Yangzijiang Shipbuilding: Finally signed massive order from Seaspan (BUY, S$1.52, TP
S$1.98)
Massive orders from Seaspan confirmed; maintain BUY. Yangzijiang (YZJ) announced that they have entered into a shipbuilding contract with Seaspan to build seven 10,000TEU containership for US$0.7b (RMB4.5b) with options for 18 identical units. The seven units will be delivered in 2014 and 2015. The latest order win lifted its YTD order win to around US$1.2b (RMB7.85b) and gross order book to US$6.1b (RMB40b), implying 2.5x FY11F revenue. No changes to our EPS estimates. Stock is now trading at 9.3x FY11 P/E. We continue to like YZJ given its high order visibility and superior execution but believe our TP (based on 15x FY11 P/E) is too aggressive given weaker-than-expected order outlook from the bulk segment. Hence, we lower our TP from S$2.47 to S$1.98 based on lower target P/E of 12x. Maintain BUY.
Moving up the value chain to build bigger vessels. The order for the newly developed container vessel type is a major milestone for YZJ and is their biggest ship product to-date that will put them in direct rivalry with the Korean shipyards in building huge containerships. We believe the gross profit margin for the new batch of containership is much lower than its existing margins (>20%) and should hover around 8-9%. The order is not expected to have significant impact on our FY11-12F EPS estimates.
Valuation: Maintain BUY with a lower TP of S$1.98 based on 12x FY11 P/E. We lower our TP for YZJ given order outlook for the bulk carrier market has turned weaker due to falling charter rates and believe orders for new bulk carriers will be few and far in between. Still, we remain positive on the stock: (1) high order book will keep the yard busy for the next couple of years; (2) we expect margins for FY11 and FY12 to stay high due to execution of pre-crisis order book.
Friday, 10 June 2011
STX OSV (DMG)
STX OSV: Secured two newbuild orders valued at US$139m (BUY, S$1.21, TP S$1.89)
Newbuild order win gathering pace; re-iterate BUY. STX OSV has secured new contracts for two newbuild platform supply vessels (PSV) for NOK750m (US$139m/S$171m) from Island Offshore. This lifted their YTD vessel order wins to ten vessels (1Q11: three vessels; 2Q11: seven vessels) with an estimated value of NOK3.6b. We estimate that backlog order book is now at NOK17.5b, which is nearly 1.5x book-to-bill ratio. No changes to our EPS estimates as we have factored in NOK12b new orders in FY11. We remain positive on STX OSV: (1) order enquiries have improved and we believe pace of order win will gather pace in 2H11; (2) STX OSV is well positioned to secure orders for high-end offshore support vessels (OSV) given its market-leading position and strong customer relationships; (3) Stock valuation is undemanding at 7x FY11 P/E.
External vessel design but design is proven. The two Roll Royce’s UT 776 CD designed vessels are expected to be delivered in 1Q13 and 3Q13. The hulls of the vessels will be constructed at the STX OSV Braila yard in Romania and the vessels will be delivered from the STX OSV Brevik yard in Norway. Although the design is not STX OSV’s own design, the UT 776 CD is a proven design and the company has delivered the same design for its clients in the past.
Contract for the second PSV subjected to certain conditions. STX OSV highlighted that the contract for the second vessel is subjected to certain conditions being fulfilled before 3Q11. No further details on the conditions were provided. We believe chances are high that the second contract will move ahead and the contract is likely to be booked in the order book in 3Q11 and not 2Q11.
Valuation: Maintain BUY with TP at S$1.89. Our TP is based on 11x FY11 P/E, 10% premium to our target P/E for small and medium OSV shipyards and ~30% discount to the big-cap rig builders.
Newbuild order win gathering pace; re-iterate BUY. STX OSV has secured new contracts for two newbuild platform supply vessels (PSV) for NOK750m (US$139m/S$171m) from Island Offshore. This lifted their YTD vessel order wins to ten vessels (1Q11: three vessels; 2Q11: seven vessels) with an estimated value of NOK3.6b. We estimate that backlog order book is now at NOK17.5b, which is nearly 1.5x book-to-bill ratio. No changes to our EPS estimates as we have factored in NOK12b new orders in FY11. We remain positive on STX OSV: (1) order enquiries have improved and we believe pace of order win will gather pace in 2H11; (2) STX OSV is well positioned to secure orders for high-end offshore support vessels (OSV) given its market-leading position and strong customer relationships; (3) Stock valuation is undemanding at 7x FY11 P/E.
External vessel design but design is proven. The two Roll Royce’s UT 776 CD designed vessels are expected to be delivered in 1Q13 and 3Q13. The hulls of the vessels will be constructed at the STX OSV Braila yard in Romania and the vessels will be delivered from the STX OSV Brevik yard in Norway. Although the design is not STX OSV’s own design, the UT 776 CD is a proven design and the company has delivered the same design for its clients in the past.
Contract for the second PSV subjected to certain conditions. STX OSV highlighted that the contract for the second vessel is subjected to certain conditions being fulfilled before 3Q11. No further details on the conditions were provided. We believe chances are high that the second contract will move ahead and the contract is likely to be booked in the order book in 3Q11 and not 2Q11.
Valuation: Maintain BUY with TP at S$1.89. Our TP is based on 11x FY11 P/E, 10% premium to our target P/E for small and medium OSV shipyards and ~30% discount to the big-cap rig builders.
Keppel Corp (DMG)
Keppel Corp: New US$142m contract from Seadrill (BUY, S$11.08, TP S$13.80)
Adding a new contract to its backlog; re-iterate BUY. Keppel announced that they have secured a US$142m (S$175m) order for a semisubmersible drilling tender from Seadrill. We estimate that total YTD order wins climbed to S$6.8b and outstanding order book is now at S$9.9b. We think Keppel is on track to hit our full-year new order forecast of S$9b. The outlook for the offshore marine sector remains robust current high crude oil prices are significantly above the investment threshold of major exploration and production companies. We maintain our EPS estimates and SOTP-derived TP of S$13.80. The stock is now trading at 14.8x FY11 P/E and 13.7x FY12 P/E. Key catalysts are further order wins and potential upside surprises from Petrobras.
