the eventual beneficiaries, as the development will provide a high‐quality asset which both REITs may acquire upon its completion. CMT could just acquire the full stake in the mall and CCT just the office component. Alternatively, the duo could jointly own stakes in the development, just like they currently jointly own stakes in Raffles City Singapore.
Friday, 3 June 2011
Mewah International (DBSVickers)
BUY S$0.98 STI : 3,160.60
Price Target : 12-Month S$ 1.23
Reason for Report : Reviewing timing of capacity additions
Potential Catalyst: Delivery of expansion projects
On track for delivery
• Sales volume normalizes from weak 1Q11
• Sabah refinery tracking ahead of schedule
• No change in forecasts - Sabah refinery still 12 months away
• Reiterate BUY call, TP of S$1.23
Rebound in sales volume. We caught up with Mewah and sales volumes in 2Q11 to-date have recovered consistent with trends indicated at the 1Q11 results briefing. African and Middle Eastern customers are buying for their current requirements as well as restocking. 1Q11 sales volumes were negatively affected (-10.8% y-o-y) by the political unrest in certain African and Middle Eastern countries. 2Q11 margins have improved from 1Q11 in line with traditional seasonal trends.
Sabah refinery ahead. The Sabah refinery project is going well and is tracking ahead of schedule. Guidance to date is for delivery in 2HCY12. For the specialty fats, commissioning will occur sometime in 3QCY11 versus guidance of 2HCY11.
Maintain forecast. We are maintaining our earnings forecast as the recovery in sales volumes, improvement in margins in 2Q11 and timing of specialty fats capacity are within expectations. Since the commissioning of the Sabah refinery is still 12 months away, we prefer to remain conservative and not to revise our Sabah refinery projections.
Buy for 26% upside. We believe increased clarity on capacity additions will trigger a re-rating as investors become more confident about Mewah’s ability to execute on its growth plans. Hence we reiterate our BUY call as the stock is attractively priced at FY11 PE of 11.1x with threeyear earnings CAGR of 15%.
Price Target : 12-Month S$ 1.23
Reason for Report : Reviewing timing of capacity additions
Potential Catalyst: Delivery of expansion projects
On track for delivery
• Sales volume normalizes from weak 1Q11
• Sabah refinery tracking ahead of schedule
• No change in forecasts - Sabah refinery still 12 months away
• Reiterate BUY call, TP of S$1.23
Rebound in sales volume. We caught up with Mewah and sales volumes in 2Q11 to-date have recovered consistent with trends indicated at the 1Q11 results briefing. African and Middle Eastern customers are buying for their current requirements as well as restocking. 1Q11 sales volumes were negatively affected (-10.8% y-o-y) by the political unrest in certain African and Middle Eastern countries. 2Q11 margins have improved from 1Q11 in line with traditional seasonal trends.
Sabah refinery ahead. The Sabah refinery project is going well and is tracking ahead of schedule. Guidance to date is for delivery in 2HCY12. For the specialty fats, commissioning will occur sometime in 3QCY11 versus guidance of 2HCY11.
Maintain forecast. We are maintaining our earnings forecast as the recovery in sales volumes, improvement in margins in 2Q11 and timing of specialty fats capacity are within expectations. Since the commissioning of the Sabah refinery is still 12 months away, we prefer to remain conservative and not to revise our Sabah refinery projections.
Buy for 26% upside. We believe increased clarity on capacity additions will trigger a re-rating as investors become more confident about Mewah’s ability to execute on its growth plans. Hence we reiterate our BUY call as the stock is attractively priced at FY11 PE of 11.1x with threeyear earnings CAGR of 15%.
Capitaland Group (DBSVickers)
CapitaLand : Pan Asian residential, commercial, hospitality and industrial property owner, developer and manager.
CapitaMalls Asia Limited : CMA is one of the largest listed shopping mall developer, owner, operator, asset manager and fund manager in Asia
Capitamall Trust : Real estate investment trust with a portfolio of major shopping malls located in suburban areas in Singapore
The West Side Story
• Land acquisition to strengthen landlord value proposition in the Jurong East locality, long term positives from entrenching position in Jurong Lakeside regional hub
• Immediate valuation accretion modest with greater longer term upside coming from on operational synergies and as location matures
• Maintain Buy for CMA, CMT and Capitaland
Entrenching presence in Jurong East. Our recent site visit to CMA/CMT/ Capitaland’s Jurong Gateway site at Boon Lay Way has reaffirmed our view that this acquisition is a strategic defensive move on their part to deepen exposure in the upcoming Jurong Lakeside regional hub area and further strengthen their positioning as a major landlord within this enclave in the medium term. Jurong Lakeside regional hub is expected to grow to 2.5x that of Tampines regional hub with a sizeable working and resident catchment. This is likely to have positive impact on property values in the longer run.
Enhancing landlord value proposition with a slew of offerings. Growing their presence in the locality to an estimated 1msf retail NLA is likely to enhance their landlord value proposition and improve their ability to be rental price makers rather than takers in the medium term. The group plans to offer a range of offerings with IMM targeted to be a value-focused mall, JCube an entertainment focused positioning and Jurong Gateway site a family lifestyle shopping complex, to enhance shopper experience in the vicinity. With the latter site to be seamlessly integrated and highly accessible to nearby amenities and transport nodes, we expect pedestrian traffic to be high in the malls. JCube is on track to open in early 2012 while the retail portion of the new Jurong Gateway property is expected to be operational by Dec 2013, in tandem with the Lend Lease development.
Near term accretion mild but expect significant upside in the medium term. We maintain our Buy calls for CMA, Capitaland and CMT as we see this deal as being accretive and represent a deployment of balance sheet capacity into higher yielding opportunities. Immediate impact on valuations is likely to be mild with an initial yield on cost of c5.9-6% but we believe upside can be generated as the regional hub matures and as operational synergies kick in. Our RNAV and TP for CMA are raised by 1ct to $2.29 and $2.51 respectively on new contributions from its 50% stake. Capitaland’s RNAV remains unchanged at $5.43 due to its small 20% share. Capitaland offers value as one of the big-cap laggards trading at 0.94x P/bk and 0.6x P/RNAV. For CMT, our DCF-backed TP is lowered slightly to $2.05 due to a small near term earnings dilution 0.5-3% on increased interest expense during the development period. When completed in FY14, the new income could boost DPU by 3-4%. CMT is currently trading at FY11 and FY12 DPU yields of 4.9-5.4%.
Deepening presence in Jurong Our site visit to the recently acquired Jurong Gateway white site by CMA, CMT and Capitaland has reaffirmed our view that this acquisition is a strategic defensive move on the group’s part to retain its dominant positioning within the Jurong East and Lakeside area as well as leveraging into the potential of this area with the upcoming development of Jurong Lakeside regional hub.
To recap, CapitaMalls Asia (CMA), CapitaMall Trust (CMT) and CapitaLand was awarded the Jurong Gateway white site at Boon Lay Way. The group put in a top bid of $969m or $1,012psf ppr, which is just 5.7% higher the second bid put in by United Engineers and Singapore Press Holdings and about 23% premium over the third bid put in by Keppel Land and Perennial Real Estate. Other bidders include consortium involving Far East Organization, Seksui House and China State Construction as well as Frasers Centrepoint. The site is the second land parcel to be released for sale at Jurong Gateway, following the successful sale of the first white site at Jurong Gateway Road to Lend Lease in June 2010 at $749m or $650psf ppr.
The 195,465 sf site has a plot ratio of 4.9x and can house a potential GFA of 957,781sf. Under the guidelines, a minimum 40% is to be set aside for office use, while the 60% can be retail, hotel or residential use.
The group intends to build a 5-storey mall and a 20-storey block of office building. Total development cost is expected to work out to $1.5b. CMA will hold 50% stake of the venture while CMT and CapitaLand will take a smaller 30% and 20% of the pie respectively.
We reckon the project can generate total rental revenue of $110-115m or 5.9-6% yield on cost based on our assumption of an average rent of $17psf/mth for the retail component and $6.50psf/mth for the office portion. The retail component is scheduled to be operational by Dec 2013 and the office component by Dec 2014.
A prime suburban location that cannot be ignored We think the land price paid is fair given the longer term outlook for the Jurong Lakeside area. The land parcel is a prime site located next to the Jurong East MRT station, in the heart of Jurong Gateway, which is the key commercial hub within the Jurong Lake District. The area is a long term development initiative that was unveiled back in Master Plan 2008, which is expected to be eventually built up into a major regional centre for the west of Singapore and 2.5x that of the Tampines Regional Centre. In the longer term, Jurong Lakeside could potentially house more than 3,000 multinational and global businesses and at least 1,000 new homes.
Currently, there is already a large population catchment of more than 1m residents in the surrounding towns like Clementi, Bukit Batok, Jurong East and Jurong West. Coupled with the relatively younger population and higher than national average monthly disposable income, we see potential for a successful suburban shopping and commercial precinct.
Strengthening its foothold in the Western Part of Singapore
More importantly, it is in the vicinity of its existing malls - IMM and JCube. With this acquisition, the group is expected to have about 1msf of retail space and 2,200 car park spaces in Jurong. Together with Lot One Shopping Mall, Bukit Panjang Plaza and the upcoming Star Vista (Buona Vista development), the group will deepen their foothold in the Western Part of Singapore.
High footfalls expected
The mall, located next to Jurong East MRT station (an interchange with two major train lines) and Jurong East Bus Interchange, will have 5 access points. We expect the shopper traffic to be high as level 1 of the mall will be linked directly to the new air-conditioned Jurong East bus Interchange, while both Level 1 and Level 2 will be linked to the Jurong East MRT Station. It is estimated that the Jurong MRT and Bus Interchange throughput commuters is about 1.3m and 0.5m/mth. In addition, the two link bridges, which will connect the new complex to the upcoming Ng Teng Fong Hospital and Lend Lease's mall, will create a larger "integrated development", thus enlarging the catchment area.
Complement not compete
The plans unveiled by CMA and CMT have further reaffirmed our view on management’s retail asset management capabilities. The strategy to offer a slew of niche shopping experiences in the 3 malls would create a complementary environment and provide operational synergies in the area. We understand that Lend Lease has secured several large anchor tenants, which include a hypermarket, cinema and food court facilities for their adjoining development. Hence, CMA/CMT intends to focus on securing speciality tenants which will make up 70% of the tenant mix with mini-anchors tenants taking up the remaining 30%. This will enable them to generate a higher average rental rate and boost returns from this develeopment.
Creating certainties in the tenant mix for the other malls
In addition, securing the new mall will give the group more certainties in planning the tenant mix for JCube and IMM and the upcoming Lend Lease's mall, at the same time lower competition. The group intends to position the new mall as a family and lifestyle mall, while IMM Building with Giant Hypermarket and plans to expand the 13 outlet stores to 30 as a value-focussed mall. JCube with its Olympic-size ice skating rink and extended operating hours will be the entertainment complex. We believe that the "3-in-1" mall will create synergy in terms of operations and leasing, resulting in cost savings in the longer term.
Office population adds to catchment pool According to URA 1Q/2011 data, Jurong East and West planning area collectively houses about 1msf of private and public office space at present but is still 35% lower than the office stock in the Tampines planning area. Furthermore, we believe that most of the office buildings are much older or have been taken up by public agencies. Hence, there is a need for more quality office space in Jurong. Occupancy rate for Jurong West and East in 1Q11 stands at 91% and 93% respectively, higher than the islandwide average of 88%. The Ministry of National Development had announced earlier that it has taken up 315,382 sf of office space at Lend Lease's building. With more Statutory Boards and MNCs looking at decentralize locations, we believe that the office component of the Jurong Gateway site can help to fill the gap.
Valuation and recommendation
We maintain our Buy calls for CMA, Capitaland and CMT as we see this deal as being accretive to the companies’ valuations and represent a deployment of balance sheet capacity into higher yielding opportunities.
In terms of impact, we expect this development to add 1ct to CMA’s RNAV to $2.29 and lift TP to $2.51. Given the group large balance sheet capacity and a net cash position of $250m as at end 1Q11, the group is well-placed to utilize its strong balance sheet to fund its share of $750m of development cost. From CMT’s perspective, this development exercise is likely to be RNAV accretive but near term earnings may be diluted by 0.5-3% due to the increased interest expense during the development period. Post 2014, DPU is expected to be boosted by 3% with new contributions from this project. Gearing would rise to c41% with the addition of its share of $500m development cost.
Our valuation for Capitaland remains unchanged after accounting for this development given the group small 20% stake. Our TP remains at $4.61, based on a 15% discount to RNAV of $5.43.
CapitaMalls Asia Limited : CMA is one of the largest listed shopping mall developer, owner, operator, asset manager and fund manager in Asia
Capitamall Trust : Real estate investment trust with a portfolio of major shopping malls located in suburban areas in Singapore
The West Side Story
• Land acquisition to strengthen landlord value proposition in the Jurong East locality, long term positives from entrenching position in Jurong Lakeside regional hub
• Immediate valuation accretion modest with greater longer term upside coming from on operational synergies and as location matures
• Maintain Buy for CMA, CMT and Capitaland
Entrenching presence in Jurong East. Our recent site visit to CMA/CMT/ Capitaland’s Jurong Gateway site at Boon Lay Way has reaffirmed our view that this acquisition is a strategic defensive move on their part to deepen exposure in the upcoming Jurong Lakeside regional hub area and further strengthen their positioning as a major landlord within this enclave in the medium term. Jurong Lakeside regional hub is expected to grow to 2.5x that of Tampines regional hub with a sizeable working and resident catchment. This is likely to have positive impact on property values in the longer run.
Enhancing landlord value proposition with a slew of offerings. Growing their presence in the locality to an estimated 1msf retail NLA is likely to enhance their landlord value proposition and improve their ability to be rental price makers rather than takers in the medium term. The group plans to offer a range of offerings with IMM targeted to be a value-focused mall, JCube an entertainment focused positioning and Jurong Gateway site a family lifestyle shopping complex, to enhance shopper experience in the vicinity. With the latter site to be seamlessly integrated and highly accessible to nearby amenities and transport nodes, we expect pedestrian traffic to be high in the malls. JCube is on track to open in early 2012 while the retail portion of the new Jurong Gateway property is expected to be operational by Dec 2013, in tandem with the Lend Lease development.
Near term accretion mild but expect significant upside in the medium term. We maintain our Buy calls for CMA, Capitaland and CMT as we see this deal as being accretive and represent a deployment of balance sheet capacity into higher yielding opportunities. Immediate impact on valuations is likely to be mild with an initial yield on cost of c5.9-6% but we believe upside can be generated as the regional hub matures and as operational synergies kick in. Our RNAV and TP for CMA are raised by 1ct to $2.29 and $2.51 respectively on new contributions from its 50% stake. Capitaland’s RNAV remains unchanged at $5.43 due to its small 20% share. Capitaland offers value as one of the big-cap laggards trading at 0.94x P/bk and 0.6x P/RNAV. For CMT, our DCF-backed TP is lowered slightly to $2.05 due to a small near term earnings dilution 0.5-3% on increased interest expense during the development period. When completed in FY14, the new income could boost DPU by 3-4%. CMT is currently trading at FY11 and FY12 DPU yields of 4.9-5.4%.
Deepening presence in Jurong Our site visit to the recently acquired Jurong Gateway white site by CMA, CMT and Capitaland has reaffirmed our view that this acquisition is a strategic defensive move on the group’s part to retain its dominant positioning within the Jurong East and Lakeside area as well as leveraging into the potential of this area with the upcoming development of Jurong Lakeside regional hub.
To recap, CapitaMalls Asia (CMA), CapitaMall Trust (CMT) and CapitaLand was awarded the Jurong Gateway white site at Boon Lay Way. The group put in a top bid of $969m or $1,012psf ppr, which is just 5.7% higher the second bid put in by United Engineers and Singapore Press Holdings and about 23% premium over the third bid put in by Keppel Land and Perennial Real Estate. Other bidders include consortium involving Far East Organization, Seksui House and China State Construction as well as Frasers Centrepoint. The site is the second land parcel to be released for sale at Jurong Gateway, following the successful sale of the first white site at Jurong Gateway Road to Lend Lease in June 2010 at $749m or $650psf ppr.
The 195,465 sf site has a plot ratio of 4.9x and can house a potential GFA of 957,781sf. Under the guidelines, a minimum 40% is to be set aside for office use, while the 60% can be retail, hotel or residential use.
The group intends to build a 5-storey mall and a 20-storey block of office building. Total development cost is expected to work out to $1.5b. CMA will hold 50% stake of the venture while CMT and CapitaLand will take a smaller 30% and 20% of the pie respectively.
We reckon the project can generate total rental revenue of $110-115m or 5.9-6% yield on cost based on our assumption of an average rent of $17psf/mth for the retail component and $6.50psf/mth for the office portion. The retail component is scheduled to be operational by Dec 2013 and the office component by Dec 2014.
A prime suburban location that cannot be ignored We think the land price paid is fair given the longer term outlook for the Jurong Lakeside area. The land parcel is a prime site located next to the Jurong East MRT station, in the heart of Jurong Gateway, which is the key commercial hub within the Jurong Lake District. The area is a long term development initiative that was unveiled back in Master Plan 2008, which is expected to be eventually built up into a major regional centre for the west of Singapore and 2.5x that of the Tampines Regional Centre. In the longer term, Jurong Lakeside could potentially house more than 3,000 multinational and global businesses and at least 1,000 new homes.
Currently, there is already a large population catchment of more than 1m residents in the surrounding towns like Clementi, Bukit Batok, Jurong East and Jurong West. Coupled with the relatively younger population and higher than national average monthly disposable income, we see potential for a successful suburban shopping and commercial precinct.
Strengthening its foothold in the Western Part of Singapore
More importantly, it is in the vicinity of its existing malls - IMM and JCube. With this acquisition, the group is expected to have about 1msf of retail space and 2,200 car park spaces in Jurong. Together with Lot One Shopping Mall, Bukit Panjang Plaza and the upcoming Star Vista (Buona Vista development), the group will deepen their foothold in the Western Part of Singapore.
High footfalls expected
The mall, located next to Jurong East MRT station (an interchange with two major train lines) and Jurong East Bus Interchange, will have 5 access points. We expect the shopper traffic to be high as level 1 of the mall will be linked directly to the new air-conditioned Jurong East bus Interchange, while both Level 1 and Level 2 will be linked to the Jurong East MRT Station. It is estimated that the Jurong MRT and Bus Interchange throughput commuters is about 1.3m and 0.5m/mth. In addition, the two link bridges, which will connect the new complex to the upcoming Ng Teng Fong Hospital and Lend Lease's mall, will create a larger "integrated development", thus enlarging the catchment area.
Complement not compete
The plans unveiled by CMA and CMT have further reaffirmed our view on management’s retail asset management capabilities. The strategy to offer a slew of niche shopping experiences in the 3 malls would create a complementary environment and provide operational synergies in the area. We understand that Lend Lease has secured several large anchor tenants, which include a hypermarket, cinema and food court facilities for their adjoining development. Hence, CMA/CMT intends to focus on securing speciality tenants which will make up 70% of the tenant mix with mini-anchors tenants taking up the remaining 30%. This will enable them to generate a higher average rental rate and boost returns from this develeopment.