Repeat unit for a long standing customer. The award-winning KFELS SSDT 3600E drilling tender will be the eighth drilling tender ordered by Seadrill since the design was first delivered in 1994. The latest drilling tender is expected to be delivered in 2Q13. We expect margins to be in the mid teens for this unit.
Key risks to our recommendation are: (1) project execution risks; (2) decline in crude oil prices below the investment threshold of oil majors at around US$75/bbl; (3) deterioration in newbuild financing.
Adding a new contract to its backlog; re-iterate BUY. Keppel announced that they have secured a US$142m (S$175m) order for a semisubmersible drilling tender from Seadrill. We estimate that total YTD order wins climbed to S$6.8b and outstanding order book is now at S$9.9b. We think Keppel is on track to hit our full-year new order forecast of S$9b. The outlook for the offshore marine sector remains robust current high crude oil prices are significantly above the investment threshold of major exploration and production companies. We maintain our EPS estimates and SOTP-derived TP of S$13.80. The stock is now trading at 14.8x FY11 P/E and 13.7x FY12 P/E. Key catalysts are further order wins and potential upside surprises from Petrobras.
Repeat unit for a long standing customer. The award-winning KFELS SSDT 3600E drilling tender will be the eighth drilling tender ordered by Seadrill since the design was first delivered in 1994. The latest drilling tender is expected to be delivered in 2Q13. We expect margins to be in the mid teens for this unit.
Key risks to our recommendation are: (1) project execution risks; (2) decline in crude oil prices below the investment threshold of oil majors at around US$75/bbl; (3) deterioration in newbuild financing.
Tiger Airways (DMG)
Tiger reports a 23% increase in passengers for the month of May 2011
The news: For the month of May 2011, Tiger Airways reported carried 596k passengers, a 23% YoY increase from 486k. Average load factor has increased by 1ppt from 82% to 83%. On a month on month basis however, number of passengers carried fell 4.3% from 623k. Tony Davis noted that the growth reflected continued resilience in demand for their low cost product.
Our thoughts: Tiger is expecting a net nine new aircraft deliveries this financial year, all of which will be deployed into Asia. While both management of THAI Airways and Tiger Airways are still keen on their Thai-Tiger JV, the fate of the JV will only be known after the Thai elections. It has recently faced a roadblock in the Philippines after the CAB halted SEAIR's domestic routes following complaints filed by competitors that it may be in violation of cabotage laws. We maintain our neutral stance on the stock given current headwinds in its regional expansion and increasingly competitive environment in Australia. Our TP of S$1.40 is based on 12x our FY12F earnings.
The news: For the month of May 2011, Tiger Airways reported carried 596k passengers, a 23% YoY increase from 486k. Average load factor has increased by 1ppt from 82% to 83%. On a month on month basis however, number of passengers carried fell 4.3% from 623k. Tony Davis noted that the growth reflected continued resilience in demand for their low cost product.
Our thoughts: Tiger is expecting a net nine new aircraft deliveries this financial year, all of which will be deployed into Asia. While both management of THAI Airways and Tiger Airways are still keen on their Thai-Tiger JV, the fate of the JV will only be known after the Thai elections. It has recently faced a roadblock in the Philippines after the CAB halted SEAIR's domestic routes following complaints filed by competitors that it may be in violation of cabotage laws. We maintain our neutral stance on the stock given current headwinds in its regional expansion and increasingly competitive environment in Australia. Our TP of S$1.40 is based on 12x our FY12F earnings.
Midas (DMG)
Midas secures RMB62m contract from CNR Changchun
The news: Midas announced that its Aluminium Alloy Division, Jilin Midas Aluminium Industries Co., Ltd has secured a RMB62m contract from CNR Changchun Railway Vehicles Co., Ltd for the Shanghai Metro Line 12 Project. Jilin Midas will supply aluminium alloy extrusion profiles for 41 train sets, or 246 train cars (1 train set = 6 train cars), with delivery expected to take place from 2011 to 2013. The contract is expected to have a positive impact on the Group’s financials for the FY11-13.
Our thoughts: Since the start of 2011, the PRC railway infrastructure industry outlook has been clouded with uncertainties following a change of top official at Ministry of Railways (MOR) in Feb 10, and a 1Q11 pre-tax loss of RMB3.7b recorded by the agency, which have resulted in Midas’ and its peers’ dismal share price performances year-to-date. Nonetheless, with MOR’s recent positive assurance that China railway construction will continue to accelerate over the next five years (i.e. 30,000 km of new lines, investments will total RMB2.8t, and nationwide operational mileage to reach 120,000km) and as new contracts are awarded, sentiments towards the sector might soon improve.
At trough valuation of 1.4x P/B, we believe share price could see inflection point should order win announcements gather momentum. Midas’ order book tallied at RMB1.2b (4Q10: RMB1.3b) as of 1Q11, with RMB228m new order wins for the year. We continue to like Midas for its dominant market position and deem current risk/reward trade-off as attractive. Maintain BUY at TP of S$0.98, pegged to 18x FY11F P/E.
The news: Midas announced that its Aluminium Alloy Division, Jilin Midas Aluminium Industries Co., Ltd has secured a RMB62m contract from CNR Changchun Railway Vehicles Co., Ltd for the Shanghai Metro Line 12 Project. Jilin Midas will supply aluminium alloy extrusion profiles for 41 train sets, or 246 train cars (1 train set = 6 train cars), with delivery expected to take place from 2011 to 2013. The contract is expected to have a positive impact on the Group’s financials for the FY11-13.