Creating certainties in the tenant mix for the other malls
In addition, securing the new mall will give the group more certainties in planning the tenant mix for JCube and IMM and the upcoming Lend Lease's mall, at the same time lower competition. The group intends to position the new mall as a family and lifestyle mall, while IMM Building with Giant Hypermarket and plans to expand the 13 outlet stores to 30 as a value-focussed mall. JCube with its Olympic-size ice skating rink and extended operating hours will be the entertainment complex. We believe that the "3-in-1" mall will create synergy in terms of operations and leasing, resulting in cost savings in the longer term.
Office population adds to catchment pool According to URA 1Q/2011 data, Jurong East and West planning area collectively houses about 1msf of private and public office space at present but is still 35% lower than the office stock in the Tampines planning area. Furthermore, we believe that most of the office buildings are much older or have been taken up by public agencies. Hence, there is a need for more quality office space in Jurong. Occupancy rate for Jurong West and East in 1Q11 stands at 91% and 93% respectively, higher than the islandwide average of 88%. The Ministry of National Development had announced earlier that it has taken up 315,382 sf of office space at Lend Lease's building. With more Statutory Boards and MNCs looking at decentralize locations, we believe that the office component of the Jurong Gateway site can help to fill the gap.
Valuation and recommendation
We maintain our Buy calls for CMA, Capitaland and CMT as we see this deal as being accretive to the companies’ valuations and represent a deployment of balance sheet capacity into higher yielding opportunities.
In terms of impact, we expect this development to add 1ct to CMA’s RNAV to $2.29 and lift TP to $2.51. Given the group large balance sheet capacity and a net cash position of $250m as at end 1Q11, the group is well-placed to utilize its strong balance sheet to fund its share of $750m of development cost. From CMT’s perspective, this development exercise is likely to be RNAV accretive but near term earnings may be diluted by 0.5-3% due to the increased interest expense during the development period. Post 2014, DPU is expected to be boosted by 3% with new contributions from this project. Gearing would rise to c41% with the addition of its share of $500m development cost.
Our valuation for Capitaland remains unchanged after accounting for this development given the group small 20% stake. Our TP remains at $4.61, based on a 15% discount to RNAV of $5.43.
UOB (CIMB)
UNDERPERFORM Maintained
S$19.38 @02/06/11
Target: S$20.38
Indonesian growth strategy
Visit to UOB Indonesia. We visited UOB’s Indonesian operations earlier in the week and came away with the impression that UOB is ready to be more aggressive after spending the last two years setting the foundation right. UOB is ready to focus on certain market segments and push for above-industry growth. UOB Indonesia’s targets are: 1) mid- and high-end consumers; 2) business banking or mini-SME banking; 3) fee income from commercial banking; and 4) leveraging its regional franchise to break into corporate banking. Given a limited size, we believe this is a sensible approach. But with Indonesia only accounting for 5% of group profits, managing margin pressures would be the bigger challenge for UOB for now and remains the basis for our Underperform rating as well as expected de-rating catalysts. Risks to our negative view are further evidence that efforts to derive feebased income bear fruit. Our target price of S$20.38, based on 1.5x CY11 P/BV (GGM-based, ROE 11.1% COE 8.9% growth 4.5%) is unchanged.
• Ready to grow in identified segments. UOB Indonesia has a 30% CAGR target for its earnings for 2011-15. In our opinion, in an environment where loan growth is 20-25% and margins are contracting, achieving this would require sustained market-share gains and a successful push into the fee business. That is possible but would demand various initiatives.
Ready to grow in identified segments. We visited UOB’s Indonesian operations earlier in the week. We came away with the impression that UOB had spent the last two years setting the foundation right and a refreshed management team is ready to focus on certain market segments and push for above-industry growth. UOB Indonesia’s targets are: 1) mid- and high-end consumers; 2) business banking or miniSME banking; 3) fee income from commercial banking; and 4) leveraging its regional franchise to break into the corporate banking market. Its vision is to be a premier bank in Indonesia, with a 30% earnings CAGR target for 2011-15. Negatives working against this are: 1) Indonesia currently accounts for only 5% of group pretax profits, thus successes here might not be meaningful for the group; and 2) margin pressures in the past year have not gone away and there remain near-term headwinds.
Background of UOB Indonesia. UOB operates in Indonesia mainly through PT Bank Buana. UOB started by acquiring a 23% stake in PT Bank Buana in 2004, eventually increasing its ownership to almost 100% in 2008, delisting Bank Buana and merging it with UOB Indonesia operations. The entity is known as UOB Indonesia today. Bank Buana was founded by eight shareholders and was mainly a small SME bank. It was a conservative outfit that went through the Asian crisis unscathed. UOB Group spent the last 2-3 years re-staffing the bank and integrating technology platforms and porting over the best practises and products from Singapore. Today, UOBI is headed by Mr. Armand Bachtiar Arief (President Director since 2007). Mr. Arief was previously part of the management team of PT Bank Internasional Indonesia. UOB has Rp38.3tr assets, gross loans of Rp27.45tr and deposits of Rp28.26tr. By assets, it is ranked the 16th largest in Indonesia (OCBC NISP 14th; DBS 19th) but by profits, it is ranked 12th(OCBC NISP 18th; DBS 20th). Market share is sub-2%.
Growing in commercial banking... The four segments under business lending are: 1) corporate banking; 2) commercial banking; 3) business banking; and 4) microbanking, in order of the size of clients’ businesses. UOB is not interested in microbanking as it is wary of the credit risks involved. Business banking was originally Bank Buana’s bread-and-butter. UOB still sees this as its main growth platform, though expansion in other segments has brought down business banking’s share of the loan portfolio to 31%. Lending spreads in business banking are attractive, credit risks are more manageable and there is still a large addressable market. This is where it hopes to concentrate its efforts. In commercial banking and corporate banking, margins are harder to eke out but banking relationships should provide opportunities to generate fee income in compensation. In these segments, the bigger local banks and foreign bulge-bracket big boys are formidable competitors. In commercial banking, UOB’s smaller branch network will put it at a disadvantage when it competes on pricing, hence the logical strategy of focusing on service and transaction convenience. In corporate banking, it is avoiding the mega-deal space and targets second-tier corporate-banking deals to start banking relationships with clients. Across the spectrum, competition is rife. Management guides that lending spreads have shrunk by about 100bp in the last 12 months.
… and in consumer banking. The consumer-banking business was non-existent at PT Bank Buana and to us, the three changes in recent years have been: 1) UOB is porting over its successful credit-card business in Singapore; 2) UOB is trying to start privilege banking to target mid- to high-end consumers; and 3) local management has convinced HQ of the merits of getting into the Indonesian mortgage market and UOB Indonesia will now offer mortgages. Our impression of the Indonesian mortgage market is that banks take on a lot of risk with property-developer customers. However, barring a macro shock like the Asian crisis, credit risks should be manageable as developers aim to protect their reputations and are unlikely to default. Like UOB’s strategy in Malaysia, credit risk management seems to hinge largely on due diligence in choosing property-developer partners and choosing choice development sites for financing. The segments that UOB is not interested in are motorcycle financing and mass-market credit cards. Its broad strategy in consumer banking is to snuggle into a niche space between a local bank and a foreign bank. UOB wants to leverage its 213 branches/sub-branches fully, but is conscious of branch productivity. It will not aim to have widespread branches to compete with the likes of BCA and BRI.
Synergies with UOB Group. UOB Indonesia has the largest branch network in the UOB family of subsidiaries. This enables the UOB Group to access the huge Indonesian market. Synergies for the group could include: 1) harnessing the group’s merchant offerings in Singapore and expanding the credit-card business in Indonesia; 2) harnessing more sophisticated products in Singapore and selling them to affluent clients in Indonesia; and 3) harnessing the branch network in the region and using it to make cross-border corporate loans and land DCM/ECM deals.
Valuation and recommendation
Maintain Underperform and target price of S$20.38, based on 1.5x CY11 P/BV (GGM-based, ROE 11.1% COE 8.9% growth 4.5%). Management has been extolling the virtues of a large ASEAN network and our visit to UOB Indonesia convinces us that it has been using its time to understand the Indonesian market and make the right staffing decisions. Management now seems more prepared to accelerate growth in Indonesia, with a 30% CAGR target for earnings. ROEs of 14.5% seem inferior to our forecasts of 21%-25% for the big banks in Indonesia though the lower profitability appears to be both a function of UOB Indonesia’s selective approach (in order to avoid credit problems in the future) and its inability to compete on funding costs or partake in the high-margin micro-lending segments. We think this is a sensible approach.
In our opinion, a 30% growth target in an environment where loan growth is 20-25% and margins are contracting would require sustained market-share gains and/or a successful push in the fee business from cross-selling and nurturing the high-end consumer segment. That is possible but whether success here would alter the investment case drastically for UOB is another thing. At 5% of group profits, Indonesia can help eventually but meanwhile, managing margin pressures remains the group’s biggest challenge. This remains the basis for our Underperform rating and de-rating catalysts expected. Risks to our negative view are further evidence that efforts to derive fee-based income bear fruit.
S$19.38 @02/06/11
Target: S$20.38
Indonesian growth strategy
Visit to UOB Indonesia. We visited UOB’s Indonesian operations earlier in the week and came away with the impression that UOB is ready to be more aggressive after spending the last two years setting the foundation right. UOB is ready to focus on certain market segments and push for above-industry growth. UOB Indonesia’s targets are: 1) mid- and high-end consumers; 2) business banking or mini-SME banking; 3) fee income from commercial banking; and 4) leveraging its regional franchise to break into corporate banking. Given a limited size, we believe this is a sensible approach. But with Indonesia only accounting for 5% of group profits, managing margin pressures would be the bigger challenge for UOB for now and remains the basis for our Underperform rating as well as expected de-rating catalysts. Risks to our negative view are further evidence that efforts to derive feebased income bear fruit. Our target price of S$20.38, based on 1.5x CY11 P/BV (GGM-based, ROE 11.1% COE 8.9% growth 4.5%) is unchanged.
• Ready to grow in identified segments. UOB Indonesia has a 30% CAGR target for its earnings for 2011-15. In our opinion, in an environment where loan growth is 20-25% and margins are contracting, achieving this would require sustained market-share gains and a successful push into the fee business. That is possible but would demand various initiatives.
Ready to grow in identified segments. We visited UOB’s Indonesian operations earlier in the week. We came away with the impression that UOB had spent the last two years setting the foundation right and a refreshed management team is ready to focus on certain market segments and push for above-industry growth. UOB Indonesia’s targets are: 1) mid- and high-end consumers; 2) business banking or miniSME banking; 3) fee income from commercial banking; and 4) leveraging its regional franchise to break into the corporate banking market. Its vision is to be a premier bank in Indonesia, with a 30% earnings CAGR target for 2011-15. Negatives working against this are: 1) Indonesia currently accounts for only 5% of group pretax profits, thus successes here might not be meaningful for the group; and 2) margin pressures in the past year have not gone away and there remain near-term headwinds.
Background of UOB Indonesia. UOB operates in Indonesia mainly through PT Bank Buana. UOB started by acquiring a 23% stake in PT Bank Buana in 2004, eventually increasing its ownership to almost 100% in 2008, delisting Bank Buana and merging it with UOB Indonesia operations. The entity is known as UOB Indonesia today. Bank Buana was founded by eight shareholders and was mainly a small SME bank. It was a conservative outfit that went through the Asian crisis unscathed. UOB Group spent the last 2-3 years re-staffing the bank and integrating technology platforms and porting over the best practises and products from Singapore. Today, UOBI is headed by Mr. Armand Bachtiar Arief (President Director since 2007). Mr. Arief was previously part of the management team of PT Bank Internasional Indonesia. UOB has Rp38.3tr assets, gross loans of Rp27.45tr and deposits of Rp28.26tr. By assets, it is ranked the 16th largest in Indonesia (OCBC NISP 14th; DBS 19th) but by profits, it is ranked 12th(OCBC NISP 18th; DBS 20th). Market share is sub-2%.
Growing in commercial banking... The four segments under business lending are: 1) corporate banking; 2) commercial banking; 3) business banking; and 4) microbanking, in order of the size of clients’ businesses. UOB is not interested in microbanking as it is wary of the credit risks involved. Business banking was originally Bank Buana’s bread-and-butter. UOB still sees this as its main growth platform, though expansion in other segments has brought down business banking’s share of the loan portfolio to 31%. Lending spreads in business banking are attractive, credit risks are more manageable and there is still a large addressable market. This is where it hopes to concentrate its efforts. In commercial banking and corporate banking, margins are harder to eke out but banking relationships should provide opportunities to generate fee income in compensation. In these segments, the bigger local banks and foreign bulge-bracket big boys are formidable competitors. In commercial banking, UOB’s smaller branch network will put it at a disadvantage when it competes on pricing, hence the logical strategy of focusing on service and transaction convenience. In corporate banking, it is avoiding the mega-deal space and targets second-tier corporate-banking deals to start banking relationships with clients. Across the spectrum, competition is rife. Management guides that lending spreads have shrunk by about 100bp in the last 12 months.
… and in consumer banking. The consumer-banking business was non-existent at PT Bank Buana and to us, the three changes in recent years have been: 1) UOB is porting over its successful credit-card business in Singapore; 2) UOB is trying to start privilege banking to target mid- to high-end consumers; and 3) local management has convinced HQ of the merits of getting into the Indonesian mortgage market and UOB Indonesia will now offer mortgages. Our impression of the Indonesian mortgage market is that banks take on a lot of risk with property-developer customers. However, barring a macro shock like the Asian crisis, credit risks should be manageable as developers aim to protect their reputations and are unlikely to default. Like UOB’s strategy in Malaysia, credit risk management seems to hinge largely on due diligence in choosing property-developer partners and choosing choice development sites for financing. The segments that UOB is not interested in are motorcycle financing and mass-market credit cards. Its broad strategy in consumer banking is to snuggle into a niche space between a local bank and a foreign bank. UOB wants to leverage its 213 branches/sub-branches fully, but is conscious of branch productivity. It will not aim to have widespread branches to compete with the likes of BCA and BRI.
Synergies with UOB Group. UOB Indonesia has the largest branch network in the UOB family of subsidiaries. This enables the UOB Group to access the huge Indonesian market. Synergies for the group could include: 1) harnessing the group’s merchant offerings in Singapore and expanding the credit-card business in Indonesia; 2) harnessing more sophisticated products in Singapore and selling them to affluent clients in Indonesia; and 3) harnessing the branch network in the region and using it to make cross-border corporate loans and land DCM/ECM deals.
Valuation and recommendation
Maintain Underperform and target price of S$20.38, based on 1.5x CY11 P/BV (GGM-based, ROE 11.1% COE 8.9% growth 4.5%). Management has been extolling the virtues of a large ASEAN network and our visit to UOB Indonesia convinces us that it has been using its time to understand the Indonesian market and make the right staffing decisions. Management now seems more prepared to accelerate growth in Indonesia, with a 30% CAGR target for earnings. ROEs of 14.5% seem inferior to our forecasts of 21%-25% for the big banks in Indonesia though the lower profitability appears to be both a function of UOB Indonesia’s selective approach (in order to avoid credit problems in the future) and its inability to compete on funding costs or partake in the high-margin micro-lending segments. We think this is a sensible approach.
In our opinion, a 30% growth target in an environment where loan growth is 20-25% and margins are contracting would require sustained market-share gains and/or a successful push in the fee business from cross-selling and nurturing the high-end consumer segment. That is possible but whether success here would alter the investment case drastically for UOB is another thing. At 5% of group profits, Indonesia can help eventually but meanwhile, managing margin pressures remains the group’s biggest challenge. This remains the basis for our Underperform rating and de-rating catalysts expected. Risks to our negative view are further evidence that efforts to derive fee-based income bear fruit.
Wilmar International (DBSVikcers)
BUY; S$5.33; Price Target : 12-Month S$6.25
Surogen proposes to buy sugar mill assets in Australia
Wilmar announced that its Australian based sugar subsidiary, Sucrogen has entered into an agreement with Proserpine Co-operative Sugar Milling Association Limited (PCSMA) to purchase the business assets of PCSMA (ie the sugar mill), on a debt free and cash free basis for A$115m.
PSCMA is a sugar mill co-operative and is Australia's 5th largest raw sugar mill with crushing capacity of 2m MT of cane. Post the acquisition of PSCMA's sugar assets (ie sugar mill), Sucrogen's milling capacity will increase to 17m MT with raw sugar production rising by about 10% to 2.2m MT.
The acquisition of PSCMA's assets is subject to approval by PCSMA members (meeting expected to be held in late July 2011) and approval by the Australian Competition and Consumer Commission (ACCC).
A key success factor in sugar is economies of scale. Consequently we are positive on the deal as it enhances Sucrogen's operating capabilities. Furthermore, the proposed deal enhances Sucrogen’s position in the Mackay central region (Queensland, Australia) where there is significant potential for an expansion in cane growing.
We are not revising our numbers at this point in time as the deal is still subject to agreement by Proserpine members and ACCC approval. We note that Sucrogen produces almost half of Australia's total raw sugar supply which may be a point of contention for the competition authorities in Australia.
As this transaction highlights the growth platform that Wilmar is developing in sugar, we reiterate our Buy call on the counter.
Proserpine Co-operative Sugar Milling Association Limited
Proserpine Co-operative Sugar Milling Association Limited (PSCMA) is a sugar mill co-operative, wholly owned by 214 sugarcane suppliers and is Australia's 5th largest raw sugar mill with crushing capacity of 2m MT of cane. The mill currently crushes 1.7m of cane producing 250k MT of sugar and other by products such as molasses and electricity.
According to PSCMA’s website all of the raw sugar produced by the mill each year is exported. Marketing of the sugar is undertaken by Queensland Sugar Limited (owned by Sucrogen) who is also responsible for pricing of a significant quantity of the sugar.
We understand there is an opportunity to process the raw sugar from the PSCMA mill in Sucrogen’s refineries extracting more value out of the sugar.
Based on the FY09/10 annual report (year ended 28 February 2010), PSCMA has been affected over the last few years by a decline in the area designated for cane growing and adverse weather conditions.
Sucrogen overview
Sucrogen was acquired by Wilmar in 2010 for an enterprise value of A$1.75bn. The business is Australia’s largest raw sugar producer and is the second largest exporter of raw sugar globally through Queensland Sugar Limited. Sucrogen currently owns and operates seven sugar mills in North and Central Queensland, Australia, producing almost half of Australia’s total raw sugar supply (c. 2m MT). Crushing capacity stands at 15m MT with refining capacity of 970k MT.
Surogen proposes to buy sugar mill assets in Australia
Wilmar announced that its Australian based sugar subsidiary, Sucrogen has entered into an agreement with Proserpine Co-operative Sugar Milling Association Limited (PCSMA) to purchase the business assets of PCSMA (ie the sugar mill), on a debt free and cash free basis for A$115m.
PSCMA is a sugar mill co-operative and is Australia's 5th largest raw sugar mill with crushing capacity of 2m MT of cane. Post the acquisition of PSCMA's sugar assets (ie sugar mill), Sucrogen's milling capacity will increase to 17m MT with raw sugar production rising by about 10% to 2.2m MT.
The acquisition of PSCMA's assets is subject to approval by PCSMA members (meeting expected to be held in late July 2011) and approval by the Australian Competition and Consumer Commission (ACCC).
A key success factor in sugar is economies of scale. Consequently we are positive on the deal as it enhances Sucrogen's operating capabilities. Furthermore, the proposed deal enhances Sucrogen’s position in the Mackay central region (Queensland, Australia) where there is significant potential for an expansion in cane growing.
We are not revising our numbers at this point in time as the deal is still subject to agreement by Proserpine members and ACCC approval. We note that Sucrogen produces almost half of Australia's total raw sugar supply which may be a point of contention for the competition authorities in Australia.
As this transaction highlights the growth platform that Wilmar is developing in sugar, we reiterate our Buy call on the counter.
Proserpine Co-operative Sugar Milling Association Limited
Proserpine Co-operative Sugar Milling Association Limited (PSCMA) is a sugar mill co-operative, wholly owned by 214 sugarcane suppliers and is Australia's 5th largest raw sugar mill with crushing capacity of 2m MT of cane. The mill currently crushes 1.7m of cane producing 250k MT of sugar and other by products such as molasses and electricity.
According to PSCMA’s website all of the raw sugar produced by the mill each year is exported. Marketing of the sugar is undertaken by Queensland Sugar Limited (owned by Sucrogen) who is also responsible for pricing of a significant quantity of the sugar.
We understand there is an opportunity to process the raw sugar from the PSCMA mill in Sucrogen’s refineries extracting more value out of the sugar.
Based on the FY09/10 annual report (year ended 28 February 2010), PSCMA has been affected over the last few years by a decline in the area designated for cane growing and adverse weather conditions.
Sucrogen overview
Sucrogen was acquired by Wilmar in 2010 for an enterprise value of A$1.75bn. The business is Australia’s largest raw sugar producer and is the second largest exporter of raw sugar globally through Queensland Sugar Limited. Sucrogen currently owns and operates seven sugar mills in North and Central Queensland, Australia, producing almost half of Australia’s total raw sugar supply (c. 2m MT). Crushing capacity stands at 15m MT with refining capacity of 970k MT.
CWT (DMG)
BUY
Price S$1.26
Previous S$1.45
Target S$1.40
Sale and leaseback of warehouse in China
CWT sold its 13,547sqm Jinshan chemical warehouse in Shanghai to Cache Logistics Trust for RMB71m and a gain of S$6.9m. We have factored the gains into our earnings and lowered our NVOCC and Logistics segments’ contribution estimates. Consequently, our FY11 and FY12 earnings forecasts are reduced by 3.4% and 12.9% respectively. We expect start-up costs from its expansion into the commodity logistics and commodity futures brokerage business to remain a drag on earnings for the next few quarters but remain positive over CWT’s long term prospects with its continued business development initiatives. Maintain BUY with a lower TP of S$1.40, based on 20.8x FY11 earnings (a 20% discount to global peers’ 7-year historical average).
Selling China warehouse. CWT is selling its 13,547 sqm (gfa) chemical warehouse facility in Shanghai for RMB71m to Cache Logistics Trust. The facility is located in the Jinshan District, within one of the largest petrochemical bases in Asia, the Shanghai Chemical Industrial Park. CWT will recognise a one–off gain of S$5.2m and a deferred gain of S$1.7m from this transaction.
Lowering earnings but still positive outlook. We have lowered our FY11 EBIT contribution from the NVOCC segment by 17.8% to S$11.1m and the Logistics segment’s earnings (pre tax and interest) by 14.3% to S$20.3m, on the back of previously bullish revenue projections and the lower margins from the coal supply chain management business. In addition, our FY12’s NVOCC EBIT contribution was cut by 22.4% and our Logistics earnings are trimmed by 7.1%. Consequently, our FY11 and FY12 earnings have been reduced by 3.4% and 12.9% and estimated to come in at S$39.8m and S$41.3m respectively. However, we remain positive on CWT‘s growth prospects in the longer term with the various new business initiatives the company has been rolling out, such as building a new 725k sqf CWT Cold Hub 2 and developing a S$10m transport hub (Transhub) that provides a multi-modal hub for loaded containers and facilities for chassis parking.
Price S$1.26
Previous S$1.45
Target S$1.40
Sale and leaseback of warehouse in China
CWT sold its 13,547sqm Jinshan chemical warehouse in Shanghai to Cache Logistics Trust for RMB71m and a gain of S$6.9m. We have factored the gains into our earnings and lowered our NVOCC and Logistics segments’ contribution estimates. Consequently, our FY11 and FY12 earnings forecasts are reduced by 3.4% and 12.9% respectively. We expect start-up costs from its expansion into the commodity logistics and commodity futures brokerage business to remain a drag on earnings for the next few quarters but remain positive over CWT’s long term prospects with its continued business development initiatives. Maintain BUY with a lower TP of S$1.40, based on 20.8x FY11 earnings (a 20% discount to global peers’ 7-year historical average).
Selling China warehouse. CWT is selling its 13,547 sqm (gfa) chemical warehouse facility in Shanghai for RMB71m to Cache Logistics Trust. The facility is located in the Jinshan District, within one of the largest petrochemical bases in Asia, the Shanghai Chemical Industrial Park. CWT will recognise a one–off gain of S$5.2m and a deferred gain of S$1.7m from this transaction.
Lowering earnings but still positive outlook. We have lowered our FY11 EBIT contribution from the NVOCC segment by 17.8% to S$11.1m and the Logistics segment’s earnings (pre tax and interest) by 14.3% to S$20.3m, on the back of previously bullish revenue projections and the lower margins from the coal supply chain management business. In addition, our FY12’s NVOCC EBIT contribution was cut by 22.4% and our Logistics earnings are trimmed by 7.1%. Consequently, our FY11 and FY12 earnings have been reduced by 3.4% and 12.9% and estimated to come in at S$39.8m and S$41.3m respectively. However, we remain positive on CWT‘s growth prospects in the longer term with the various new business initiatives the company has been rolling out, such as building a new 725k sqf CWT Cold Hub 2 and developing a S$10m transport hub (Transhub) that provides a multi-modal hub for loaded containers and facilities for chassis parking.
Cache Logistics Trust (OCBC)
Maiden foray into China
Maiden foray into China. Cache Logistics Trust (CACHE) announced on 1 Jun that it is acquiring a chemical warehouse facility in Shanghai (Jinshan Chemical Warehouse) from its sponsor, CWT Limited, via an acquisition and leaseback arrangement for a purchase consideration of S$13.5m. This asset falls under the right of first refusal (ROFR) granted to CACHE at the time of IPO in Apr 2010. CWT will lease back the facility for a period of three years with an option for a further three years. The lease is triple-net and rental will commence at RMB 1.30 psm/day for the first year and increased by 2% per annum thereafter. Any extension of the lease will be on the same lease terms, save for rental and associated increase which will be at fair market rates. This acquisition marks CACHE's first acquisition outside Singapore into China.
About the property. The property is located in Jinshan District within the successful Shanghai Chemical Industrial Park (SCIP), one of the largest petrochemical bases in Asia. SCIP is well-positioned and commands the interest of both local and multi-national end-users with an overall occupancy rate of around 90%. The property was developed by CWT and completed in 2007. The premises comprised of four single-storey chemical warehouse buildings, ancillary office space, loading bays and car parks. The facility is sited on a land area of 33,506 sqm, with a built-up gross floor area of about 13,547 sqm. CACHE intends to finance the acquisition by debt. Upon completion of the transaction, expected to be within Jun 2011, CACHE's gearing will rise from 27.9% to 29.2%.
Yield-accretive acquisition. The NPI yield of the new property is 8.6%. This is higher than CACHE's existing portfolio yield of 7.6%, making the acquisition yield-accretive. The average of the two valuations provided by CB Richard Ellis and Knight Frank Petty, who acted on behalf of the manager and trustee respectively, is approximately S$14.6m, higher than the purchase consideration. This acquisition will enable CACHE to capitalise on the economic growth in China and in particular the resilient chemical and commodity logistics businesses. Concurrently, by diversifying into a different market, CACHE is expected to benefit from risk diversification from the property and the economic cycles where CACHE's portfolio is located. CACHE stated that it is actively also looking to expand to other tier-one Chinese cities such as Tianjin, Beijing and Chengdu. We look forward to more property additions not only to diversify CACHE's tenant base, but also to reduce its concentration risk on a single asset (CWT Hub which still account for 46.3% of FY11 gross revenue). Factoring in contributions from the new acquisition, our fair value increased marginally from S$1.05 to S$1.06. Reiterate BUY. (Ong Kian Lin)
Maiden foray into China. Cache Logistics Trust (CACHE) announced on 1 Jun that it is acquiring a chemical warehouse facility in Shanghai (Jinshan Chemical Warehouse) from its sponsor, CWT Limited, via an acquisition and leaseback arrangement for a purchase consideration of S$13.5m. This asset falls under the right of first refusal (ROFR) granted to CACHE at the time of IPO in Apr 2010. CWT will lease back the facility for a period of three years with an option for a further three years. The lease is triple-net and rental will commence at RMB 1.30 psm/day for the first year and increased by 2% per annum thereafter. Any extension of the lease will be on the same lease terms, save for rental and associated increase which will be at fair market rates. This acquisition marks CACHE's first acquisition outside Singapore into China.
About the property. The property is located in Jinshan District within the successful Shanghai Chemical Industrial Park (SCIP), one of the largest petrochemical bases in Asia. SCIP is well-positioned and commands the interest of both local and multi-national end-users with an overall occupancy rate of around 90%. The property was developed by CWT and completed in 2007. The premises comprised of four single-storey chemical warehouse buildings, ancillary office space, loading bays and car parks. The facility is sited on a land area of 33,506 sqm, with a built-up gross floor area of about 13,547 sqm. CACHE intends to finance the acquisition by debt. Upon completion of the transaction, expected to be within Jun 2011, CACHE's gearing will rise from 27.9% to 29.2%.
Yield-accretive acquisition. The NPI yield of the new property is 8.6%. This is higher than CACHE's existing portfolio yield of 7.6%, making the acquisition yield-accretive. The average of the two valuations provided by CB Richard Ellis and Knight Frank Petty, who acted on behalf of the manager and trustee respectively, is approximately S$14.6m, higher than the purchase consideration. This acquisition will enable CACHE to capitalise on the economic growth in China and in particular the resilient chemical and commodity logistics businesses. Concurrently, by diversifying into a different market, CACHE is expected to benefit from risk diversification from the property and the economic cycles where CACHE's portfolio is located. CACHE stated that it is actively also looking to expand to other tier-one Chinese cities such as Tianjin, Beijing and Chengdu. We look forward to more property additions not only to diversify CACHE's tenant base, but also to reduce its concentration risk on a single asset (CWT Hub which still account for 46.3% of FY11 gross revenue). Factoring in contributions from the new acquisition, our fair value increased marginally from S$1.05 to S$1.06. Reiterate BUY. (Ong Kian Lin)
KSH Holdings (OCBC)
Value to emerge but short term headwinds prevail
Construction is core, recent expansion into property development. Listed on SGX in 2007, KSH Holdings is a company involved in construction, property development and management. Its core construction segment is focused in Singapore, where KSH acts as the main contractor for projects in both the private and public sectors. As of 31 Mar 2011, its pipeline consisted of seven projects worth S$406m that would underpin revenues to 2013 with S$146m already recognized. In recent years, KSH also diversified into property development and management in Singapore and China. KSH typically works with JV partners to leverage off its partners' expertise and manages its capital risk. Its current development portfolio consisted of six projects in Singapore and one in China.
Value kicker in development business. There are three main components of KSH's value. First, its investment property in Tianjing - Tianxing Riverfront Square. Secondly, its property development business. Finally, its construction business. We use a sum of parts methodology to determine KSH's value. Assuming 80% occupancy and a 7% cap rate, we value KSH's stake in Tianxing Riverfront at S$48m. For the development segment, we add a S$53m NPV surplus to assets on book. Final ly, we value the construction segment at 3 times FY11 earnings. We then apply a 60% discount for liquidity and development segment specific risks and arrive at a 31 cents share price value.
Market overly punishing share price. From KSH's price history, we observe price movements (against the STI) in excess of 3 standard deviations on dates when sequentially higher earnings were announced. This is despite the significant forward visibility in KSH's construction order book. In addition, the share price did not react to several notable land acquisitions, particularly Farrer Park site from which an estimated NPV of S$43m may be derived. In our view, these data-points imply a lack of market attention or an overlypunishing discount to its development business.
HOLD due to flagging drivers. Over the longer term, we believe the price would ref lect the value of i ts development segment as earnings get manifested into hard cash in the balance sheet. In the next 12 months, however, we see headwinds from a slow-down in private construction demand and uncertainty in the private residential sector. When these clouds clear and more clarity is available for project sales, especially for Cityscape@Farrer Park, we could see a significant re-rating of the share price. We initiate coverage on KSH with a HOLD rating and a fair value estimate of 31 cents.(Eli Lee)
Construction is core, recent expansion into property development. Listed on SGX in 2007, KSH Holdings is a company involved in construction, property development and management. Its core construction segment is focused in Singapore, where KSH acts as the main contractor for projects in both the private and public sectors. As of 31 Mar 2011, its pipeline consisted of seven projects worth S$406m that would underpin revenues to 2013 with S$146m already recognized. In recent years, KSH also diversified into property development and management in Singapore and China. KSH typically works with JV partners to leverage off its partners' expertise and manages its capital risk. Its current development portfolio consisted of six projects in Singapore and one in China.
Value kicker in development business. There are three main components of KSH's value. First, its investment property in Tianjing - Tianxing Riverfront Square. Secondly, its property development business. Finally, its construction business. We use a sum of parts methodology to determine KSH's value. Assuming 80% occupancy and a 7% cap rate, we value KSH's stake in Tianxing Riverfront at S$48m. For the development segment, we add a S$53m NPV surplus to assets on book. Final ly, we value the construction segment at 3 times FY11 earnings. We then apply a 60% discount for liquidity and development segment specific risks and arrive at a 31 cents share price value.
Market overly punishing share price. From KSH's price history, we observe price movements (against the STI) in excess of 3 standard deviations on dates when sequentially higher earnings were announced. This is despite the significant forward visibility in KSH's construction order book. In addition, the share price did not react to several notable land acquisitions, particularly Farrer Park site from which an estimated NPV of S$43m may be derived. In our view, these data-points imply a lack of market attention or an overlypunishing discount to its development business.
HOLD due to flagging drivers. Over the longer term, we believe the price would ref lect the value of i ts development segment as earnings get manifested into hard cash in the balance sheet. In the next 12 months, however, we see headwinds from a slow-down in private construction demand and uncertainty in the private residential sector. When these clouds clear and more clarity is available for project sales, especially for Cityscape@Farrer Park, we could see a significant re-rating of the share price. We initiate coverage on KSH with a HOLD rating and a fair value estimate of 31 cents.(Eli Lee)
Yamada Green Resources (KimEng)
Business overview: Yamada Green is a major supplier of edible fungus such as shiitake mushrooms and black fungus. It operates one of the largest shiitake mushroom cultivation bases of approximately 4,292 mu in Fujian Province, China. The group also supplies its processed food products to overseas markets.
Recent development: For 1Q11, Yamada posted a net profit of RMB63.1m, up 17.6% YoY on the back of 31.4% growth in revenue to RMB164.0m. The improved turnover was mainly due to higher sales of shiitake mushrooms as well as maiden contribution from its newly-leased black fungus cultivation land. Gross margin however, shrank by 4.3ppt to 44.9% in 1Q11 as a result of costlier raw materials for its processed food products.
Our view:
ASP growth should continue. In 1Q11, the ASP for fresh shiitake mushrooms rose by a further 6% from RMB6.6/kg to RMB7.0/kg. We expect ASP growth to continue in tandem with the rising disposable income of Chinese consumers and their greater emphasis on green and healthy products.
High-value product cultivated. Yamada has introduced black fungus in a bid to reduce its over-reliance on one product. In February this year, it signed a lease agreement for an existing cultivation plot, measuring 86 mu, with an annual production capacity of 2,800 tonnes of black fungus. This is a higher-margin food product which should contribute positively to Yamada’s bottomline.
Expansion of cultivation base. In April this year, Yamada secured its single largest block of mushroom cultivation land of 1,678 mu. Despite the slight delay given the rising land costs, the new cultivation base is expected to be ready in time for the next harvest season between September this year and April next year. With this latest acquisition, Yamada’s total shiitake mushroom cultivation base is estimated to increase significantly by 64.2% to 4,292 mu.
Trading at a discount to peers. The stock currently trades at only 4x FY11 PER, based on Bloomberg estimates. This is a discount of more than 25% against its peers such as China Minzhong (6.5x forward PER) and Sino Grandness (4.5x PER).
Recent development: For 1Q11, Yamada posted a net profit of RMB63.1m, up 17.6% YoY on the back of 31.4% growth in revenue to RMB164.0m. The improved turnover was mainly due to higher sales of shiitake mushrooms as well as maiden contribution from its newly-leased black fungus cultivation land. Gross margin however, shrank by 4.3ppt to 44.9% in 1Q11 as a result of costlier raw materials for its processed food products.
Our view:
ASP growth should continue. In 1Q11, the ASP for fresh shiitake mushrooms rose by a further 6% from RMB6.6/kg to RMB7.0/kg. We expect ASP growth to continue in tandem with the rising disposable income of Chinese consumers and their greater emphasis on green and healthy products.
High-value product cultivated. Yamada has introduced black fungus in a bid to reduce its over-reliance on one product. In February this year, it signed a lease agreement for an existing cultivation plot, measuring 86 mu, with an annual production capacity of 2,800 tonnes of black fungus. This is a higher-margin food product which should contribute positively to Yamada’s bottomline.
Expansion of cultivation base. In April this year, Yamada secured its single largest block of mushroom cultivation land of 1,678 mu. Despite the slight delay given the rising land costs, the new cultivation base is expected to be ready in time for the next harvest season between September this year and April next year. With this latest acquisition, Yamada’s total shiitake mushroom cultivation base is estimated to increase significantly by 64.2% to 4,292 mu.
Trading at a discount to peers. The stock currently trades at only 4x FY11 PER, based on Bloomberg estimates. This is a discount of more than 25% against its peers such as China Minzhong (6.5x forward PER) and Sino Grandness (4.5x PER).
CapitaLand (KimEng)
Event:
A consortium comprising CapitaMalls Asia (CMA), CapitaMall Trust (CMT) and CapitaLand has secured a White Site at Boon Lay Way for $969m, or $1,012 psf ppr. CapitaLand will lend its expertise on the office component while CMA will lead the design for the retail portion. With this acquisition, the CapitaLand group of companies will have a strong foothold in Jurong Gateway, right in the commercial heart of the Jurong Lake District. Maintain BUY.
Our View:
The Jurong Gateway (JG) site will have a total GFA of 957,781 sq ft, 40% of which will be for office use and 60% for retail. The stakes held by CMA, CMT and CapitaLand are 50%, 30% and 20%, respectively. The total development cost is estimated to be around $1.5b.
At first glance, the bid appears aggressive, as it is nearly 55% higher than the psf price paid for the adjacent site in June last year. A closer analysis, however, shows the JG site to be superior in location and with fewer site constraints. The consortium is targeting retail rents of $16-18 psf pm and office rents of around $7-8 psf pm. This should translate to yield on cost of about 6% for both components.
With the acquisition, the CapitaLand group of companies will have its foothold strengthened, not just in the Jurong Lake District, but also in western Singapore. In addition, it will gain exposure to quality office space in Jurong, which will be sought after in the future when the district matures as a regional commercial hub.