Our thoughts: Since the start of 2011, the PRC railway infrastructure industry outlook has been clouded with uncertainties following a change of top official at Ministry of Railways (MOR) in Feb 10, and a 1Q11 pre-tax loss of RMB3.7b recorded by the agency, which have resulted in Midas’ and its peers’ dismal share price performances year-to-date. Nonetheless, with MOR’s recent positive assurance that China railway construction will continue to accelerate over the next five years (i.e. 30,000 km of new lines, investments will total RMB2.8t, and nationwide operational mileage to reach 120,000km) and as new contracts are awarded, sentiments towards the sector might soon improve.
At trough valuation of 1.4x P/B, we believe share price could see inflection point should order win announcements gather momentum. Midas’ order book tallied at RMB1.2b (4Q10: RMB1.3b) as of 1Q11, with RMB228m new order wins for the year. We continue to like Midas for its dominant market position and deem current risk/reward trade-off as attractive. Maintain BUY at TP of S$0.98, pegged to 18x FY11F P/E.
First Ship Lease Trust (DMG)
First Ship Lease Trust: Acquisition of product tanker and new unit placement
The news: First Ship Lease Trust (FSLT) announced that it has placed out 56m new units at issue price of S$0.35/unit. The new units represent ~9.4% of total units FSLT prior to the placement and ~8.6% of FSLT’s enlarged share capital (post placement). Net proceeds from the placement amount to ~S$18.7m and FSLT intends to use all the net proceeds for the proposed acquisition of MT TORM Marine which was announced on 9 Jun 2011. In the event that the propose acquisition fail to go through for any reason, the net proceeds will be used to acquire other vessels with leases or companies holding such vessels.
Our thoughts: In a short space of two weeks, FSLT has acted swiftly and proposed to acquire two product tankers worth a total of US$92m. Including the latest addition, FSLT’s vessel size will be increased to 25 (11 product tankers, two crude oil tankers, three chemical tankers, seven containerships, two dry bulk carriers). The latest acquisitions are FSLT’s first two acquisitions since Oct 2008. We view FSLT’s change in stance towards more aggressive expansion as signal of management’s more bullish outlook. Currently, FSLT is trading at 15% FY11 Bloomberg consensus dividend yield. We do not have a rating on this counter.
The news: First Ship Lease Trust (FSLT) announced that it has placed out 56m new units at issue price of S$0.35/unit. The new units represent ~9.4% of total units FSLT prior to the placement and ~8.6% of FSLT’s enlarged share capital (post placement). Net proceeds from the placement amount to ~S$18.7m and FSLT intends to use all the net proceeds for the proposed acquisition of MT TORM Marine which was announced on 9 Jun 2011. In the event that the propose acquisition fail to go through for any reason, the net proceeds will be used to acquire other vessels with leases or companies holding such vessels.
Our thoughts: In a short space of two weeks, FSLT has acted swiftly and proposed to acquire two product tankers worth a total of US$92m. Including the latest addition, FSLT’s vessel size will be increased to 25 (11 product tankers, two crude oil tankers, three chemical tankers, seven containerships, two dry bulk carriers). The latest acquisitions are FSLT’s first two acquisitions since Oct 2008. We view FSLT’s change in stance towards more aggressive expansion as signal of management’s more bullish outlook. Currently, FSLT is trading at 15% FY11 Bloomberg consensus dividend yield. We do not have a rating on this counter.
MIDAS (Lim&Tan)
- After a 3 month hiatus, Midas has finally announced a contract win from repeat customer CNR for the supply of aluminium alloy extrusion profiles for 246 train cars. This is for Shanghai Metro Line 12 Project and delivery is expected to take place from 2011 to 2013.
- While notable, the contract size of Rmb62mln is small relative to Midas’ current order backlog of Rmb1.2bln and Jan-June’11 wins totalling Rmb227.5mln is still 52% short of Jan-June’10’s Rmb472.6mln. And full year 2010 order wins of Rmb472.6mln itself represents a decline of 56% from year ago’s record Rmb1.083bln.
- Hopefully , management’s previously disclosed expectations of a pick up in orders in 2H 2011 would materialize to help arrest the declining order book trend of the last 1.5 years.
- This is especially important as the company is ramping up new production capacity significantly in anticipation of bigger orders going forward
- Since the revelations of the Railway Ministry scandals’ in Feb ’11, Midas’ share price has declined about 30%. While significant, it is nonetheless in line with that of its major customers such as CSR and CNR which are listed in Hong Kong and China respectively.
- While the consensus in general is still bullish on the railway sector in China, we note that the sharp declines in share prices of related stocks reflect the fact that uncertainties in terms of order wins going forward is real as well as whether the historically high profitability of these companies can be sustained going forward given that the Railway Ministry had plunged into its first ever loss in 1Q 2011.
- We maintain Neutral recommendation on Midas, notwithstanding its depressed share price
- While notable, the contract size of Rmb62mln is small relative to Midas’ current order backlog of Rmb1.2bln and Jan-June’11 wins totalling Rmb227.5mln is still 52% short of Jan-June’10’s Rmb472.6mln. And full year 2010 order wins of Rmb472.6mln itself represents a decline of 56% from year ago’s record Rmb1.083bln.
- Hopefully , management’s previously disclosed expectations of a pick up in orders in 2H 2011 would materialize to help arrest the declining order book trend of the last 1.5 years.
- This is especially important as the company is ramping up new production capacity significantly in anticipation of bigger orders going forward
- Since the revelations of the Railway Ministry scandals’ in Feb ’11, Midas’ share price has declined about 30%. While significant, it is nonetheless in line with that of its major customers such as CSR and CNR which are listed in Hong Kong and China respectively.
- While the consensus in general is still bullish on the railway sector in China, we note that the sharp declines in share prices of related stocks reflect the fact that uncertainties in terms of order wins going forward is real as well as whether the historically high profitability of these companies can be sustained going forward given that the Railway Ministry had plunged into its first ever loss in 1Q 2011.
- We maintain Neutral recommendation on Midas, notwithstanding its depressed share price
CHINA MILK (Lim&Tan)
The findings of the special audit review conducted by KPMG are worth a read. Among its findings are:
1. Response to majority of requests have been characterized as “obtuse and risible” and perception is of a company “not ready to be transparent” in its commercial activities.