Action & Recommendation:
While the targeted 6% yield on cost for the JG site is attractive, the actual impact on CapitaLand’s RNAV is minimal. The asset, when completed, is likely to be eventually monetised and sold to CMT and CCT. We have trimmed our target price to $4.14, pegged at par to RNAV after adjusting for the share prices of the listed subsidiaries. Maintain BUY.
A consortium comprising CapitaMalls Asia (CMA), CapitaMall Trust (CMT) and CapitaLand has secured a White Site at Boon Lay Way for $969m, or $1,012 psf ppr. CapitaLand will lend its expertise on the office component while CMA will lead the design for the retail portion. With this acquisition, the CapitaLand group of companies will have a strong foothold in Jurong Gateway, right in the commercial heart of the Jurong Lake District. Maintain BUY.
Our View:
The Jurong Gateway (JG) site will have a total GFA of 957,781 sq ft, 40% of which will be for office use and 60% for retail. The stakes held by CMA, CMT and CapitaLand are 50%, 30% and 20%, respectively. The total development cost is estimated to be around $1.5b.
At first glance, the bid appears aggressive, as it is nearly 55% higher than the psf price paid for the adjacent site in June last year. A closer analysis, however, shows the JG site to be superior in location and with fewer site constraints. The consortium is targeting retail rents of $16-18 psf pm and office rents of around $7-8 psf pm. This should translate to yield on cost of about 6% for both components.
With the acquisition, the CapitaLand group of companies will have its foothold strengthened, not just in the Jurong Lake District, but also in western Singapore. In addition, it will gain exposure to quality office space in Jurong, which will be sought after in the future when the district matures as a regional commercial hub.
Action & Recommendation:
While the targeted 6% yield on cost for the JG site is attractive, the actual impact on CapitaLand’s RNAV is minimal. The asset, when completed, is likely to be eventually monetised and sold to CMT and CCT. We have trimmed our target price to $4.14, pegged at par to RNAV after adjusting for the share prices of the listed subsidiaries. Maintain BUY.
UOB (DMG)
Promising growth prospects in Indonesia (BUY, S$19.40, TP S$22.00)
We visited management of UOB Indonesia (UOBI) in Jakarta, and came out optimistic on its growth prospects there. We believe UOB’s strategy to grow its overseas operations in Malaysia, Thailand and Indonesia is in the right direction. Maintain BUY on UOB with target price of S$22.00, pegged to 1.65x FY11 book. UOB remains our top pick within the banking sector.
Indonesia operations to grow faster than Singapore. UOBI aims to contribute pre-tax profit CAGR of 30% by 2015. This will be achieved via aggressive customer acquisition in the targeted customer segment of consumer, commercial and corporate.
UOBI to leverage on UOB expertise and name. Whilst Indonesia loans currently account for a small 3.6% of UOB global loans, management intends to grow the Indonesia operations more aggressively. UOBI will leverage on the UOB name and expertise to build its business. UOBI will avoid competing on interest rates, but attempt to offer better services to clients eg improving on channel delivery and speed of approval, etc.
Focusing on savings deposits to fund asset expansion. Strong 2010 loan expansion has led to the loan deposit ratio rising to 97% as of Dec 2010, versus Dec 2009’s 89%. With savings deposits accounting for 26% share of total deposits, UOBI plans to aggressively expand its savings deposits to fund its future asset expansion. There has been some initial success, with deposits rising 30% YoY as of Mar 2011.
Loan growth to offset effects of NIM squeeze. UOBI’s 4Q10 NIM of 6.05% is narrower than 3Q10’s 6.60%, and management pointed to further squeeze going forward, as competition intensifies. However, loan expansion will help to build UOBI’s net interest income. UOBI loan growth will also add to UOB’s global loan expansion.
We visited management of UOB Indonesia (UOBI) in Jakarta, and came out optimistic on its growth prospects there. We believe UOB’s strategy to grow its overseas operations in Malaysia, Thailand and Indonesia is in the right direction. Maintain BUY on UOB with target price of S$22.00, pegged to 1.65x FY11 book. UOB remains our top pick within the banking sector.
Indonesia operations to grow faster than Singapore. UOBI aims to contribute pre-tax profit CAGR of 30% by 2015. This will be achieved via aggressive customer acquisition in the targeted customer segment of consumer, commercial and corporate.
UOBI to leverage on UOB expertise and name. Whilst Indonesia loans currently account for a small 3.6% of UOB global loans, management intends to grow the Indonesia operations more aggressively. UOBI will leverage on the UOB name and expertise to build its business. UOBI will avoid competing on interest rates, but attempt to offer better services to clients eg improving on channel delivery and speed of approval, etc.
Focusing on savings deposits to fund asset expansion. Strong 2010 loan expansion has led to the loan deposit ratio rising to 97% as of Dec 2010, versus Dec 2009’s 89%. With savings deposits accounting for 26% share of total deposits, UOBI plans to aggressively expand its savings deposits to fund its future asset expansion. There has been some initial success, with deposits rising 30% YoY as of Mar 2011.
Loan growth to offset effects of NIM squeeze. UOBI’s 4Q10 NIM of 6.05% is narrower than 3Q10’s 6.60%, and management pointed to further squeeze going forward, as competition intensifies. However, loan expansion will help to build UOBI’s net interest income. UOBI loan growth will also add to UOB’s global loan expansion.
Tiger Airways (DMG)
Thai-Tiger still in the cards (NEUTRAL. S$1.33, TP S$1.40)
We recently had a conference call with Thai Airways over the fate of Thai Tiger. Thai Airway’s new budget carrier, Thai Wings is not meant to replace Thai Tiger but will target the middle market, and be similar to Singapore Airline’s Silkair. However the fate of the JV still remains in the hands of Thailand’s Ministry of Transportation and will be known after the Thai elections set for 3 July 2011. We maintain our neutral stance with a TP of S$1.40.
Thai Wings not to replace Thai-Tiger. Thai Airways’s new budget carrier, Thai Wings which is targeted to commence operations by April 2012 will not be in direct competition with Thai-Tiger. Instead, it will be targeting the middle market, in between the high end and lower end and be similar to SIA’s SilkAir. Our channel checks reveal that while Thai Airways has a 39% stake in budget carrier NokAir (which also services the middle market), Thai has been unhappy with its minority stake as it is unable to exert enough control over the airline’s strategy and operations. We also believe that Thai wishes to gain from Tiger’s expertise in running a low cost airline.
Details on Thai-Tiger. The future of Thai-Tiger is still pending the Ministry of Transport’s approval and will be known after the Thai elections which is due to be held on 3 July 2012. We were told that while Thai will hold the majority stake (51%) in the JV, all the branding of the planes will be under Tiger Airways and the fleet will come from the latter. It said that Tiger has committed ten A320s in the first year should the JV take-off. Tiger is expecting net nine new aircraft deliveries this FY12 so we should expect it to advance deliveries should the JV be approved. The first route to be taken by the JV would be Tiger’s current BKK-SIN route.
Huge upside if JV is approved. We believe the Thai market offers huge potential for Tiger should the Thai-Tiger JV be approved. At present, we understand that Thai Airways holds a 40% market share while Air Asia holds another 40%. While it appears that Thai has lost market share to Air Asia, we were told by management that absolute number of passengers carried has actually not dwindled but Air Asia has just managed to create a whole new niche demand. We believe that Thai-Tiger is well placed to be a formidable competitor to Thai Air Asia as it would be part of the national carrier’s arm. This would be appealing to the patriotic Thais who are potentially likely to favor supporting their own national carrier.
Valuations. We have chosen to be conservative with our estimates and assumed that the Thai-Tiger JV will not be approved. We maintain our earnings estimates for now and maintain our NEUTRAL stance on the stock with a TP of $1.40, pegged to 12x FY12F earnings.
We recently had a conference call with Thai Airways over the fate of Thai Tiger. Thai Airway’s new budget carrier, Thai Wings is not meant to replace Thai Tiger but will target the middle market, and be similar to Singapore Airline’s Silkair. However the fate of the JV still remains in the hands of Thailand’s Ministry of Transportation and will be known after the Thai elections set for 3 July 2011. We maintain our neutral stance with a TP of S$1.40.
Thai Wings not to replace Thai-Tiger. Thai Airways’s new budget carrier, Thai Wings which is targeted to commence operations by April 2012 will not be in direct competition with Thai-Tiger. Instead, it will be targeting the middle market, in between the high end and lower end and be similar to SIA’s SilkAir. Our channel checks reveal that while Thai Airways has a 39% stake in budget carrier NokAir (which also services the middle market), Thai has been unhappy with its minority stake as it is unable to exert enough control over the airline’s strategy and operations. We also believe that Thai wishes to gain from Tiger’s expertise in running a low cost airline.
Details on Thai-Tiger. The future of Thai-Tiger is still pending the Ministry of Transport’s approval and will be known after the Thai elections which is due to be held on 3 July 2012. We were told that while Thai will hold the majority stake (51%) in the JV, all the branding of the planes will be under Tiger Airways and the fleet will come from the latter. It said that Tiger has committed ten A320s in the first year should the JV take-off. Tiger is expecting net nine new aircraft deliveries this FY12 so we should expect it to advance deliveries should the JV be approved. The first route to be taken by the JV would be Tiger’s current BKK-SIN route.
Huge upside if JV is approved. We believe the Thai market offers huge potential for Tiger should the Thai-Tiger JV be approved. At present, we understand that Thai Airways holds a 40% market share while Air Asia holds another 40%. While it appears that Thai has lost market share to Air Asia, we were told by management that absolute number of passengers carried has actually not dwindled but Air Asia has just managed to create a whole new niche demand. We believe that Thai-Tiger is well placed to be a formidable competitor to Thai Air Asia as it would be part of the national carrier’s arm. This would be appealing to the patriotic Thais who are potentially likely to favor supporting their own national carrier.
Valuations. We have chosen to be conservative with our estimates and assumed that the Thai-Tiger JV will not be approved. We maintain our earnings estimates for now and maintain our NEUTRAL stance on the stock with a TP of $1.40, pegged to 12x FY12F earnings.
China Fishery (DMG)
Share price beaten down; upgrade to BUY (BUY, S$1.55, TP S$1.77)
Company fundamentals still intact, recent sell-down unwarranted. Since mid May 11, China Fishery’s (CFG) share price fell some 13% to S$1.55. We contacted management, and understand that operations are still sound and up to expectations. Barring unforeseen circumstances, we continue to remain optimistic on 2HFY11 earnings due to (1) delayed fish roe sales pushed to the coming quarter, (2) fishing season in Peru which began in Apr, and (3) South Pacific/Mauritania performance expected to be in-line or better than 1HFY11’s. Currently trading at 10.5x FY11 P/E, valuations appear attractive. Given that the company’s fundamentals remain sound, we think the recent sell down is unwarranted, and upgrade our call to BUY, with TP unchanged at S$1.77 based on 12x FY11 P/E. This implies a 14% upside from current price.
Outlook for 2HFY11 still up to expectations. North Pacific (NP) trawling’s delivery of fish roe to Japan in Mar 11 was delayed due to the earthquake. We expect this to result in higher ASPs for the coming quarter. Fishing grounds in Peru were closed temporarily but has since reopened in Apr 11. Together with a 47% increase in TAC limits to 3.7m tonnes for the Apr season, the outlook for Peru’s fishmeal operations looks rosy as well. We also understand that CFG has contracted to sell its 3QFY11 fishmeal at US$1,400-1,500/tonne, higher than the current spot rates of ~US$1,360/tonne.
Valuations look attractive; upgrade to BUY. As fundamentals for the company continue to remain intact, CFG trading at 10.5x FY11 P/E looks attractive in our opinion. Our target FY11 P/E of 12x is a 60% premium to peer average. Risks to our call include poorer than expected execution for CFG’s South Pacific/Mauritania operations.
Company fundamentals still intact, recent sell-down unwarranted. Since mid May 11, China Fishery’s (CFG) share price fell some 13% to S$1.55. We contacted management, and understand that operations are still sound and up to expectations. Barring unforeseen circumstances, we continue to remain optimistic on 2HFY11 earnings due to (1) delayed fish roe sales pushed to the coming quarter, (2) fishing season in Peru which began in Apr, and (3) South Pacific/Mauritania performance expected to be in-line or better than 1HFY11’s. Currently trading at 10.5x FY11 P/E, valuations appear attractive. Given that the company’s fundamentals remain sound, we think the recent sell down is unwarranted, and upgrade our call to BUY, with TP unchanged at S$1.77 based on 12x FY11 P/E. This implies a 14% upside from current price.
Outlook for 2HFY11 still up to expectations. North Pacific (NP) trawling’s delivery of fish roe to Japan in Mar 11 was delayed due to the earthquake. We expect this to result in higher ASPs for the coming quarter. Fishing grounds in Peru were closed temporarily but has since reopened in Apr 11. Together with a 47% increase in TAC limits to 3.7m tonnes for the Apr season, the outlook for Peru’s fishmeal operations looks rosy as well. We also understand that CFG has contracted to sell its 3QFY11 fishmeal at US$1,400-1,500/tonne, higher than the current spot rates of ~US$1,360/tonne.
Valuations look attractive; upgrade to BUY. As fundamentals for the company continue to remain intact, CFG trading at 10.5x FY11 P/E looks attractive in our opinion. Our target FY11 P/E of 12x is a 60% premium to peer average. Risks to our call include poorer than expected execution for CFG’s South Pacific/Mauritania operations.
SMRT (DMG)
SMRT’s subsidiary, BYD sign electric vehicle MOU (BT)
The news: SMRT’s wholly owned subsidiary, SMRT International Pte Ltd (SMRTI), will enter into discussions with China-based BYD regarding the possibility of establishing a joint venture to develop, distribute, and sell electric vehicles, including e-buses and electric taxi vehicles. It is mentioned that the move is part of SMRT’s commitment to environmental sustainability. In order to further promote better air quality, SMRT is also constantly exploring the use of electric vehicles in its bus and taxi fleet.
Our thoughts: We see SMRT’s latest tie-up with BYD as signs that SMRT is willing to explore the use of electric vehicles in the future should they be economical. The latest move reinforces SMRT’s credential as one of the leading land transportation companies in Asia to actively promote use of green vehicles. Although we like SMRT’s long term commitment to green vehicles, its current valuation remains steep at 18x FY12 PATMI compared to its mean forward P/E of 14-15x since Oct 2003. Maintain NEUTRAL on the counter with TP of S$1.94. Within the land transport space, we prefer ComfortDelGro (BUY/TP S$1.80) which is trading at a cheaper valuation of 14x FY11 PATMI.
The news: SMRT’s wholly owned subsidiary, SMRT International Pte Ltd (SMRTI), will enter into discussions with China-based BYD regarding the possibility of establishing a joint venture to develop, distribute, and sell electric vehicles, including e-buses and electric taxi vehicles. It is mentioned that the move is part of SMRT’s commitment to environmental sustainability. In order to further promote better air quality, SMRT is also constantly exploring the use of electric vehicles in its bus and taxi fleet.
Our thoughts: We see SMRT’s latest tie-up with BYD as signs that SMRT is willing to explore the use of electric vehicles in the future should they be economical. The latest move reinforces SMRT’s credential as one of the leading land transportation companies in Asia to actively promote use of green vehicles. Although we like SMRT’s long term commitment to green vehicles, its current valuation remains steep at 18x FY12 PATMI compared to its mean forward P/E of 14-15x since Oct 2003. Maintain NEUTRAL on the counter with TP of S$1.94. Within the land transport space, we prefer ComfortDelGro (BUY/TP S$1.80) which is trading at a cheaper valuation of 14x FY11 PATMI.
Thursday, 2 June 2011
Treasury China Trust (OCBC)
Not Rated
Current Price: S$2.10
Diversification into China's tier-2 cities
Betting on China. We recently visited TCT's commercial assets in Shanghai and Qingdao, including the newly acquired Central Avenue Mall and pending Huai Hai Mall (midst of acquisition with settlement no later than 30 Jun). We observe that TCT has over time evolved its strategy in China, which used to focus on commercial assets and development projects in tier-1 cities such as Beijing and Shanghai . Recently, it has concentrated on regional expansion into tier-2 cities, including developing a large-scale retail property at the Laoshan district of Qingdao with the Trio group. TCT is also actively looking at deals in Xi'an in Shangxi province, forming a strategic partnership with the Ginwa Group to tap the emerging retail market in central and west China.
Three key advantages. We observed that TCT has three key advantages in China. First, TCT is listed as a business trust instead of a REIT, with the more flexible structure of 30% development cap and 45% gearing limit, as stipulated in its trust deed. The development component sets TCT apart from REITs which have little development exposure (10% deposited proper ty max) . TCT is thus bet ter posi t ioned to achieve accretive-yields due to cost savings from vertical integration. It is also not bounded by investment constraints, such as at least 75% of assets must be invested in income-producing properties. Secondly, TCT is upscaling its tenant mix from mostly low-mid tier to mid-high end retailers, which provide income uplift. Presently, some of its existing leases are well below prevailing market rates. For example, the anchor tenant Parkson, at City Centre, is paying only RMB1.73 psqm/day (average rate is RMB6 psqm/day). With the completion of the City Centre extension, Parkson will be vacating the property in 2012, whi le Marks and Spencer was roped in as the replacing tenant on a 10+5 years lease. On TCT's debt portfolio, 85% is USD-denominated but 100% of its revenue is in RMB. TCT thus enjoys low borrowing costs, while the likely RMB appreciation in the mid to long term provides further forex upside.
Supply overhang remains. According to DTZ, there is an anticipated supply of new office space in Shanghai, amounting to about 100% of existing stock in 2011-2014. Likewise, highend retail space is expected to increase by another 50% from 2011 to 2013. The large new supply is expected to drag down overall occupancy rates and intensify the "winners/losers" divide among the Shanghai properties. Oversupply and inflation risks (dampening demand) remain our top concerns for the trust and we expect management to consciously address these as the trust grows in asset size. We do NOT have a rating for TCT presently.
Background
About TCT. Operational in China since 2005 and listed on the SGX in June 2010, Treasury China Trust (TCT) is the first Singapore listed business trust focusing on commercial real estate in China, with AUM in excess of RMB 11.5b (S$2.2b) and a quality of portfolio of more than 800,000 sqm of office and retail properties comprising four income producing assets and three development assets, administered by a team of 80 professionals. TCT aims to position itself as a "total return vehicle", with a combination of recurring income from existing portfolio as well as potential upside from selected development properties. Shareholders' value can emanate from both organic growth as well as capital appreciation. Embedded in TCT's Trust Deed are the following corporate structures to impose various disciplines:
1) Minimum of 80% of net distributable income to be distributed in the first three years
2) Maximum gearing cap of 45% (based on total assets)
3) Maximum development cap of 30% of total assets
The trust also has the option of distributing income from net distributable income and realized and unrealized gains from asset enhancement - allowing the entity to share gains from development appreciation or sale and/or reinvest the returns into higher growth potential assets. TCT has undertaken to pay out minimum 80% of its net rental income for the first three years and 50% thereafter. The looser financial disciplines allow TCT to be more flexible, which is the key to its "Total Return Vehicle" strategy.
SWOT Analysis
Strengths:
- Experience as owner, manager and developer of commercial real estate in China. TCT has successfully carried out various asset enhancement initiatives, improved tenant profiles and achieved positive rental reversions, especially from legacy leases in its existing assets.