2. Verification of cash balances simply could not be done with the refusal by bank manager to grant an interview / co-operate.
3. Purchase of cattle (at a cost of US$28.3 mln/37.2 mln in Nov ’09) that turned out to be of the similar average age as those to be replaced (5 years and not <2 years as alleged) because of diminishing returns on milk productivity.
4. Notwithstanding the replacement exercise, population of cows fell 53.5% over a 12-month period between Apr ’09 (21,747) and Mar ’10 (10,101).
5. Major capex spending (US$72.9 mln on securing land use rights and cultivation of crops like alfalfa; US$72.9 mln on Improvement Works to the farm & facilities) were not only not disclosed, the benefits are not apparent, eg buildings and facilities “cannot be said by any stretch of reason to be more than basic or at best average” after the works. They were also not even tabled for board discussion.
6. The company does not have a meaningful internal audit structure in place.
- Findings like the above do not bode well at all for the S-Chips sector.
1. Response to majority of requests have been characterized as “obtuse and risible” and perception is of a company “not ready to be transparent” in its commercial activities.
2. Verification of cash balances simply could not be done with the refusal by bank manager to grant an interview / co-operate.
3. Purchase of cattle (at a cost of US$28.3 mln/37.2 mln in Nov ’09) that turned out to be of the similar average age as those to be replaced (5 years and not <2 years as alleged) because of diminishing returns on milk productivity.
4. Notwithstanding the replacement exercise, population of cows fell 53.5% over a 12-month period between Apr ’09 (21,747) and Mar ’10 (10,101).
5. Major capex spending (US$72.9 mln on securing land use rights and cultivation of crops like alfalfa; US$72.9 mln on Improvement Works to the farm & facilities) were not only not disclosed, the benefits are not apparent, eg buildings and facilities “cannot be said by any stretch of reason to be more than basic or at best average” after the works. They were also not even tabled for board discussion.
6. The company does not have a meaningful internal audit structure in place.
- Findings like the above do not bode well at all for the S-Chips sector.
Heng Long International (KimEng)
Background: Incorporated in 1977, Heng Long is one of the world’s five top-tier tanneries of crocodilian leather. Its activities involve sourcing, tanning and processing raw crocodilian skins into crust and high-end finished crocodilian leather. The group delivers to an impressive global list of top luxury conglomerates such as LVMH, Prada, Rolex and Franck Muller.
Recent development: Management said that its substantial shareholders have been approached with a non-binding expression of interest which might well turn into an offer for the entire firm. With three out of five of the top-tier crocodile tanneries already acquired by Hermes and Gucci, it is only a matter of time that Heng Long will be next, given its unique position as the sole supplier in Asia.
Our view:
Affluent consumers emerging in Asia. During the global financial crisis, Heng Long was aided by the growing wealth in China and Russia looking to purchase lower-grade crocodile skins, yet still wanting to enjoy the status they reflect. With Asian consumer demand on the rise, management plans to double its production capacity of 281,000 skins pa.
Why it is an attractive takeover target. The demand for crocodile skin is severely limited by supply due to the scarcity of crocodile farming accompanied with regulations imposed by global environmental agencies (CITES.) The entry barriers to this business are especially high, not least because of the specific climate that is required to breed crocodiles. In order to have control of the supply, luxury brands would likely want to secure their upstream peers.
Scarcity premium. Heng Long holds the pricing power over the supply of crocodile skins, validating its success on never marking down a loss quarter ever. This is in turn reflected in its premium valuation with the stock currently trading at historical PER of 22.1x
Recent development: Management said that its substantial shareholders have been approached with a non-binding expression of interest which might well turn into an offer for the entire firm. With three out of five of the top-tier crocodile tanneries already acquired by Hermes and Gucci, it is only a matter of time that Heng Long will be next, given its unique position as the sole supplier in Asia.
Our view:
Affluent consumers emerging in Asia. During the global financial crisis, Heng Long was aided by the growing wealth in China and Russia looking to purchase lower-grade crocodile skins, yet still wanting to enjoy the status they reflect. With Asian consumer demand on the rise, management plans to double its production capacity of 281,000 skins pa.
Why it is an attractive takeover target. The demand for crocodile skin is severely limited by supply due to the scarcity of crocodile farming accompanied with regulations imposed by global environmental agencies (CITES.) The entry barriers to this business are especially high, not least because of the specific climate that is required to breed crocodiles. In order to have control of the supply, luxury brands would likely want to secure their upstream peers.
Scarcity premium. Heng Long holds the pricing power over the supply of crocodile skins, validating its success on never marking down a loss quarter ever. This is in turn reflected in its premium valuation with the stock currently trading at historical PER of 22.1x
M1 (KimEng)
Event:
By now, it should be clear that the “sell in May and go away” cliché has taken strong hold of the market as the last reporting season did not give any scope for upgrades, either in forecasts or recommendations. If anything, most companies flagged rising costs this year as the biggest stumbling block to growth. In such times, we believe investors should stick close to defensive stocks such as M1. A 100% dividend payout will translate to a highly attractive yield of 7%. BUY.
Our View:
For FY11, we think M1 will have the added catalyst of a possible dividend encore. Last year, it paid out 100% of its earnings, adding a special dividend of 3.5 cents a share on top of the ordinary dividend of 7.7 cents a share. Looking at capex trends, we believe it is possible that the company may follow up with a similar payout this year, and upgrade our dividend forecast for FY11 from 14.5 cents to 18 cents, assuming a 100% payout ratio against the typical 80%.
M1’s Long Term Evolution (LTE) network – Singapore’s first 4G high-speed (300Mbps) wireless network – will be fully deployed by 1Q12. While a major item, this has always been part of M1’s upgrading plans. Therefore, we do not expect 2011 capex to stray beyond guidance of $100m. With just $12m capex in 1Q11, we believe capex for the rest of the year should stay similarly tame. This should enhance M1’s ability to pay more dividends.
Unlike previous years when subscriber acquisition subsidies shot up due to Apple’s new iPhones, such costs should not be a concern this year with the proliferation of non-Apple products. Although costs are likely to rise in 2H11 as M1 ramps up its NGNBN-related sales activities, most of them will be variable in nature. In fact, as it cuts more traffic to its own backhaul transmission network this year, higher sales costs should be mitigated by lower leased circuit costs.
Action & Recommendation:
Maintain BUY with a target price of $2.88, based on 16x FY11F earnings.
By now, it should be clear that the “sell in May and go away” cliché has taken strong hold of the market as the last reporting season did not give any scope for upgrades, either in forecasts or recommendations. If anything, most companies flagged rising costs this year as the biggest stumbling block to growth. In such times, we believe investors should stick close to defensive stocks such as M1. A 100% dividend payout will translate to a highly attractive yield of 7%. BUY.
Our View:
For FY11, we think M1 will have the added catalyst of a possible dividend encore. Last year, it paid out 100% of its earnings, adding a special dividend of 3.5 cents a share on top of the ordinary dividend of 7.7 cents a share. Looking at capex trends, we believe it is possible that the company may follow up with a similar payout this year, and upgrade our dividend forecast for FY11 from 14.5 cents to 18 cents, assuming a 100% payout ratio against the typical 80%.
M1’s Long Term Evolution (LTE) network – Singapore’s first 4G high-speed (300Mbps) wireless network – will be fully deployed by 1Q12. While a major item, this has always been part of M1’s upgrading plans. Therefore, we do not expect 2011 capex to stray beyond guidance of $100m. With just $12m capex in 1Q11, we believe capex for the rest of the year should stay similarly tame. This should enhance M1’s ability to pay more dividends.
Unlike previous years when subscriber acquisition subsidies shot up due to Apple’s new iPhones, such costs should not be a concern this year with the proliferation of non-Apple products. Although costs are likely to rise in 2H11 as M1 ramps up its NGNBN-related sales activities, most of them will be variable in nature. In fact, as it cuts more traffic to its own backhaul transmission network this year, higher sales costs should be mitigated by lower leased circuit costs.
Action & Recommendation:
Maintain BUY with a target price of $2.88, based on 16x FY11F earnings.
Yangzijiang Shipbuilding (KimEng)
Yangzijiang Shipbuilding (YZJ SP) – Secured shipbuilding contracts with Seaspan Corp
Previous day closing price: $1.53
Recommendation – BUY (maintained)
Target price – $2.15 (maintained)
Yangzijiang (YZJ) announced yesterday that it has secured shipbuilding contracts worth US$0.7b with Seaspan Corporation to build seven units of 10,000 TEU containerships. We understand that the agreement comes with options for another 18 identical units to be built. If all 18 options are exercised, the total estimated value of the 25 units of 10,000 TEU containerships is expected to be US$2.5b. More significantly, this will bring YZJ’s confirmed order wins to US$1.2b, meeting 60% of our 2011 forecast.
According to management, the seven new vessels are scheduled for delivery in 2014 and 2015. This newly developed container vessel type is fuel-efficient in nature and its proprietary designs meet the current demand for larger capacity vessels to have lower emission and be eco-friendly. With this contract win, YZJ became the first Chinese yard to win an order for 10,000 TEU containerships as it challenges South Korea’s dominance in building more profitable types of ships. In our view, this also affirms YZJ’s technological capability as it moves up the learning curve to design and build larger and higher-end vessels.
While the total contract value, including the options, is slightly higher than the market’s expectation of US$2.2b (when it signed a letter of intent in March with Seaspan for 22 containerships), the pricing of US$0.1b per vessel is largely in line with our estimate. After a much anticipated wait, we believe the actual confirmation of such a large order from Seaspan will be hugely positive for YZJ’s share price. Maintain BUY and target price of $2.15.
Previous day closing price: $1.53
Recommendation – BUY (maintained)
Target price – $2.15 (maintained)
Yangzijiang (YZJ) announced yesterday that it has secured shipbuilding contracts worth US$0.7b with Seaspan Corporation to build seven units of 10,000 TEU containerships. We understand that the agreement comes with options for another 18 identical units to be built. If all 18 options are exercised, the total estimated value of the 25 units of 10,000 TEU containerships is expected to be US$2.5b. More significantly, this will bring YZJ’s confirmed order wins to US$1.2b, meeting 60% of our 2011 forecast.
According to management, the seven new vessels are scheduled for delivery in 2014 and 2015. This newly developed container vessel type is fuel-efficient in nature and its proprietary designs meet the current demand for larger capacity vessels to have lower emission and be eco-friendly. With this contract win, YZJ became the first Chinese yard to win an order for 10,000 TEU containerships as it challenges South Korea’s dominance in building more profitable types of ships. In our view, this also affirms YZJ’s technological capability as it moves up the learning curve to design and build larger and higher-end vessels.
While the total contract value, including the options, is slightly higher than the market’s expectation of US$2.2b (when it signed a letter of intent in March with Seaspan for 22 containerships), the pricing of US$0.1b per vessel is largely in line with our estimate. After a much anticipated wait, we believe the actual confirmation of such a large order from Seaspan will be hugely positive for YZJ’s share price. Maintain BUY and target price of $2.15.
Thursday, 9 June 2011
Adampak (KimEng)
Background: While it may be a bit simplistic to label Adampak as just a label manufacturer, it would not be far off. Of course, these labels are not the mailing labels one stick on envelopes but highly-technical labels used in the electronics, pharmaceuticals, computers and peripherals, petroleum and consumer industries.
Key products: Adampak produces labels such as barcode labels, heat-resistant labels and medical labels. Advanced labels include RFID labels for tracking and control, and security labels with optical technology used for counterfeit detection. The company also supplies die-cut components such as adhesive-free zone seals for HDDs, dampers, insulators and bonding tapes.