- Flexible corporate structure as a listed business trust (vis-à-vis a REIT)
- Strong corporate governance
- Exposure to RMB which provides 100% of TCT's revenue base and the associated benefits of its likely appreciation in the mid to long term.
- Connected advisory board (senior executives of China's SOE), who can assist with navigating and resolving any governmental and regulatory issues that may arise.
Weakness:
- Over-reliance on the Shanghai property market
- "Diffused" positioning in the market (involves in Office, Retail and Industrial Real Estate)
- Concentration risk on the City Centre asset (accounts for 71% of 1Q11 NPI)
- TCT's stock is thinly traded, which inherently increases share price volatility (partly because TCT was listed on SGX by introduction, with not many analysts covering it).
Opportunities:
- Ride on China's robust economic growth
- Exposure to appreciating RMB (revenue) and depreciating USD (borrowings)
- Success in Shanghai provides jumping off points to other central and western markets in China
- ROFR to acquire any income producing commercial real estate or development land in Greater China sourced by sponsor (Treasury Holdings Group)
Threats:
- Supply overhang in Shanghai - Increased competition
- Inflation risk
- Regulatory risk - More tightening measures from the Chinese government
- Further credit tightening in China which will increase RMB borrowing costs
Current Price: S$2.10
Diversification into China's tier-2 cities
Betting on China. We recently visited TCT's commercial assets in Shanghai and Qingdao, including the newly acquired Central Avenue Mall and pending Huai Hai Mall (midst of acquisition with settlement no later than 30 Jun). We observe that TCT has over time evolved its strategy in China, which used to focus on commercial assets and development projects in tier-1 cities such as Beijing and Shanghai . Recently, it has concentrated on regional expansion into tier-2 cities, including developing a large-scale retail property at the Laoshan district of Qingdao with the Trio group. TCT is also actively looking at deals in Xi'an in Shangxi province, forming a strategic partnership with the Ginwa Group to tap the emerging retail market in central and west China.
Three key advantages. We observed that TCT has three key advantages in China. First, TCT is listed as a business trust instead of a REIT, with the more flexible structure of 30% development cap and 45% gearing limit, as stipulated in its trust deed. The development component sets TCT apart from REITs which have little development exposure (10% deposited proper ty max) . TCT is thus bet ter posi t ioned to achieve accretive-yields due to cost savings from vertical integration. It is also not bounded by investment constraints, such as at least 75% of assets must be invested in income-producing properties. Secondly, TCT is upscaling its tenant mix from mostly low-mid tier to mid-high end retailers, which provide income uplift. Presently, some of its existing leases are well below prevailing market rates. For example, the anchor tenant Parkson, at City Centre, is paying only RMB1.73 psqm/day (average rate is RMB6 psqm/day). With the completion of the City Centre extension, Parkson will be vacating the property in 2012, whi le Marks and Spencer was roped in as the replacing tenant on a 10+5 years lease. On TCT's debt portfolio, 85% is USD-denominated but 100% of its revenue is in RMB. TCT thus enjoys low borrowing costs, while the likely RMB appreciation in the mid to long term provides further forex upside.
Supply overhang remains. According to DTZ, there is an anticipated supply of new office space in Shanghai, amounting to about 100% of existing stock in 2011-2014. Likewise, highend retail space is expected to increase by another 50% from 2011 to 2013. The large new supply is expected to drag down overall occupancy rates and intensify the "winners/losers" divide among the Shanghai properties. Oversupply and inflation risks (dampening demand) remain our top concerns for the trust and we expect management to consciously address these as the trust grows in asset size. We do NOT have a rating for TCT presently.
Background
About TCT. Operational in China since 2005 and listed on the SGX in June 2010, Treasury China Trust (TCT) is the first Singapore listed business trust focusing on commercial real estate in China, with AUM in excess of RMB 11.5b (S$2.2b) and a quality of portfolio of more than 800,000 sqm of office and retail properties comprising four income producing assets and three development assets, administered by a team of 80 professionals. TCT aims to position itself as a "total return vehicle", with a combination of recurring income from existing portfolio as well as potential upside from selected development properties. Shareholders' value can emanate from both organic growth as well as capital appreciation. Embedded in TCT's Trust Deed are the following corporate structures to impose various disciplines:
1) Minimum of 80% of net distributable income to be distributed in the first three years
2) Maximum gearing cap of 45% (based on total assets)
3) Maximum development cap of 30% of total assets
The trust also has the option of distributing income from net distributable income and realized and unrealized gains from asset enhancement - allowing the entity to share gains from development appreciation or sale and/or reinvest the returns into higher growth potential assets. TCT has undertaken to pay out minimum 80% of its net rental income for the first three years and 50% thereafter. The looser financial disciplines allow TCT to be more flexible, which is the key to its "Total Return Vehicle" strategy.
SWOT Analysis
Strengths:
- Experience as owner, manager and developer of commercial real estate in China. TCT has successfully carried out various asset enhancement initiatives, improved tenant profiles and achieved positive rental reversions, especially from legacy leases in its existing assets.
- Flexible corporate structure as a listed business trust (vis-à-vis a REIT)
- Strong corporate governance
- Exposure to RMB which provides 100% of TCT's revenue base and the associated benefits of its likely appreciation in the mid to long term.
- Connected advisory board (senior executives of China's SOE), who can assist with navigating and resolving any governmental and regulatory issues that may arise.
Weakness:
- Over-reliance on the Shanghai property market
- "Diffused" positioning in the market (involves in Office, Retail and Industrial Real Estate)
- Concentration risk on the City Centre asset (accounts for 71% of 1Q11 NPI)
- TCT's stock is thinly traded, which inherently increases share price volatility (partly because TCT was listed on SGX by introduction, with not many analysts covering it).
Opportunities:
- Ride on China's robust economic growth
- Exposure to appreciating RMB (revenue) and depreciating USD (borrowings)
- Success in Shanghai provides jumping off points to other central and western markets in China
- ROFR to acquire any income producing commercial real estate or development land in Greater China sourced by sponsor (Treasury Holdings Group)
Threats:
- Supply overhang in Shanghai - Increased competition
- Inflation risk
- Regulatory risk - More tightening measures from the Chinese government
- Further credit tightening in China which will increase RMB borrowing costs
CWT Limited (CIMB)
OUTPERFORM Maintained
S$1.21 Target: S$1.71
Mkt.Cap: S$714m/US$576m
Logistics
Going asset-light in China
Sale and leaseback to Cache
Raising flexibility in China. CWT announced yesterday it has entered into a sale and leaseback transaction with Cache. The transaction is rather small, at S$13.5m for a 13,547 sq m warehouse in Jinshan, Shanghai. We have lowered our FY11-13 estimates by 0.6-0.8% to account for the financial impact of this transaction. Accordingly, our target price dips from S$1.72 to S$1.71, still based on 19x CY12 P/E, one standard deviation above its 4-year forward average. Overall, the transaction should bestow greater flexibility on CWT’s operations in China, and allow CWT to plough capital into its more profitable freight-forwarding network in China. In addition, following its recent price underperformance, we believe value has emerged. We expect catalysts from faster traction in its Indonesian coal-trading business and potential foray into Mongolian coal trading.
The news
CWT has entered into a sale and leaseback transaction with Cache Logistics Trust. The asset, a 13,547 sq m chemical logistics warehouse in Jinshan, Shanghai, will be sold for Rmb71m (S$13.5m). CWT will book a S$6.86m gain: S$5.15m as a one-time gain and S$1.71m as deferred gains to match its leaseback commitments. CWT will lease back the property for three years, at Rmb1.30 per sq m per day for the first year, with rental escalations of 2% per year for the remaining term.
Comments
Transaction appears to favour Cache at first glance... According to disclosures by Cache Logistics Trust, the property was valued at around Rmb77m by external valuers. However, CWT sold it for Rmb71m, below this appraised value.
… but actually win-win for both. However, we believe the transaction is in line with CWT’s asset-light strategic direction in China. CWT will be able to enjoy greater flexibility in China. Prior to this transaction, the property was developed and operated by CWT for its chemical logistics business in China. However, the scale of this business is small and CWT has been unable to optimise warehousing space, with the result that the asset could not generate very good returns on invested capital. By selling and leasing back, CWT would be able to monetise its asset and redeploy capital to its profitable freight-forwarding business in China. It also has the option to downsize its chemical logistics business after three years.
Will CWT exit China’s warehousing business? We believe opportunities in the Chinese logistics industry will continue to attract CWT. We believe CWT could be heading towards leasing warehouses across China to accommodate the logistical needs of its clients. We do not rule out the possibility of another sale and leaseback for its smaller Tianjin facility (86 sq m) to Cache Logistics Trust.
Slight impact on bottom line. Rental for the first year should approximate S$1.28m, before escalating to S$1.3m in the second and third years. Deferred gains amortisation should provide a buffer of S$570k annually. This means CWT would have to bear an additional S$715k-768k annually for the next three years. Adjusting for corporate taxes, CWT could end up bearing an additional S$300k-400k annually. This lowers our FY11-13 earnings estimates by 0.6-08%.
Valuation and recommendation
Slightly positive; maintain Outperform. We believe the transaction will allow CWT to invest freed-up capital in its more profitable freight-forwarding network in China. In addition, it has the flexibility to downsize its not-so-profitable chemical logistics business in China. Elsewhere, we remain bullish on its Indonesian coal-trading business, which could provide near-term earnings surprises.
CWT’s recent price underperformance has also thrown up value for the stock. We maintain Outperform, albeit with a slightly lower target price of S$1.71 (from S$1.72) after our earnings adjustments. We expect re-rating catalysts from faster traction in its Indonesian coal-trading business and potential foray into Mongolian coal trading.
S$1.21 Target: S$1.71
Mkt.Cap: S$714m/US$576m
Logistics
Going asset-light in China
Sale and leaseback to Cache
Raising flexibility in China. CWT announced yesterday it has entered into a sale and leaseback transaction with Cache. The transaction is rather small, at S$13.5m for a 13,547 sq m warehouse in Jinshan, Shanghai. We have lowered our FY11-13 estimates by 0.6-0.8% to account for the financial impact of this transaction. Accordingly, our target price dips from S$1.72 to S$1.71, still based on 19x CY12 P/E, one standard deviation above its 4-year forward average. Overall, the transaction should bestow greater flexibility on CWT’s operations in China, and allow CWT to plough capital into its more profitable freight-forwarding network in China. In addition, following its recent price underperformance, we believe value has emerged. We expect catalysts from faster traction in its Indonesian coal-trading business and potential foray into Mongolian coal trading.
The news
CWT has entered into a sale and leaseback transaction with Cache Logistics Trust. The asset, a 13,547 sq m chemical logistics warehouse in Jinshan, Shanghai, will be sold for Rmb71m (S$13.5m). CWT will book a S$6.86m gain: S$5.15m as a one-time gain and S$1.71m as deferred gains to match its leaseback commitments. CWT will lease back the property for three years, at Rmb1.30 per sq m per day for the first year, with rental escalations of 2% per year for the remaining term.
Comments
Transaction appears to favour Cache at first glance... According to disclosures by Cache Logistics Trust, the property was valued at around Rmb77m by external valuers. However, CWT sold it for Rmb71m, below this appraised value.
… but actually win-win for both. However, we believe the transaction is in line with CWT’s asset-light strategic direction in China. CWT will be able to enjoy greater flexibility in China. Prior to this transaction, the property was developed and operated by CWT for its chemical logistics business in China. However, the scale of this business is small and CWT has been unable to optimise warehousing space, with the result that the asset could not generate very good returns on invested capital. By selling and leasing back, CWT would be able to monetise its asset and redeploy capital to its profitable freight-forwarding business in China. It also has the option to downsize its chemical logistics business after three years.
Will CWT exit China’s warehousing business? We believe opportunities in the Chinese logistics industry will continue to attract CWT. We believe CWT could be heading towards leasing warehouses across China to accommodate the logistical needs of its clients. We do not rule out the possibility of another sale and leaseback for its smaller Tianjin facility (86 sq m) to Cache Logistics Trust.
Slight impact on bottom line. Rental for the first year should approximate S$1.28m, before escalating to S$1.3m in the second and third years. Deferred gains amortisation should provide a buffer of S$570k annually. This means CWT would have to bear an additional S$715k-768k annually for the next three years. Adjusting for corporate taxes, CWT could end up bearing an additional S$300k-400k annually. This lowers our FY11-13 earnings estimates by 0.6-08%.
Valuation and recommendation
Slightly positive; maintain Outperform. We believe the transaction will allow CWT to invest freed-up capital in its more profitable freight-forwarding network in China. In addition, it has the flexibility to downsize its not-so-profitable chemical logistics business in China. Elsewhere, we remain bullish on its Indonesian coal-trading business, which could provide near-term earnings surprises.
CWT’s recent price underperformance has also thrown up value for the stock. We maintain Outperform, albeit with a slightly lower target price of S$1.71 (from S$1.72) after our earnings adjustments. We expect re-rating catalysts from faster traction in its Indonesian coal-trading business and potential foray into Mongolian coal trading.
Cache Logistics Trust (CIMB)
OUTPERFORM Maintained
S$0.94 Target: S$1.32
Mkt.Cap: S$598m/US$482m
Maiden acquisition overseas
First asset in China
Cache has acquired its first overseas asset, in China, through a sale-and-leaseback arrangement with sponsor CWT for Rmb71m (S$13.5m), 7-8% below valuation. We expect the deal to be DPU-accretive with NPI yields of 8.6% surpassing its current portfolio average of 7.6%. Nonetheless, we are neutral on the deal given limited DPU accretion of 0.03ct (+0.3%), increased risks in a new location and insufficient step-up increases to counter Chinese inflation. We keep our DPU estimates and DDM target price of S$1.32 (discount rate 8.4%) as we had factored in acquisition growth. Cache trades at 1x P/BV and offers a forward DPU yield of 10%. We see catalysts from more accretive acquisitions.
The news
Cache will be acquiring a chemical warehouse facility in Shanghai under rights of first refusal from its sponsor, CWT Ltd, through sale and leaseback for 3+3 years. The purchase price is Rmb71m or Rmb487psf (S$13.5m or S$93psf). A triple net rent of Rmb1.30 psm per day for the first year comes with a 2% annual step-up. The 13,547 sq m warehouse is located in Jinshan District in the Shanghai Chemical Industrial Park, an industrial zone in Shanghai specialising in the development of petrochemicals and fine chemicals. The park is also one of the largest and fullyintegrated petrochemical bases in Asia. Developed by CWT in 2007, the warehouse has high-quality specifications and caters to a variety of chemical warehousing classes.
Comments
Yield-accretive but concerns increase. The Rmb71m price is 7-8% below valuation. Acquired at an NPI yield of 8.6% vs. its current portfolio average of 7.6%, the acquisition is expected to add to yields. The acquisition will be fully debt-funded and management expects annualised DPU accretion of 0.03ct (0.3% of FY10’s annualised DPU). However, we are not too excited given the smaller spread between property yields and risk-free rates in China (estimated 300bp) relative to Singapore (estimated 500bp). The leaseback period of three years may also not be sufficient to mitigate risks from foreign exposure. Additionally, the small step-up increase of 2% is below Chinese inflation levels of about 5%, diminishing the advantage of a discounted purchase price.
Funding with S$ debt. We understand that the acquisition will be funded with a S$-denominated loan. With the yuan on the uptrend, management has no plans to hedge foreign-exchange exposure from this asset in the near term. We do not see much risk in the short term and also expect cost of borrowing to come in slightly below our forecast of 3.5%.
Asset leverage to rise marginally to 29% from 28% after the acquisition, still leaving debt headroom of about S$213m, assuming 45% gearing. Cache still has the right of first refusal to sponsor CWT’s warehouse in Tianjin. Locally, it remains on the lookout for third-party assets and has similar such rights to CWT’s assets in Singapore.
Valuation and recommendation
Maintain Outperform. Our positive view on this acquisition is tempered by increased risks in venturing overseas and insufficient step-up increases to counter Chinese inflation. No changes to our DPU estimates or DDM target price of S$1.32 (discount rate 8.4%) as we had factored in S$220m of acquisitions for 2011. Cache trades at 1x P/BV and a prospective forward yield of 10%. We see catalysts from more accretive acquisitions.
S$0.94 Target: S$1.32
Mkt.Cap: S$598m/US$482m
Maiden acquisition overseas
First asset in China
Cache has acquired its first overseas asset, in China, through a sale-and-leaseback arrangement with sponsor CWT for Rmb71m (S$13.5m), 7-8% below valuation. We expect the deal to be DPU-accretive with NPI yields of 8.6% surpassing its current portfolio average of 7.6%. Nonetheless, we are neutral on the deal given limited DPU accretion of 0.03ct (+0.3%), increased risks in a new location and insufficient step-up increases to counter Chinese inflation. We keep our DPU estimates and DDM target price of S$1.32 (discount rate 8.4%) as we had factored in acquisition growth. Cache trades at 1x P/BV and offers a forward DPU yield of 10%. We see catalysts from more accretive acquisitions.
The news
Cache will be acquiring a chemical warehouse facility in Shanghai under rights of first refusal from its sponsor, CWT Ltd, through sale and leaseback for 3+3 years. The purchase price is Rmb71m or Rmb487psf (S$13.5m or S$93psf). A triple net rent of Rmb1.30 psm per day for the first year comes with a 2% annual step-up. The 13,547 sq m warehouse is located in Jinshan District in the Shanghai Chemical Industrial Park, an industrial zone in Shanghai specialising in the development of petrochemicals and fine chemicals. The park is also one of the largest and fullyintegrated petrochemical bases in Asia. Developed by CWT in 2007, the warehouse has high-quality specifications and caters to a variety of chemical warehousing classes.
Comments
Yield-accretive but concerns increase. The Rmb71m price is 7-8% below valuation. Acquired at an NPI yield of 8.6% vs. its current portfolio average of 7.6%, the acquisition is expected to add to yields. The acquisition will be fully debt-funded and management expects annualised DPU accretion of 0.03ct (0.3% of FY10’s annualised DPU). However, we are not too excited given the smaller spread between property yields and risk-free rates in China (estimated 300bp) relative to Singapore (estimated 500bp). The leaseback period of three years may also not be sufficient to mitigate risks from foreign exposure. Additionally, the small step-up increase of 2% is below Chinese inflation levels of about 5%, diminishing the advantage of a discounted purchase price.
Funding with S$ debt. We understand that the acquisition will be funded with a S$-denominated loan. With the yuan on the uptrend, management has no plans to hedge foreign-exchange exposure from this asset in the near term. We do not see much risk in the short term and also expect cost of borrowing to come in slightly below our forecast of 3.5%.
Asset leverage to rise marginally to 29% from 28% after the acquisition, still leaving debt headroom of about S$213m, assuming 45% gearing. Cache still has the right of first refusal to sponsor CWT’s warehouse in Tianjin. Locally, it remains on the lookout for third-party assets and has similar such rights to CWT’s assets in Singapore.
Valuation and recommendation
Maintain Outperform. Our positive view on this acquisition is tempered by increased risks in venturing overseas and insufficient step-up increases to counter Chinese inflation. No changes to our DPU estimates or DDM target price of S$1.32 (discount rate 8.4%) as we had factored in S$220m of acquisitions for 2011. Cache trades at 1x P/BV and a prospective forward yield of 10%. We see catalysts from more accretive acquisitions.