Our view:
Highly dependent on electronics. Although Adampak has been trying to broaden its customer base in recent years, the HDD industry still accounts for half of its sales. Another significant segment is telecommunications (7% of sales), while other electronics industries account for 31% of sales. In total, the electronics sector accounts for 87% of total sales and nonelectronics sales contribute the remainder. Labels account for 70% of group revenue while die-cut components account for 30%.
Started the year on an off note. Given its high exposure to the electronics sector, Adampak’s 1Q11 profits not surprisingly fell 35%. HDD-related sales fell 15% YoY while telecom sales fell 12%, led by a 25% plunge in sales of die-cut components to HDD customers. Gross margin also contracted 4ppt to 30% on the back of the lower sales as well as higher labour and raw material costs that it could not adjust fast enough. However, sales of labels to the nonelectronics sectors fared better, up 19% YoY.
Generous dividend payer. While Adampak has had its fair share of earnings ups and downs over the years, it has not stinged on the dividends. As the company is in a fairly mature industry, capex is not significant. This has allowed it to enjoy strong free cash flow generation. In the past five years, it has paid out 100% of earnings as dividends, and even during the recession years, dividend payout averaged about 60%. As at March this year, net cash accounted for 21% of its market cap.
Key products: Adampak produces labels such as barcode labels, heat-resistant labels and medical labels. Advanced labels include RFID labels for tracking and control, and security labels with optical technology used for counterfeit detection. The company also supplies die-cut components such as adhesive-free zone seals for HDDs, dampers, insulators and bonding tapes.
Our view:
Highly dependent on electronics. Although Adampak has been trying to broaden its customer base in recent years, the HDD industry still accounts for half of its sales. Another significant segment is telecommunications (7% of sales), while other electronics industries account for 31% of sales. In total, the electronics sector accounts for 87% of total sales and nonelectronics sales contribute the remainder. Labels account for 70% of group revenue while die-cut components account for 30%.
Started the year on an off note. Given its high exposure to the electronics sector, Adampak’s 1Q11 profits not surprisingly fell 35%. HDD-related sales fell 15% YoY while telecom sales fell 12%, led by a 25% plunge in sales of die-cut components to HDD customers. Gross margin also contracted 4ppt to 30% on the back of the lower sales as well as higher labour and raw material costs that it could not adjust fast enough. However, sales of labels to the nonelectronics sectors fared better, up 19% YoY.
Generous dividend payer. While Adampak has had its fair share of earnings ups and downs over the years, it has not stinged on the dividends. As the company is in a fairly mature industry, capex is not significant. This has allowed it to enjoy strong free cash flow generation. In the past five years, it has paid out 100% of earnings as dividends, and even during the recession years, dividend payout averaged about 60%. As at March this year, net cash accounted for 21% of its market cap.
China Animal Healthcare (KimEng)
Separate the wheat from the chaff
Event:
China Animal Healthcare’s (CAH) share price has corrected by almost 39% since the group won approval last December for its Hong Kong dual‐listing status. A weaker‐than‐expected 1Q11 results might have hurt stock value but we believe it was also unfairly hit by the recent spate of accounting and governance scandals involving Chinese companies listed here and abroad. We see the current weakness in share price as a good opportunity to buy into this quality stock.
Our View:
To recap, CAH posted a marginal 8.9% YoY improvement in 1Q11 net profit to RMB39.9m. This excluded the gain in fair value of derivative instruments and interest expense related to the convertible bonds. The softer growth was attributed to higher administrative expenses, arising from the increase in amortisation charges as well as start‐up costs following the acquisition of Bigvet Biotech.
In subsequent quarters, however, we expect CAH’s topline growth momentum to pick up upon obtaining the qualification rights to distribute its animal foot‐and‐mouth disease (FMD) vaccines to 10 provinces and municipalities. We understand that the first batch of vaccines has already been delivered in April.
As a manufacturer of three out of the four compulsory vaccines in China, CAH is keen to purchase the relevant production licence for bird flu vaccine. This will allow the group to fill in the missing piece of its business strategy and become a major player in the vaccine space, where barriers to entry are characteristically high.
Action & Recommendation
Reuters reported last month that CAH is in talks with investment banks to list on the Hong Kong Exchange and delist from Singapore. Though management has declined to comment on the article, it does not change our fundamental view on the group. Maintain BUY with a target price of $0.46, based on 15x FY11F PER (>30% discount to its peer average).
Event:
China Animal Healthcare’s (CAH) share price has corrected by almost 39% since the group won approval last December for its Hong Kong dual‐listing status. A weaker‐than‐expected 1Q11 results might have hurt stock value but we believe it was also unfairly hit by the recent spate of accounting and governance scandals involving Chinese companies listed here and abroad. We see the current weakness in share price as a good opportunity to buy into this quality stock.
Our View:
To recap, CAH posted a marginal 8.9% YoY improvement in 1Q11 net profit to RMB39.9m. This excluded the gain in fair value of derivative instruments and interest expense related to the convertible bonds. The softer growth was attributed to higher administrative expenses, arising from the increase in amortisation charges as well as start‐up costs following the acquisition of Bigvet Biotech.
In subsequent quarters, however, we expect CAH’s topline growth momentum to pick up upon obtaining the qualification rights to distribute its animal foot‐and‐mouth disease (FMD) vaccines to 10 provinces and municipalities. We understand that the first batch of vaccines has already been delivered in April.
As a manufacturer of three out of the four compulsory vaccines in China, CAH is keen to purchase the relevant production licence for bird flu vaccine. This will allow the group to fill in the missing piece of its business strategy and become a major player in the vaccine space, where barriers to entry are characteristically high.
Action & Recommendation
Reuters reported last month that CAH is in talks with investment banks to list on the Hong Kong Exchange and delist from Singapore. Though management has declined to comment on the article, it does not change our fundamental view on the group. Maintain BUY with a target price of $0.46, based on 15x FY11F PER (>30% discount to its peer average).
Olam International Ltd (OCBC)
Maintain BUY
Previous Rating: BUY
Current Price: S$2.75
Fair Value: S$3.22
Maintain BUY with new S$3.22 fair value
Equity funding raise exercise. Olam International Limited had recently announced an equity fund raising exercise to raise around S$740m of gross proceeds; this via three separate tranches, including a pro-rata and non-renounceable preferential offering of 97.3m new shares at S$2.56 each to entitled shareholders on the basis of one preferential share for every 22 existing shares. The offer prices of S$2.60 (for institutional investors and Temasek Holdings) and S$2.56 represented discounts of 8.1% and 9.5% to the pre-halt price of S$2.83. Olam intends to spend half of the proceeds on potential acquisitions in the future; 30% on capex; and 20% on general corporate purposes.
Modest recovery in share price. But because of the potential dilution in EPS (earnings per share) due to the 13.4% increase in existing share capital, Olam's stock price took a hit when it resumed trading on Tue (7 Jun), dropping by as much as 6.0%, before recovering somewhat to end 3.5% lower. And the stock continued its recovery yesterday, ending some 0.7% higher at S$2.75, despite a weaker overall market (STI down 0.3%); this suggests that the market is now looking beyond the EPS dilution and towards potential M&As and its future prospects. We believe that the latest fund raising exercise should also reduce near-term overhang of another fund raising exercise.
Revising FY11 and FY12 estimates. In the wake of its better than - expected 3Q FY11 performance, the latest share placement/offer, as well as other changes in assumptions following the change in analyst coverage, we revise our FY11 and FY12 estimates. As a recap, Olam posted a 74.7% YoY and 17.6% jump in revenue to S$4,735.7m in 3QFY11; while reported net profit climbed 42.5% YoY (down 12.5% QoQ) to S$127.3m (core around S$104.6m). For 9MFY11, revenue rose 53.1% to S$11,212.4m, while reported net profit climbed 13.2% to S$302.4m; estimated core earnings came in at around S$219.0m. As such, we now expect Olam to post FY11F revenue of S$13,767.3m and a net profit of S$369.4m. For FY12, we expect revenue of S$15,605.1m and net profit of S$408.5m.
Revising fair value to S$3.22. We are also revising our fair value from S$3.53 to S$3.22 (now based on 19x FY12F EPS). As there is still an upside of some 17% from here, we maintain our BUY rating. Other potential catalysts include the financial close of the Urea Manufacturing Project in Gabon (which we have not included any contributions yet) and more earnings accretive M&As. Key risks include continued volatilities in commodity prices and foreign exchange rates.
Previous Rating: BUY
Current Price: S$2.75
Fair Value: S$3.22
Maintain BUY with new S$3.22 fair value
Equity funding raise exercise. Olam International Limited had recently announced an equity fund raising exercise to raise around S$740m of gross proceeds; this via three separate tranches, including a pro-rata and non-renounceable preferential offering of 97.3m new shares at S$2.56 each to entitled shareholders on the basis of one preferential share for every 22 existing shares. The offer prices of S$2.60 (for institutional investors and Temasek Holdings) and S$2.56 represented discounts of 8.1% and 9.5% to the pre-halt price of S$2.83. Olam intends to spend half of the proceeds on potential acquisitions in the future; 30% on capex; and 20% on general corporate purposes.
Modest recovery in share price. But because of the potential dilution in EPS (earnings per share) due to the 13.4% increase in existing share capital, Olam's stock price took a hit when it resumed trading on Tue (7 Jun), dropping by as much as 6.0%, before recovering somewhat to end 3.5% lower. And the stock continued its recovery yesterday, ending some 0.7% higher at S$2.75, despite a weaker overall market (STI down 0.3%); this suggests that the market is now looking beyond the EPS dilution and towards potential M&As and its future prospects. We believe that the latest fund raising exercise should also reduce near-term overhang of another fund raising exercise.
Revising FY11 and FY12 estimates. In the wake of its better than - expected 3Q FY11 performance, the latest share placement/offer, as well as other changes in assumptions following the change in analyst coverage, we revise our FY11 and FY12 estimates. As a recap, Olam posted a 74.7% YoY and 17.6% jump in revenue to S$4,735.7m in 3QFY11; while reported net profit climbed 42.5% YoY (down 12.5% QoQ) to S$127.3m (core around S$104.6m). For 9MFY11, revenue rose 53.1% to S$11,212.4m, while reported net profit climbed 13.2% to S$302.4m; estimated core earnings came in at around S$219.0m. As such, we now expect Olam to post FY11F revenue of S$13,767.3m and a net profit of S$369.4m. For FY12, we expect revenue of S$15,605.1m and net profit of S$408.5m.
Revising fair value to S$3.22. We are also revising our fair value from S$3.53 to S$3.22 (now based on 19x FY12F EPS). As there is still an upside of some 17% from here, we maintain our BUY rating. Other potential catalysts include the financial close of the Urea Manufacturing Project in Gabon (which we have not included any contributions yet) and more earnings accretive M&As. Key risks include continued volatilities in commodity prices and foreign exchange rates.
CHINA MINZHONG (Lim&Tan)
We highlight several key points from China Minzhong’s CFO Mr Ryan Siek’s interview with Reuters:
a. the company aims to sell 40-45% more fresh vegetables over the next fiscal year to boost profit margins as fresh vegetables command gross margins of 60% versus processed vegetable’s 30%;
b. the company targets to derive 50% of its sales from fresh vegetables in the next 3-5 years, up from 30% currently;
c. in the fresh vegetable segment, the company is also targeting to increase sales contributions from higher margined and more niche products such as king oyster mushroom, black fungus, asparagus and organic vegetables;
d. the company expects contributions from higher margined king oyster mushroom to increase from the current 8 tonnes per day to 11 by the end of this year and 20 by end of next year;
e. most of their farmland in Fujian has not been impacted by the severe drought situation and besides, their peak harvest season has already ended with the next one expected to restart in Aug/Sept ’11;
f. in their industry, it is normal to have an “Act of God” clause in their contracts with their customers where the company will be protected against any penalties for non-deliveries in the event of crop failures under unforeseen weather conditions;
g. being a leader in their industry, the company benefits from being able to select premium farmland less prone to floods, droughts while having better irrigation and drainage systems to enhance production yields.