Mapletree Logistics Trust (OCBC)
Maintain BUY
Previous Rating: BUY
Current Price: S$0.915
Fair Value: S$1.01
Spotlight is on South Korea
KPPC Pyeongtaek Centre. Mapletree Logistics Trust (MLT) recently announced that it has signed a conditional sale and purchase agreement with Korea Port Processing Co. Ltd (KPPC) for the acquisition of KPPC Pyeongtaek Centre at a purchase pr ice of approximately S$85.9m. The proper ty comprises two blocks of dry goods warehouses with a total GFA of about 100,900 sqm. There is also potential for organic growth as it has yet to maximise its permissible plot ratio, which will yield an additional GFA of close to 20,000 sqm. The property provides an initial NPI yield of 8.6%. The vendor, KPPC, will lease the entire property for a period of 5 years with an annual rental escalation of 3.0%. MLT has stated that this acquisition marks an important milestone to entrench the trust into the South Korea market. The acquisition is expected to be completed by 3Q11. Given the sizeable acquisition, the contribution of South Korea to the total portfolio's gross revenue is expected to increase from 2.7% to 5.6%. Consequently, KPPC will be the first Korean customer in MLT's list of top ten tenants; thus further diversifying its tenant base. Assuming that the purchase price and other acquisition costs of the property are fully funded by debt, MLT's gearing level will increase to about 41% (after taking into account all acquisitions and divestments announced to date).
Capital recycle play in action. MLT also announced on 31 May that it has completed the divestment of 9 Tampines Street 92 for a total consideration of S$12.8m. Approximately S$11.2m will be redeployed to partially fund the acquisition of Jian Huang Building. Recall that 39 Tampines Street 92 is still in the midst of divestment for S$14.7m. MLT has previously cited that the two properties have building specifications that are now outdated and no longer ideal for modern logistics operations. Given its limited growth potential, it believes that divesting these assets would be the best option to maximise returns. MLT expects the disposal gain to result in a one-time increase in FY11 DPU by 0.07- 0.09 S cents.
More acquisitions to come. Apart from Korea, MLT has also added that it is actively looking at acquiring a warehouse (60,000 sqm and 98% leased) in Malaysia from its sponsor. MLT should be able to complete the acquisition by this year. Going forward, i ts main acquisi t ion focus cont inues to be in Singapore, Malaysia and South Korea. MLT has a proven track record of execut ing a vi r tuous cycle of accret ive acquisi t ions and competitive fund-raising. It is also a favourable move to recycle proceeds into better-yielding assets. Factoring in contributions from the new acquisition, our fair value increased from S$1.00 to S$1.01. Reiterate BUY.
Tenants at KPPC Pyeongtaek Centre. KPPC was established in 2000. It is a third party logistics operator, providing logistics and related value-add services, such as pre-delivery inspection, for major end-users and manufacturers in Korea. In addition to KPPC, the property is also subleased to other tenants. The main sub-tenant, E-Land Retail Co. Ltd ("ELand"), occupies approximately two-thirds of the property. E-Land is part of an integrated fashion and retail Korean conglomerate with a reported turnover in 2010 of KRW7.4 trillion (approximately S$8.4 billion). With more than 60 brands under its ownership, the E-Land Group has international presence in China, Hong Kong, Vietnam, the United States and Europe.
Previous Rating: BUY
Current Price: S$0.915
Fair Value: S$1.01
Spotlight is on South Korea
KPPC Pyeongtaek Centre. Mapletree Logistics Trust (MLT) recently announced that it has signed a conditional sale and purchase agreement with Korea Port Processing Co. Ltd (KPPC) for the acquisition of KPPC Pyeongtaek Centre at a purchase pr ice of approximately S$85.9m. The proper ty comprises two blocks of dry goods warehouses with a total GFA of about 100,900 sqm. There is also potential for organic growth as it has yet to maximise its permissible plot ratio, which will yield an additional GFA of close to 20,000 sqm. The property provides an initial NPI yield of 8.6%. The vendor, KPPC, will lease the entire property for a period of 5 years with an annual rental escalation of 3.0%. MLT has stated that this acquisition marks an important milestone to entrench the trust into the South Korea market. The acquisition is expected to be completed by 3Q11. Given the sizeable acquisition, the contribution of South Korea to the total portfolio's gross revenue is expected to increase from 2.7% to 5.6%. Consequently, KPPC will be the first Korean customer in MLT's list of top ten tenants; thus further diversifying its tenant base. Assuming that the purchase price and other acquisition costs of the property are fully funded by debt, MLT's gearing level will increase to about 41% (after taking into account all acquisitions and divestments announced to date).
Capital recycle play in action. MLT also announced on 31 May that it has completed the divestment of 9 Tampines Street 92 for a total consideration of S$12.8m. Approximately S$11.2m will be redeployed to partially fund the acquisition of Jian Huang Building. Recall that 39 Tampines Street 92 is still in the midst of divestment for S$14.7m. MLT has previously cited that the two properties have building specifications that are now outdated and no longer ideal for modern logistics operations. Given its limited growth potential, it believes that divesting these assets would be the best option to maximise returns. MLT expects the disposal gain to result in a one-time increase in FY11 DPU by 0.07- 0.09 S cents.
More acquisitions to come. Apart from Korea, MLT has also added that it is actively looking at acquiring a warehouse (60,000 sqm and 98% leased) in Malaysia from its sponsor. MLT should be able to complete the acquisition by this year. Going forward, i ts main acquisi t ion focus cont inues to be in Singapore, Malaysia and South Korea. MLT has a proven track record of execut ing a vi r tuous cycle of accret ive acquisi t ions and competitive fund-raising. It is also a favourable move to recycle proceeds into better-yielding assets. Factoring in contributions from the new acquisition, our fair value increased from S$1.00 to S$1.01. Reiterate BUY.
Tenants at KPPC Pyeongtaek Centre. KPPC was established in 2000. It is a third party logistics operator, providing logistics and related value-add services, such as pre-delivery inspection, for major end-users and manufacturers in Korea. In addition to KPPC, the property is also subleased to other tenants. The main sub-tenant, E-Land Retail Co. Ltd ("ELand"), occupies approximately two-thirds of the property. E-Land is part of an integrated fashion and retail Korean conglomerate with a reported turnover in 2010 of KRW7.4 trillion (approximately S$8.4 billion). With more than 60 brands under its ownership, the E-Land Group has international presence in China, Hong Kong, Vietnam, the United States and Europe.
CHINA FISHERY (KimEng)
BUY
Price S$1.55
Previous S$1.77
Target S$1.77
Share price beaten down; upgrade to BUY
Company fundamentals still intact, recent sell-down unwarranted. Since mid May 11, China Fishery’s (CFG) share price fell some 13% to S$1.55. We contacted management, and understand that operations are still sound and up to expectations. Barring unforeseen circumstances, we continue to remain optimistic on 2HFY11 earnings due to (1) delayed fish roe sales pushed to the coming quarter, (2) fishing season in Peru which began in Apr, and (3) South Pacific/Mauritania performance expected to be in-line or better than 1HFY11’s. Currently trading at 10.5x FY11 P/E, valuations appear attractive. Given that the company’s fundamentals remain sound, we think the recent sell down is unwarranted, and upgrade our call to BUY, with TP unchanged at S$1.77 based on 12x FY11 P/E. This implies a 14% upside from current price.
Outlook for 2HFY11 still up to expectations. North Pacific (NP) trawling’s delivery of fish roe to Japan in Mar 11 was delayed due to the earthquake. We expect this to result in higher ASPs for the coming quarter. Fishing grounds in Peru were closed temporarily but has since reopened in Apr 11. Together with a 47% increase in TAC limits to 3.7m tonnes for the Apr season, the outlook for Peru’s fishmeal operations looks rosy as well. We also understand that CFG has contracted to sell its 3QFY11 fishmeal at US$1,400-1,500/tonne, higher than the current spot rates of ~US$1,360/tonne.
Valuations look attractive; upgrade to BUY. As fundamentals for the company continue to remain intact, CFG trading at 10.5x FY11 P/E looks attractive in our opinion. Our target FY11 P/E of 12x is a 60% premium to peer average. Risks to our call include poorer than expected execution for CFG’s South Pacific/Mauritania operations.
Price S$1.55
Previous S$1.77
Target S$1.77
Share price beaten down; upgrade to BUY
Company fundamentals still intact, recent sell-down unwarranted. Since mid May 11, China Fishery’s (CFG) share price fell some 13% to S$1.55. We contacted management, and understand that operations are still sound and up to expectations. Barring unforeseen circumstances, we continue to remain optimistic on 2HFY11 earnings due to (1) delayed fish roe sales pushed to the coming quarter, (2) fishing season in Peru which began in Apr, and (3) South Pacific/Mauritania performance expected to be in-line or better than 1HFY11’s. Currently trading at 10.5x FY11 P/E, valuations appear attractive. Given that the company’s fundamentals remain sound, we think the recent sell down is unwarranted, and upgrade our call to BUY, with TP unchanged at S$1.77 based on 12x FY11 P/E. This implies a 14% upside from current price.
Outlook for 2HFY11 still up to expectations. North Pacific (NP) trawling’s delivery of fish roe to Japan in Mar 11 was delayed due to the earthquake. We expect this to result in higher ASPs for the coming quarter. Fishing grounds in Peru were closed temporarily but has since reopened in Apr 11. Together with a 47% increase in TAC limits to 3.7m tonnes for the Apr season, the outlook for Peru’s fishmeal operations looks rosy as well. We also understand that CFG has contracted to sell its 3QFY11 fishmeal at US$1,400-1,500/tonne, higher than the current spot rates of ~US$1,360/tonne.
Valuations look attractive; upgrade to BUY. As fundamentals for the company continue to remain intact, CFG trading at 10.5x FY11 P/E looks attractive in our opinion. Our target FY11 P/E of 12x is a 60% premium to peer average. Risks to our call include poorer than expected execution for CFG’s South Pacific/Mauritania operations.
Azeus Systems (KimEng)
Background: Azeus Systems is an information technology services consultant based in Hong Kong, with software development done in China and the Philippines. It has a solid track record of completing over 100 projects for more than 40 government departments in Hong Kong and over 16 projects with private sector companies.
A rare breed: Azeus was the first company in Greater China in 2003 to be ranked at Level 5 under the Capability Maturity Model (CMM), a model used to improve organisational business processes. CMMI Level 5 is very difficult to attain and is an important endorsement benchmark used by customers to rate software companies.
Big player in HK public sector IT deals. When Azeus was listed in 2004, almost all of its revenue came from the Hong Kong government. Since then, it has also ventured into the private sector and completed more than 16 projects with various companies. However, it still maintains a large contribution from public sector contracts. For example, it recently secured one of the largest government contracts ever worth HK$70m for application maintenance services for a major government department.
Balanced revenue mix but volatile earnings. Azeus derives 55% of its revenue from IT services, which is deal-related and lumpy, while a high level of recurring revenue (46%) comes from maintenance and support and business process outsourcing. But earnings have been volatile as cost control was also a recurring problem. Particularly unpredictable were purchases of lower-margin third-party hardware and software, and legal fees arising from disputes with customers over contract handling.
However, financial strength is undisputed. Despite unpredictable earnings, Azeus has maintained a clean balance sheet. It is debt-free while cash alone accounts for 68% of its market capitalisation. Although it may suffer negative cash flow in certain years, that is mainly due to timing as Azeus collects cash upon achievement of project milestones. As such, it has traditionally paid out 100% of its earnings even in 2009 and 2011 when earnings plunged to HK$0.8m and HK$3.4m, respectively.
A rare breed: Azeus was the first company in Greater China in 2003 to be ranked at Level 5 under the Capability Maturity Model (CMM), a model used to improve organisational business processes. CMMI Level 5 is very difficult to attain and is an important endorsement benchmark used by customers to rate software companies.
Big player in HK public sector IT deals. When Azeus was listed in 2004, almost all of its revenue came from the Hong Kong government. Since then, it has also ventured into the private sector and completed more than 16 projects with various companies. However, it still maintains a large contribution from public sector contracts. For example, it recently secured one of the largest government contracts ever worth HK$70m for application maintenance services for a major government department.
Balanced revenue mix but volatile earnings. Azeus derives 55% of its revenue from IT services, which is deal-related and lumpy, while a high level of recurring revenue (46%) comes from maintenance and support and business process outsourcing. But earnings have been volatile as cost control was also a recurring problem. Particularly unpredictable were purchases of lower-margin third-party hardware and software, and legal fees arising from disputes with customers over contract handling.
However, financial strength is undisputed. Despite unpredictable earnings, Azeus has maintained a clean balance sheet. It is debt-free while cash alone accounts for 68% of its market capitalisation. Although it may suffer negative cash flow in certain years, that is mainly due to timing as Azeus collects cash upon achievement of project milestones. As such, it has traditionally paid out 100% of its earnings even in 2009 and 2011 when earnings plunged to HK$0.8m and HK$3.4m, respectively.
Tiger Airways (DMG)
Cloudy times (NEUTRAL, S$1.41, TP S$1.40)
Thai Airways has announced that it will be setting up its own budget airline - Thai Wings - to compete with AirAsia. This is a negative development for Thai Tiger (a JV between Thai Airways and Tiger Airways) as it has been delayed for months, awaiting for an approval by the Ministry of Transportation. To compound matters, Tiger's CEO Tony Davis has just sold 1m shares at S$1.42, paring down his stake from 0.75% to 0.57%. We maintain NEUTRAL on the stock with a TP of S$1.40, pegged to 12x FY12F earnings. In the low cost space, we prefer AirAsia with a TP of RM3.89, pegged to 12x FY11F earnings.
Thai Airways to set up own budget airline. Thai Airways has announced it will establish a new budget carrier tentatively dubbed “Thai Wings” to compete head on with AirAsia. According to Bernama, Piyasvasti Amranand, president of Thai Airways, said THAI will continue to serve high end passengers while the new airline will serve middle market and Thai Tiger will serve the lower market. According to CAPA, Thai Wing will operate shorthaul services with five leased B737s and two other leased aircraft in its first year with the fleet expected to reach 11 within three years. Operations are targeted to commence by April 2012. Thai which signed an MoU with Tiger last year to form a 51:49 JV said the launch of Thai Tiger has been delayed till July/August 2011.
CEO Tony Davis sells 1m shares. CEO Tony Davis has further pared down his stake in the airline by 1m shares, or 24.3% of his holdings at S$1.42. This reduces his stake in the airline from 0.75% to 0.57%. The sale is below the IPO price of S$1.50 and comes at a time when the airline is faced with rising headwinds in its regional expansion.
No change in estimates, as assumptions already conservative. We maintain our earnings estimates as we believe our assumptions are conservative. Our earnings are based on the assumption that aircraft utilisation will fall from 4.9 sectors p/aircraft/day to 4.7x/4.6x in FY12/FY13. We also assume average ticket prices will fall from S$83 in FY11 to S$79/S$78 in FY12/FY13 as the airline tries to entice passengers with cheap tickets. We believe a load factor of 84% for FY12/FY13 is sustainable in light of cheap tickets.
Maintain NEUTRAL. We expect the market to react negatively to the news. We maintain our NEUTRAL stance on the stock with a 12-month TP of S$1.40, pegged to 12x FY earnings
Thai Airways has announced that it will be setting up its own budget airline - Thai Wings - to compete with AirAsia. This is a negative development for Thai Tiger (a JV between Thai Airways and Tiger Airways) as it has been delayed for months, awaiting for an approval by the Ministry of Transportation. To compound matters, Tiger's CEO Tony Davis has just sold 1m shares at S$1.42, paring down his stake from 0.75% to 0.57%. We maintain NEUTRAL on the stock with a TP of S$1.40, pegged to 12x FY12F earnings. In the low cost space, we prefer AirAsia with a TP of RM3.89, pegged to 12x FY11F earnings.
Thai Airways to set up own budget airline. Thai Airways has announced it will establish a new budget carrier tentatively dubbed “Thai Wings” to compete head on with AirAsia. According to Bernama, Piyasvasti Amranand, president of Thai Airways, said THAI will continue to serve high end passengers while the new airline will serve middle market and Thai Tiger will serve the lower market. According to CAPA, Thai Wing will operate shorthaul services with five leased B737s and two other leased aircraft in its first year with the fleet expected to reach 11 within three years. Operations are targeted to commence by April 2012. Thai which signed an MoU with Tiger last year to form a 51:49 JV said the launch of Thai Tiger has been delayed till July/August 2011.
CEO Tony Davis sells 1m shares. CEO Tony Davis has further pared down his stake in the airline by 1m shares, or 24.3% of his holdings at S$1.42. This reduces his stake in the airline from 0.75% to 0.57%. The sale is below the IPO price of S$1.50 and comes at a time when the airline is faced with rising headwinds in its regional expansion.
No change in estimates, as assumptions already conservative. We maintain our earnings estimates as we believe our assumptions are conservative. Our earnings are based on the assumption that aircraft utilisation will fall from 4.9 sectors p/aircraft/day to 4.7x/4.6x in FY12/FY13. We also assume average ticket prices will fall from S$83 in FY11 to S$79/S$78 in FY12/FY13 as the airline tries to entice passengers with cheap tickets. We believe a load factor of 84% for FY12/FY13 is sustainable in light of cheap tickets.
Maintain NEUTRAL. We expect the market to react negatively to the news. We maintain our NEUTRAL stance on the stock with a 12-month TP of S$1.40, pegged to 12x FY earnings
SGX
Minimum bid size reduction to help liquidity (BUY, S$7.57, TP S$8.90)
SGX will reduce the minimum bid size for securities on 4 July 2011. The initiative is expected to lead to a tightening of bid-ask spreads by as much as 80%. Based on 2010 stockmarket turnover, SGX estimates $1.7b in annual savings. SGX expects this initiative to lead to more liquidity in Singapore. We maintain our BUY call on SGX, with target price of S$8.90. This is derived from 22x FY13 EPS, and premised on FY13 average daily turnover of S$2.02b.
To cater to the narrowing of the bid sizes, SGX will widen the Forced Order Range for all securities to +/-20 bids from +/- 10 bids across all price ranges. Forced Order Range is a preexecution mechanism which helps investors to avoid error trades when entering prices of orders.
The revised Minimum Bid Size and wider Forced Order Range will apply to all securities traded on SGX except exchange traded funds, loan stocks and bonds.
We note that the reduction of the minimum bid size on 24 Dec 2007 corresponded with increased trading volumes in Jan 2008, but this could be partly attributed to the seasonal factor in play. Nonetheless, we believe this current initiative could contribute marginally to increased trading volumes.
SGX will reduce the minimum bid size for securities on 4 July 2011. The initiative is expected to lead to a tightening of bid-ask spreads by as much as 80%. Based on 2010 stockmarket turnover, SGX estimates $1.7b in annual savings. SGX expects this initiative to lead to more liquidity in Singapore. We maintain our BUY call on SGX, with target price of S$8.90. This is derived from 22x FY13 EPS, and premised on FY13 average daily turnover of S$2.02b.
To cater to the narrowing of the bid sizes, SGX will widen the Forced Order Range for all securities to +/-20 bids from +/- 10 bids across all price ranges. Forced Order Range is a preexecution mechanism which helps investors to avoid error trades when entering prices of orders.
The revised Minimum Bid Size and wider Forced Order Range will apply to all securities traded on SGX except exchange traded funds, loan stocks and bonds.
We note that the reduction of the minimum bid size on 24 Dec 2007 corresponded with increased trading volumes in Jan 2008, but this could be partly attributed to the seasonal factor in play. Nonetheless, we believe this current initiative could contribute marginally to increased trading volumes.
CapitaMall Trust (DMG)
More details on joint development (NEUTRAL, S$2.00, TP S$2.02)
Joint venture to develop retail/office space at Jurong Gateway. Following the successful bidding of the 195,463 sqft (18,159.1sqm) site at Jurong Gateway (JG), CapitaMall Trust (CMT), CapitaMall Asia (CMA) and CapitaLand have revealed their plan to build a retail/office commercial centre at JG. The total development cost of the project will be ~S$1.5b for a total GFA of 960k sqft, implying ~S$1,560 psf development cost. The expected NPI yield on development cost is ~6%, which is favourable compared to CMT’s current 12-mth forward yield of 5.2%. We expect incremental DPU of ~0.5-0.6S¢ beginning FY14. After factoring the potential contributions from FY14 onwards, our TP is raised to S$2.02 based on DDM (COE: 8.0%; TGR: 2.0%). Maintain NEUTRAL.
CMT’s share of project is 30%. Under the joint tender agreement, CMT/CMA/CapitaLand will hold 30%/50%/20% stake in the development. The consortium has indicated that it intends to develop the site on a 60%/40% retail/office basis. The retail mall and office are slated to commence operations in Dec 2013 and Dec 2014 respectively. Given that this is a Greenfield site, there will be no DPU accretion to CMT in the next two years.
Strategic location comes at dearer price. The latest site to be awarded sits conveniently beside Jurong East MRT and bus interchanges. Although the land acquisition cost came in at S$1,012psf ppr, 56% premium to previous acquisition cost of land at Jurong Gateway Road in Jun 2010 (won by Lend Lease), the CMT/CMA/CapitaLand joint venture’s bid price was only 5.7% premium over second bidder’s tendered price. In addition, given that the MRT and bus interchange entrance/exit will be directly facing this newly acquired site at JG, we believe the price paid for this piece of land is reasonable. Based on pre-committed rents at JCube, we believe the retail/office rents at JG can hit S$16-18/S$6-8 psf pm. Coupled with assumed NPI margin of 75-80%, the NPI yield of the commercial development at JG is ~5-6%.
Joint venture to develop retail/office space at Jurong Gateway. Following the successful bidding of the 195,463 sqft (18,159.1sqm) site at Jurong Gateway (JG), CapitaMall Trust (CMT), CapitaMall Asia (CMA) and CapitaLand have revealed their plan to build a retail/office commercial centre at JG. The total development cost of the project will be ~S$1.5b for a total GFA of 960k sqft, implying ~S$1,560 psf development cost. The expected NPI yield on development cost is ~6%, which is favourable compared to CMT’s current 12-mth forward yield of 5.2%. We expect incremental DPU of ~0.5-0.6S¢ beginning FY14. After factoring the potential contributions from FY14 onwards, our TP is raised to S$2.02 based on DDM (COE: 8.0%; TGR: 2.0%). Maintain NEUTRAL.
CMT’s share of project is 30%. Under the joint tender agreement, CMT/CMA/CapitaLand will hold 30%/50%/20% stake in the development. The consortium has indicated that it intends to develop the site on a 60%/40% retail/office basis. The retail mall and office are slated to commence operations in Dec 2013 and Dec 2014 respectively. Given that this is a Greenfield site, there will be no DPU accretion to CMT in the next two years.
Strategic location comes at dearer price. The latest site to be awarded sits conveniently beside Jurong East MRT and bus interchanges. Although the land acquisition cost came in at S$1,012psf ppr, 56% premium to previous acquisition cost of land at Jurong Gateway Road in Jun 2010 (won by Lend Lease), the CMT/CMA/CapitaLand joint venture’s bid price was only 5.7% premium over second bidder’s tendered price. In addition, given that the MRT and bus interchange entrance/exit will be directly facing this newly acquired site at JG, we believe the price paid for this piece of land is reasonable. Based on pre-committed rents at JCube, we believe the retail/office rents at JG can hit S$16-18/S$6-8 psf pm. Coupled with assumed NPI margin of 75-80%, the NPI yield of the commercial development at JG is ~5-6%.
Cache Logistics Trust (DMG)
Buys accretive China warehouse
The news: Cache Logistics Trust (CLT) is buying a 13,547 sqm (gfa) chemical warehouse facility in Shanghai for RMB71m. The facility is located in the Jinshan District, within one of the largest petrochemical bases in Asia, the Shanghai Chemical Industrial Park.
Our thoughts: This acquisition marks the company’s entry into China. We believe this acquisition will allow CLT to diversify its income base from a geographical perspective, as well as capture the upside of China’s growth in the chemical logistics business. The acquisition is expected to be accretive, with DPU likely to expand 0.03S¢ per unit. We do not have a rating on the counter.
The news: Cache Logistics Trust (CLT) is buying a 13,547 sqm (gfa) chemical warehouse facility in Shanghai for RMB71m. The facility is located in the Jinshan District, within one of the largest petrochemical bases in Asia, the Shanghai Chemical Industrial Park.
Our thoughts: This acquisition marks the company’s entry into China. We believe this acquisition will allow CLT to diversify its income base from a geographical perspective, as well as capture the upside of China’s growth in the chemical logistics business. The acquisition is expected to be accretive, with DPU likely to expand 0.03S¢ per unit. We do not have a rating on the counter.
Wednesday, 1 June 2011
Roxy Pacific Hldgs Ltd (OCBC)
Maintain HOLD
Previous Rating: HOLD
Current Price: S$0.46
Fair Value: S$0.51
Acquisition of site at Hillview Terrace
Acquired site at Hillview Terrace. Roxy-Pacific's (ROXY) 45% associate, Mequity (Hillview) Pte. Ltd, recently acquired a site at Hillview Terrace for S$45.0m. This site consists of factory buildings on seven adjoining land lots which were acquired individually from several parties. Note that this transaction is not an en bloc sale and hence does not need approval from the Strata Title Board. The size of the plot is 49,164 sq ft with an allowable GFA of 94,395 sq ft (plot ratio 1.92). Including an estimated 17.5m development charge, this translates to a cost of $662 per sq ft per plot ratio. We note that Mequity has another project near by - Nottinghill Suites at Toh Tuck Rd. We believe the Hillview Terrace project would launch in 4Q11 neatly after Nottinghill's launch in Jun 11, and some synergy could be der ived between execut ing both projects. In our view, the Hillview Terrace project will break even at $1,036 per sq ft and could achieve an average selling price (ASP) of $1,200 psf, if given a small average unit size (~500 sq ft). This would yield an attributable net present value (NPV) of $5.9m and accrete 1 cent to our RNAV.
Possible short-term catalysts in 3Q11. We expect Nottinghill Suites at Toh Tuck Rd to launch in Jun 11. There are an estimated 124 units in total, with most of them being 1-2 bd units at an average size of 500 sq ft. Early indicative prices appear to start at $650k for a 400 sq ft unit, translating to an ASP around $1.6k psf. Total quantum prices for most units across the project would be capped at an affordable level below $1m. We think it is possible ROXY could hit these price levels given the $1.4k psf achieved for smaller units (<500) sq ft at the 999-year Terrene launched near by last year. Strong sales at Nottinghill could be a short-term price catalyst in 3Q11. In addition, 70 Shenton Way continues to be on the market for sale. An opportunistic sale would be positive for faster capital turnover and could be another catalyst in 3Q11.
Maintain HOLD. That said, we believe ROXY's upside potential is counter-balanced by the threat of residential policy overhang as the government rethinks housing policy with a new Minister of National Development in place amidst the backdrop of unabated mass-segment private residential bullishness. We update assumptions and Nottinghill ASP to $1.4k psf. Maintain HOLD with a revised fair value of $0.51 (at 30% discount to RNAV) versus $0.49 previously.
Previous Rating: HOLD
Current Price: S$0.46
Fair Value: S$0.51
Acquisition of site at Hillview Terrace
Acquired site at Hillview Terrace. Roxy-Pacific's (ROXY) 45% associate, Mequity (Hillview) Pte. Ltd, recently acquired a site at Hillview Terrace for S$45.0m. This site consists of factory buildings on seven adjoining land lots which were acquired individually from several parties. Note that this transaction is not an en bloc sale and hence does not need approval from the Strata Title Board. The size of the plot is 49,164 sq ft with an allowable GFA of 94,395 sq ft (plot ratio 1.92). Including an estimated 17.5m development charge, this translates to a cost of $662 per sq ft per plot ratio. We note that Mequity has another project near by - Nottinghill Suites at Toh Tuck Rd. We believe the Hillview Terrace project would launch in 4Q11 neatly after Nottinghill's launch in Jun 11, and some synergy could be der ived between execut ing both projects. In our view, the Hillview Terrace project will break even at $1,036 per sq ft and could achieve an average selling price (ASP) of $1,200 psf, if given a small average unit size (~500 sq ft). This would yield an attributable net present value (NPV) of $5.9m and accrete 1 cent to our RNAV.
Possible short-term catalysts in 3Q11. We expect Nottinghill Suites at Toh Tuck Rd to launch in Jun 11. There are an estimated 124 units in total, with most of them being 1-2 bd units at an average size of 500 sq ft. Early indicative prices appear to start at $650k for a 400 sq ft unit, translating to an ASP around $1.6k psf. Total quantum prices for most units across the project would be capped at an affordable level below $1m. We think it is possible ROXY could hit these price levels given the $1.4k psf achieved for smaller units (<500) sq ft at the 999-year Terrene launched near by last year. Strong sales at Nottinghill could be a short-term price catalyst in 3Q11. In addition, 70 Shenton Way continues to be on the market for sale. An opportunistic sale would be positive for faster capital turnover and could be another catalyst in 3Q11.
Maintain HOLD. That said, we believe ROXY's upside potential is counter-balanced by the threat of residential policy overhang as the government rethinks housing policy with a new Minister of National Development in place amidst the backdrop of unabated mass-segment private residential bullishness. We update assumptions and Nottinghill ASP to $1.4k psf. Maintain HOLD with a revised fair value of $0.51 (at 30% discount to RNAV) versus $0.49 previously.
Plantations & Commodities (CIMB)
• Glencore’s listing arouses interest in supply-chain managers; maintain Overweight with Noble as our top pick. Glencore’s recent listing has stirred interest in supply-chain managers with several investors comparing Glencore with Noble and questioning the former’s lower valuations and business model. We revisit their business models briefly and compare their historical valuations. We view Glencore as a complement to rather than substitute for Noble. Maintain Overweight on the Plantations and Commodities sector, with Noble as our preferred supplychain manager. No changes to our earnings estimates or stock ratings. We anticipate re-rating catalysts for locally-listed supply-chain managers from volume growth and earnings contributions from recent investments. Noble remains an Outperform while Olam remains a Neutral.
• Differences in business models justify valuation gap. Glencore trades at 8.8x CY12 P/E, a discount to Noble’s 12.0x and Olam’s 16.7x. Its lower valuations may, however, be justified by its portfolio which comprises mainly hard commodities, whereas 21% of Noble’s portfolio consists of agricultural products while 100% of Olam’s portfolio is made up of soft commodities. Hard commodities tend to command lower valuations due to more-pronounced cyclicality and companies’ heightened earnings volatility. In our view, the recent decline in metal prices could have a more adverse impact on Glencore than Noble given the former’s significant exposure to metals and minerals.
• Fundamentals remain positive. Recent commodity-price declines have also sparked fears of a fall in demand following a string of lacklustre economic indicators. We view the recent pullback as a temporary unwinding of speculative flows rather than a structural reversal of demand and supply fundamentals. While price weakness and recent events (e.g. Japan’s earthquake, Ivory Coast’s political events) may suggest muted performances from supply-chain managers in 2Q11, we remain confident in their medium-term prospects, buoyed by sound underlying demand and supply fundamentals.
Supply-chain managers at a glance
Different business models; different valuations. Noble’s shares were softer during Glencore’s listing, possibly due to portfolio reallocations, coupled with a broad sell-off of commodities amid fears of lower demand following a string of lacklustre global economic indicators. While Glencore’s valuations are lower than Noble’s, the two are not directly comparable due to differences in their business models. Glencore’s portfolio comprises 62% of energy products, 31% of metals and minerals and 7% of agricultural products. On top of that, it has a structurally long position in fleet chartering, exposing it to fluctuations in spot freight rates. Noble, on the other hand, is 66% concentrated on energy, 21% on agriculture and 13% on metals, minerals and ores. Its exposure to freight rates is insignificant. Glencore’s lower valuations could perhaps be justified by its exposure to freight markets and portfolio of hard commodities, which typically command lower valuations due to a higher degree of cyclicality, and therefore earnings volatility. As such, we view Glencore as a complement to rather than substitute for Noble.
Figure 1 provides an overview of supply-chain managers’ products and geographic segmentation, as well as historical valuations. Managers handling soft commodities, especially food-related products, historically command higher valuations (with the exception of ADM). This is in line with their greater earnings stability from fooddemand inelasticity vs. the demand for hard commodities such as metals.
Softer metal and mineral prices could deal a bigger blow to Glencore than Noble. Metals and minerals accounted for 48% of Glencore’s operating profit in FY10 and 19% of Noble’s. Softening metal prices could therefore have a more adverse impact on Glencore’s profits than Noble’s. Glencore’s portfolio is heavily skewed towards metals and minerals, including zinc, silver and iron ore, with significant upstream exposure via the ownership of mines. This exposes it to price fluctuations. The recent downturn in commodity prices could thus result in a devaluation of its inventories and hurt its profitability.
Noble is buffered by agriculture. Conversely, agriculture, for which demand is less elastic than metals, accounted for 47% of Noble’s operating profit in FY10 and 14% of Glencore’s. This suggests greater earnings stability for Noble than Glencore. Although agricultural commodity prices were recently rather volatile, we believe that the impact on volumes should be quite subdued.
Fundamentals intact
Glencore’s CEO Mr Ivan Glasenberg’s comments on the recent sell-off in commodities:
“A lot of it has been funds creating a bit of froth in the market, but the underlying fundamentals of the commodities market is relatively strong because of the tightening of supply… Asian demand should underpin growth in commodities as global producers strive to keep pace with booming appetite from the region.”
Underlying fundamentals remain positive. In our view, the recent pullback in commodity prices is more likely the result of a temporary unwinding of speculative flows rather than a structural reversal of demand and supply fundamentals. We remain sanguine over commodity fundamentals, on the basis of: 1) the global economic recovery; 2) continued growth in China and India; and 3) the massive reconstruction in Japan which should drive demand for various commodities. Residual effects from global events such as Japan’s earthquake and the Ivory Coast’s political events may disrupt trade flows in the near term, but these headwinds should ease by 3Q11, paving the way for firmer flows in 2H11. Other headwinds may, nevertheless, arise from: 1) the faster-than-expected cooling of emerging economies such as China and India, which may weaken the demand for commodities; and 2) an unwinding of QE2 by the Fed as it prepares the market for rate hikes in 2012. This would reduce the excess liquidity that has been financing speculative investment in commodities.
Valuation and recommendation
Maintain Overweight; Noble remains our preferred supply-chain manager. Locally listed supply-chain managers are on track to deliver earnings growth, helped by: 1) larger pipeline capacities, which should support volume growth; 2) margin improvements as they integrate their networks and exploit profit points along the chain; and 3) the resumption of global trade after disruptions caused by Japan’s disasters, Ivory Coast’s embargo and Australia’s floods.
We maintain our Outperform rating on Noble with an unchanged target price of S$2.70 (based on 15x CY12 P/E), and Neutral rating on Olam with an unchanged target price of S$3.34 (based on 18.7x CY12 P/E). Noble remains our preferred supply-chain manager for its more attractive valuations than peers, stronger balance sheet, product diversification across hard and soft commodities, and superior working-capital efficiency. Against Glencore, we believe that its earnings should be more resilient to the recent decline in the prices of hard commodities given its lower exposure to this product segment.
• Differences in business models justify valuation gap. Glencore trades at 8.8x CY12 P/E, a discount to Noble’s 12.0x and Olam’s 16.7x. Its lower valuations may, however, be justified by its portfolio which comprises mainly hard commodities, whereas 21% of Noble’s portfolio consists of agricultural products while 100% of Olam’s portfolio is made up of soft commodities. Hard commodities tend to command lower valuations due to more-pronounced cyclicality and companies’ heightened earnings volatility. In our view, the recent decline in metal prices could have a more adverse impact on Glencore than Noble given the former’s significant exposure to metals and minerals.
• Fundamentals remain positive. Recent commodity-price declines have also sparked fears of a fall in demand following a string of lacklustre economic indicators. We view the recent pullback as a temporary unwinding of speculative flows rather than a structural reversal of demand and supply fundamentals. While price weakness and recent events (e.g. Japan’s earthquake, Ivory Coast’s political events) may suggest muted performances from supply-chain managers in 2Q11, we remain confident in their medium-term prospects, buoyed by sound underlying demand and supply fundamentals.
Supply-chain managers at a glance
Different business models; different valuations. Noble’s shares were softer during Glencore’s listing, possibly due to portfolio reallocations, coupled with a broad sell-off of commodities amid fears of lower demand following a string of lacklustre global economic indicators. While Glencore’s valuations are lower than Noble’s, the two are not directly comparable due to differences in their business models. Glencore’s portfolio comprises 62% of energy products, 31% of metals and minerals and 7% of agricultural products. On top of that, it has a structurally long position in fleet chartering, exposing it to fluctuations in spot freight rates. Noble, on the other hand, is 66% concentrated on energy, 21% on agriculture and 13% on metals, minerals and ores. Its exposure to freight rates is insignificant. Glencore’s lower valuations could perhaps be justified by its exposure to freight markets and portfolio of hard commodities, which typically command lower valuations due to a higher degree of cyclicality, and therefore earnings volatility. As such, we view Glencore as a complement to rather than substitute for Noble.
Figure 1 provides an overview of supply-chain managers’ products and geographic segmentation, as well as historical valuations. Managers handling soft commodities, especially food-related products, historically command higher valuations (with the exception of ADM). This is in line with their greater earnings stability from fooddemand inelasticity vs. the demand for hard commodities such as metals.
Softer metal and mineral prices could deal a bigger blow to Glencore than Noble. Metals and minerals accounted for 48% of Glencore’s operating profit in FY10 and 19% of Noble’s. Softening metal prices could therefore have a more adverse impact on Glencore’s profits than Noble’s. Glencore’s portfolio is heavily skewed towards metals and minerals, including zinc, silver and iron ore, with significant upstream exposure via the ownership of mines. This exposes it to price fluctuations. The recent downturn in commodity prices could thus result in a devaluation of its inventories and hurt its profitability.
Noble is buffered by agriculture. Conversely, agriculture, for which demand is less elastic than metals, accounted for 47% of Noble’s operating profit in FY10 and 14% of Glencore’s. This suggests greater earnings stability for Noble than Glencore. Although agricultural commodity prices were recently rather volatile, we believe that the impact on volumes should be quite subdued.
Fundamentals intact
Glencore’s CEO Mr Ivan Glasenberg’s comments on the recent sell-off in commodities:
“A lot of it has been funds creating a bit of froth in the market, but the underlying fundamentals of the commodities market is relatively strong because of the tightening of supply… Asian demand should underpin growth in commodities as global producers strive to keep pace with booming appetite from the region.”
Underlying fundamentals remain positive. In our view, the recent pullback in commodity prices is more likely the result of a temporary unwinding of speculative flows rather than a structural reversal of demand and supply fundamentals. We remain sanguine over commodity fundamentals, on the basis of: 1) the global economic recovery; 2) continued growth in China and India; and 3) the massive reconstruction in Japan which should drive demand for various commodities. Residual effects from global events such as Japan’s earthquake and the Ivory Coast’s political events may disrupt trade flows in the near term, but these headwinds should ease by 3Q11, paving the way for firmer flows in 2H11. Other headwinds may, nevertheless, arise from: 1) the faster-than-expected cooling of emerging economies such as China and India, which may weaken the demand for commodities; and 2) an unwinding of QE2 by the Fed as it prepares the market for rate hikes in 2012. This would reduce the excess liquidity that has been financing speculative investment in commodities.
Valuation and recommendation
Maintain Overweight; Noble remains our preferred supply-chain manager. Locally listed supply-chain managers are on track to deliver earnings growth, helped by: 1) larger pipeline capacities, which should support volume growth; 2) margin improvements as they integrate their networks and exploit profit points along the chain; and 3) the resumption of global trade after disruptions caused by Japan’s disasters, Ivory Coast’s embargo and Australia’s floods.
We maintain our Outperform rating on Noble with an unchanged target price of S$2.70 (based on 15x CY12 P/E), and Neutral rating on Olam with an unchanged target price of S$3.34 (based on 18.7x CY12 P/E). Noble remains our preferred supply-chain manager for its more attractive valuations than peers, stronger balance sheet, product diversification across hard and soft commodities, and superior working-capital efficiency. Against Glencore, we believe that its earnings should be more resilient to the recent decline in the prices of hard commodities given its lower exposure to this product segment.
ConscienceFood Hldgs (DBSVickers)
BUY S$0.24 STI : 3,159.93 (Upgrade from HOLD)
Price Target : 12-Month S$ 0.35 (Prev S$ 0.26)
Reason for Report : Company update
Potential Catalyst: Beverage business
A brighter outlook ahead
• Upgrade to Buy on better revenue and margin expectations in 2H11, TP raised to S$0.35
• Margins to improve in 2H11 on higher global wheat supply
• Beverage business to drive earnings in FY12F
Looking forward to a stronger 2H11. We are upgrading CSF from Hold to BUY on better sales and margin expectations. We were previously concerned about CSF’s ability to improve and sustain margins. Following Russia’s lifting of its ban on wheat exports from 1 July 2011, we believe CSF’s margin pressure will ease in 2H11 on higher global wheat supply. The ban has been in place since August 2010.
Revenue for FY11F raised on better sales volumes. Quarterly sales volumes in 4Q10/1Q11 were higher than average on more orders from existing customers. We raise our FY11F revenue estimates by 20% to Rp861bn based on : (a) higher sales volume coupled with an ASP rise of 8% at the end of 1Q11; and (ii) commencement of cup noodle sales in 2H11.
Beverages to drive 46% earnings growth in FY12F. We believe the beverage business is a potential catalyst for CSF in FY12F. On our estimates, the beverage business is capable of netting margins as high as 17%. Based on the planned manufacturing capacity, the beverage business is likely to contribute close to 30% in revenue and earnings in FY12F.
Upgrade to Buy, TP raised to S$0.35. Factoring in the impact of better sales volumes and margins, we revise our FY11F earnings up by 33%. Accordingly, we raise our TP from S$0.26 to S$0.35 based on 7x FY11F PE. Upgrade to BUY with potential upside of 46%.
Better revenue and margin expectations in 2H11
A better 2H11 ahead. We are upgrading CSF from Hold to BUY on better sales and margin expectations. We were previously concerned about CSF’s ability to improve and sustain margins, but following Russia’s lifting of its ban on wheat exports, we believe CSF’s margin pressure will ease on more global supplies in 2H11. CSF also posted strong sales volumes in 4Q10/1Q11 which we believe will be sustainable for the rest of FY11F. Factoring in the impact of better sales volumes and margins, we revise FY11F earnings up by 33%. Based on 7x FY11F PE, we are raising our target price for CSF from S$0.26 to S$0.35.
Wheat prices to ease on more supply. Russia announced that it would lift its export ban on wheat that was in place since August 2010 from 1 July 2011. A drought in Russia last year prompted the Russian government to impose a complete ban on grain exports to avoid domestic price increases. We believe this should put no further pressure on wheat prices for CSF for the rest of FY11F. Wheat prices have risen by 45% to an average of US$302/mt in YTD2011 (2H10 average: US$269/mt) compared to US$208/mt as at 30 June 2010 as drought and floods limited global supplies. Gross margins in 4Q10/1Q11 declined to 26.2%/25.2%, from 28.3% in 9M10. With the increase in global wheat supply going forward, we believe margins for CSF will improve in 2H11 to above 27%.
Revenue raised on better sales volumes. In FY09/FY10, instant noodle sales volume averaged 130m/180m pieces per quarter. Sales volumes in 4Q10/1Q11 were significantly higher at 220m/250m on more orders from existing customers. Therefore, we are raising our FY11F revenue estimates by 20% to Rp861bn based on: (i) higher sales volume coupled with an ASP rise of 8% at the end of 1Q11; and (b) commencement of cup noodle sales in 2H11.
Margin challenges in FY11F, but expect a strong FY12F. The key challenge for CSF in FY11F is higher wheat prices and margin pressure. For FY12F, the earnings outlook is stronger. We believe the beverage business is a potential catalyst for CSF in FY12F. The planned beverage manufacturing business is expected to commence operations and to start contributing in FY12F. On our estimates, CSF’s beverage business is capable of netting margins as high as 17% and based on the planned manufacturing capacity, the beverage business is likely to contribute close to 30% in revenue and earnings in FY12F. Thus, we are expecting strong revenue and earnings growth of 41% and 46% respectively in FY12F as a result of the contribution from the beverage business. The beverage business will also reduce the impact of higher wheat prices on CSF.
Valuations undemanding
Earnings upgraded. We have raised FY11F revenue by 20% to Rp861bn and earnings by 33% to Rp138bn. This is based on improved gross margin projections for 2H11, higher instant noodle sales volumes of above 200m pieces per quarter, higher average selling prices and contribution of cup noodle sales in 2H11.
Undemanding valuations. CSF currently trades at 4.8x prospective earnings. CSF’s current price is also close to its IPO price of S$0.22. Therefore, based on CSF’s earnings growth outlook and undemanding valuation, we think downside for the stock is low.
Upgrade to Buy, TP raised to S$0.35. We continue to value CSF at 7x FY11F PE. Our TP is raised to S$0.35 as we have increased our earnings estimates. Upgrade CSF to BUY with potential upside of 46%.
Price Target : 12-Month S$ 0.35 (Prev S$ 0.26)
Reason for Report : Company update
Potential Catalyst: Beverage business
A brighter outlook ahead
• Upgrade to Buy on better revenue and margin expectations in 2H11, TP raised to S$0.35
• Margins to improve in 2H11 on higher global wheat supply
• Beverage business to drive earnings in FY12F
Looking forward to a stronger 2H11. We are upgrading CSF from Hold to BUY on better sales and margin expectations. We were previously concerned about CSF’s ability to improve and sustain margins. Following Russia’s lifting of its ban on wheat exports from 1 July 2011, we believe CSF’s margin pressure will ease in 2H11 on higher global wheat supply. The ban has been in place since August 2010.
Revenue for FY11F raised on better sales volumes. Quarterly sales volumes in 4Q10/1Q11 were higher than average on more orders from existing customers. We raise our FY11F revenue estimates by 20% to Rp861bn based on : (a) higher sales volume coupled with an ASP rise of 8% at the end of 1Q11; and (ii) commencement of cup noodle sales in 2H11.
Beverages to drive 46% earnings growth in FY12F. We believe the beverage business is a potential catalyst for CSF in FY12F. On our estimates, the beverage business is capable of netting margins as high as 17%. Based on the planned manufacturing capacity, the beverage business is likely to contribute close to 30% in revenue and earnings in FY12F.
Upgrade to Buy, TP raised to S$0.35. Factoring in the impact of better sales volumes and margins, we revise our FY11F earnings up by 33%. Accordingly, we raise our TP from S$0.26 to S$0.35 based on 7x FY11F PE. Upgrade to BUY with potential upside of 46%.
Better revenue and margin expectations in 2H11
A better 2H11 ahead. We are upgrading CSF from Hold to BUY on better sales and margin expectations. We were previously concerned about CSF’s ability to improve and sustain margins, but following Russia’s lifting of its ban on wheat exports, we believe CSF’s margin pressure will ease on more global supplies in 2H11. CSF also posted strong sales volumes in 4Q10/1Q11 which we believe will be sustainable for the rest of FY11F. Factoring in the impact of better sales volumes and margins, we revise FY11F earnings up by 33%. Based on 7x FY11F PE, we are raising our target price for CSF from S$0.26 to S$0.35.
Wheat prices to ease on more supply. Russia announced that it would lift its export ban on wheat that was in place since August 2010 from 1 July 2011. A drought in Russia last year prompted the Russian government to impose a complete ban on grain exports to avoid domestic price increases. We believe this should put no further pressure on wheat prices for CSF for the rest of FY11F. Wheat prices have risen by 45% to an average of US$302/mt in YTD2011 (2H10 average: US$269/mt) compared to US$208/mt as at 30 June 2010 as drought and floods limited global supplies. Gross margins in 4Q10/1Q11 declined to 26.2%/25.2%, from 28.3% in 9M10. With the increase in global wheat supply going forward, we believe margins for CSF will improve in 2H11 to above 27%.
Revenue raised on better sales volumes. In FY09/FY10, instant noodle sales volume averaged 130m/180m pieces per quarter. Sales volumes in 4Q10/1Q11 were significantly higher at 220m/250m on more orders from existing customers. Therefore, we are raising our FY11F revenue estimates by 20% to Rp861bn based on: (i) higher sales volume coupled with an ASP rise of 8% at the end of 1Q11; and (b) commencement of cup noodle sales in 2H11.
Margin challenges in FY11F, but expect a strong FY12F. The key challenge for CSF in FY11F is higher wheat prices and margin pressure. For FY12F, the earnings outlook is stronger. We believe the beverage business is a potential catalyst for CSF in FY12F. The planned beverage manufacturing business is expected to commence operations and to start contributing in FY12F. On our estimates, CSF’s beverage business is capable of netting margins as high as 17% and based on the planned manufacturing capacity, the beverage business is likely to contribute close to 30% in revenue and earnings in FY12F. Thus, we are expecting strong revenue and earnings growth of 41% and 46% respectively in FY12F as a result of the contribution from the beverage business. The beverage business will also reduce the impact of higher wheat prices on CSF.
Valuations undemanding
Earnings upgraded. We have raised FY11F revenue by 20% to Rp861bn and earnings by 33% to Rp138bn. This is based on improved gross margin projections for 2H11, higher instant noodle sales volumes of above 200m pieces per quarter, higher average selling prices and contribution of cup noodle sales in 2H11.
Undemanding valuations. CSF currently trades at 4.8x prospective earnings. CSF’s current price is also close to its IPO price of S$0.22. Therefore, based on CSF’s earnings growth outlook and undemanding valuation, we think downside for the stock is low.
Upgrade to Buy, TP raised to S$0.35. We continue to value CSF at 7x FY11F PE. Our TP is raised to S$0.35 as we have increased our earnings estimates. Upgrade CSF to BUY with potential upside of 46%.
Goodpack Ltd (OCBC)
Downgrade to HOLD
Previous Rating: BUY
Current Price: S$2.05
Fair Value: S$2.12
Cautious on the demand for rubber
Rubber prices have risen YTD.... High demand has driven rubber prices higher by 57% from the past year and reached a record of US$574.4/tonne in Feb. Rubber's stellar performance came on the back of strong automotive sales in China, which had spiked 32% last year and surpassed the US as the top auto market for the second year running. The surge in crude oil prices have also helped push natural rubber demand higher as synthetic rubber uses crude oil as a principal raw material. Al though pr ices may have cooled of f recent highs, tyre manufacturers and analysts are expecting prices to remain elevated after global production estimate for rubber by the Association of Natural Rubber Producing Countries (ANRPC) was amended downwards from 10.025m to 9.936m tonnes after output revisions from Indonesia and Philippines.
… but is demand sustainable? China auto sales in Apr was down 0.25% YoY (-16% MoM) at 1.55m units. The decline was attributed to the removal of government subsidies on the purchase of smal l vehicles as wel l as the supply chain disruptions arising from Japan's earthquake. Vehicle purchase limits in certain cities and higher oil prices also had an effect on overall auto sales. Despite the decline, China's auto sales still rose about 6% YoY for the first four months of the year. Going forward, analysts have lowered earlier full-year estimates on the back of higher fuel prices and the Chinese government is likely to continue pursuing cooling measures with the further r e m o v a l o f s t i m u l u s m e a s u r e s a n d i m p l e m e n t a t i o n o f restrictions to control traffic. The China Automotive Technology & Research Center has even forecasted a decline as large as 10% for auto sales this year. However, with supply disruptions caused by Japan's ear thquake determined to be largely confined to 2Q 2011, auto sales globally are still expected to post modest gains as demand from other Asian countries like India will remain relatively resilient to offset potential declines from China, barring any sudden interest rate hikes to combat high inflation that may dampen demand.
Downgrade to HOLD. Goodpack currently enjoys about 82% revenue contribution from the natural and synthetic rubber segments (34% and 48% respectively). While we believe that rubber demand will remain supported from tyre replacements for existing vehicles, and continue to like Goodpack for its growth opportunities, we have adopted a cautious stance in the event of overzealous tightening measures from inflation-threatened countries like China and India that might curb demand drastically. Furthermore, on valuation grounds, the recent run-up in Goodpack's share price has reduced our upside potential. As such, we downgrade Goodpack to HOLD at an unchanged fair value of S$2.12 and will turn buyers at S$1.88.
Previous Rating: BUY
Current Price: S$2.05
Fair Value: S$2.12
Cautious on the demand for rubber
Rubber prices have risen YTD.... High demand has driven rubber prices higher by 57% from the past year and reached a record of US$574.4/tonne in Feb. Rubber's stellar performance came on the back of strong automotive sales in China, which had spiked 32% last year and surpassed the US as the top auto market for the second year running. The surge in crude oil prices have also helped push natural rubber demand higher as synthetic rubber uses crude oil as a principal raw material. Al though pr ices may have cooled of f recent highs, tyre manufacturers and analysts are expecting prices to remain elevated after global production estimate for rubber by the Association of Natural Rubber Producing Countries (ANRPC) was amended downwards from 10.025m to 9.936m tonnes after output revisions from Indonesia and Philippines.
… but is demand sustainable? China auto sales in Apr was down 0.25% YoY (-16% MoM) at 1.55m units. The decline was attributed to the removal of government subsidies on the purchase of smal l vehicles as wel l as the supply chain disruptions arising from Japan's earthquake. Vehicle purchase limits in certain cities and higher oil prices also had an effect on overall auto sales. Despite the decline, China's auto sales still rose about 6% YoY for the first four months of the year. Going forward, analysts have lowered earlier full-year estimates on the back of higher fuel prices and the Chinese government is likely to continue pursuing cooling measures with the further r e m o v a l o f s t i m u l u s m e a s u r e s a n d i m p l e m e n t a t i o n o f restrictions to control traffic. The China Automotive Technology & Research Center has even forecasted a decline as large as 10% for auto sales this year. However, with supply disruptions caused by Japan's ear thquake determined to be largely confined to 2Q 2011, auto sales globally are still expected to post modest gains as demand from other Asian countries like India will remain relatively resilient to offset potential declines from China, barring any sudden interest rate hikes to combat high inflation that may dampen demand.
Downgrade to HOLD. Goodpack currently enjoys about 82% revenue contribution from the natural and synthetic rubber segments (34% and 48% respectively). While we believe that rubber demand will remain supported from tyre replacements for existing vehicles, and continue to like Goodpack for its growth opportunities, we have adopted a cautious stance in the event of overzealous tightening measures from inflation-threatened countries like China and India that might curb demand drastically. Furthermore, on valuation grounds, the recent run-up in Goodpack's share price has reduced our upside potential. As such, we downgrade Goodpack to HOLD at an unchanged fair value of S$2.12 and will turn buyers at S$1.88.
Artivision Technologies Limited (KimEng)
Background: Artivision was incorporated in Singapore in 2004 and listed on the SGX-Catalist in August 2008. The company possesses a core proprietary computer vision technology, which it uses for two main businesses – video security and online video advertising
Recent development: There has been a strong interest in Artivision since it announced its new Facebook application, Advision. Advision displays advertisements in videos and still photographs shared by Facebook users and splits advertising revenue with the users. We invited management to conduct a live demonstration of the new application and to share its vision for this new business.
Our view:
- Social media as advertising channel. With about 600m registered users and growing, Facebook has become an effective way to reach out to the generation of today. Social media has its appeal, which makes Advision an enticing proposition for both Facebook users and advertisers. A thousand clicks would generate 50 cents for users while advertisers get to reach a large audience in a fast and effective manner.
- Keen interest from advertisers and Internet sites. Artivision said it has signed up about $0.5m worth of advertisements that are ready to be launched with the rollout of the application. Advertisers and other social media and Internet sites have indicated interest in the application. Though it is currently working with Facebook, Artivision said it is free to work with other social networking sites including those in China such as renren.com.
- A first-mover advantage. The heart of Artivision’s technology is the software in which the company has invested about $30m and eight years to build. For a competitor to come up with an alternative system, it might take at least two years, by which time Artivision would have already monetised on the opportunity.
- Could be the breakthrough it needs. There are no real profits for Artivision as yet and the company is in a negative equity position and may need to raise more funds. If Advision works out well, it could be the breakthrough the company needs. There is the possibility of a buyout from an Internet giant. Interestingly, Facebook has been known to acquire a company for talents rather than for the products. The endorsement by Facebook goes to show its appreciation of the product.
Recent development: There has been a strong interest in Artivision since it announced its new Facebook application, Advision. Advision displays advertisements in videos and still photographs shared by Facebook users and splits advertising revenue with the users. We invited management to conduct a live demonstration of the new application and to share its vision for this new business.
Our view:
- Social media as advertising channel. With about 600m registered users and growing, Facebook has become an effective way to reach out to the generation of today. Social media has its appeal, which makes Advision an enticing proposition for both Facebook users and advertisers. A thousand clicks would generate 50 cents for users while advertisers get to reach a large audience in a fast and effective manner.
- Keen interest from advertisers and Internet sites. Artivision said it has signed up about $0.5m worth of advertisements that are ready to be launched with the rollout of the application. Advertisers and other social media and Internet sites have indicated interest in the application. Though it is currently working with Facebook, Artivision said it is free to work with other social networking sites including those in China such as renren.com.
- A first-mover advantage. The heart of Artivision’s technology is the software in which the company has invested about $30m and eight years to build. For a competitor to come up with an alternative system, it might take at least two years, by which time Artivision would have already monetised on the opportunity.
- Could be the breakthrough it needs. There are no real profits for Artivision as yet and the company is in a negative equity position and may need to raise more funds. If Advision works out well, it could be the breakthrough the company needs. There is the possibility of a buyout from an Internet giant. Interestingly, Facebook has been known to acquire a company for talents rather than for the products. The endorsement by Facebook goes to show its appreciation of the product.
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