COMMENTS
1. The above positive updates and comments from the company will likely be able to help offset some of the recent market concerns. While its true that vegetable prices have fallen a significant 10-15% mom in May ’11, it is nevertheless still on a rising trend from a year and 2 year ago levels of about 15%. M a n a g e m e n t ’ s f o c u s o n i n c r e a s i n g s a l e s cont r ibut ions f rom ni che and hi ghe r ma r g ined vegetables such as king oyster mushrooms, black fungus, asparagus and organic vegetables will likely help insulate them from the decline in the more generic vegetable prices. The recent decline in vegetable prices also comes at a time during the company’s low season with the next peak season starting only in Aug/Sept ’11. And with the recent 20% decline in its share price, we believe the stock is attractive again and are upgrading it to a BUY ahead of next week’s analysts farm visit (to Fujian).
a. the company aims to sell 40-45% more fresh vegetables over the next fiscal year to boost profit margins as fresh vegetables command gross margins of 60% versus processed vegetable’s 30%;
b. the company targets to derive 50% of its sales from fresh vegetables in the next 3-5 years, up from 30% currently;
c. in the fresh vegetable segment, the company is also targeting to increase sales contributions from higher margined and more niche products such as king oyster mushroom, black fungus, asparagus and organic vegetables;
d. the company expects contributions from higher margined king oyster mushroom to increase from the current 8 tonnes per day to 11 by the end of this year and 20 by end of next year;
e. most of their farmland in Fujian has not been impacted by the severe drought situation and besides, their peak harvest season has already ended with the next one expected to restart in Aug/Sept ’11;
f. in their industry, it is normal to have an “Act of God” clause in their contracts with their customers where the company will be protected against any penalties for non-deliveries in the event of crop failures under unforeseen weather conditions;
g. being a leader in their industry, the company benefits from being able to select premium farmland less prone to floods, droughts while having better irrigation and drainage systems to enhance production yields.
COMMENTS
1. The above positive updates and comments from the company will likely be able to help offset some of the recent market concerns. While its true that vegetable prices have fallen a significant 10-15% mom in May ’11, it is nevertheless still on a rising trend from a year and 2 year ago levels of about 15%. M a n a g e m e n t ’ s f o c u s o n i n c r e a s i n g s a l e s cont r ibut ions f rom ni che and hi ghe r ma r g ined vegetables such as king oyster mushrooms, black fungus, asparagus and organic vegetables will likely help insulate them from the decline in the more generic vegetable prices. The recent decline in vegetable prices also comes at a time during the company’s low season with the next peak season starting only in Aug/Sept ’11. And with the recent 20% decline in its share price, we believe the stock is attractive again and are upgrading it to a BUY ahead of next week’s analysts farm visit (to Fujian).
Straits Asia Resources (DMG)
Straits Asia Resources: Share price has performed up to expectations (NEUTRAL,
S$3.10, TP S$3.08)
Stock price up 20% since 20 Apr 11, downgrade to NEUTRAL. Straits Asia Resources has enjoyed a solid share price run since 20 Apr 11 when we upgraded our call to a BUY. However, we believe all the good news has already been priced in: (1) Sebuku’s Northern Leases permits have been issued – this takes away licensing risks which we believe have been bugging investors. (2) High coal prices averaging US$125/tonne YTD have been factored in our forecasts. Though we are forecasting a strong 90/91% net profit growth for FY11/12, we are downgrading the counter to NEUTRAL on the back of lack of visible catalysts for further share price upside. Valuations currently appear fair with FY11 P/E of 16.4x at 10% premium to peer average. We believe investors should await a better entry level, with higher than expected coal prices, production volume and/or coal reserves serving as positive catalysts.
Recent meeting with management suggests Northern Leases operations are on track. Tanah Putih pit’s Stage 1 plan involves immediate extension of the pit to allow ramp up in Sebuku’s production to commence in 2H11. Stages 2 and 3 involve creation of additional pits, and are targeted to be ready by late 2012. These additional pits will serve as a contingency plan in the event of bad weather as well. Separately, we expect to have a reserves/resource update for the Northern Leases in ~a year’s time. Management has a resource target of 30-50m tonnes, while we are using ~30m tonnes for our reserves assumptions. Higher than expected reserves/resources could serve as an immediate catalyst for the counter.
Downgrade to NEUTRAL as valuations appear fair. We forecast a strong 90/91% net profit growth for FY11/12 driven by both higher volumes and ASPs. However, trading at 16.4x FY11 P/E, the counter appears to be fully valued. Our TP is unchanged at S$3.08 and we downgrade our call to NEUTRAL.
S$3.10, TP S$3.08)
Stock price up 20% since 20 Apr 11, downgrade to NEUTRAL. Straits Asia Resources has enjoyed a solid share price run since 20 Apr 11 when we upgraded our call to a BUY. However, we believe all the good news has already been priced in: (1) Sebuku’s Northern Leases permits have been issued – this takes away licensing risks which we believe have been bugging investors. (2) High coal prices averaging US$125/tonne YTD have been factored in our forecasts. Though we are forecasting a strong 90/91% net profit growth for FY11/12, we are downgrading the counter to NEUTRAL on the back of lack of visible catalysts for further share price upside. Valuations currently appear fair with FY11 P/E of 16.4x at 10% premium to peer average. We believe investors should await a better entry level, with higher than expected coal prices, production volume and/or coal reserves serving as positive catalysts.
Recent meeting with management suggests Northern Leases operations are on track. Tanah Putih pit’s Stage 1 plan involves immediate extension of the pit to allow ramp up in Sebuku’s production to commence in 2H11. Stages 2 and 3 involve creation of additional pits, and are targeted to be ready by late 2012. These additional pits will serve as a contingency plan in the event of bad weather as well. Separately, we expect to have a reserves/resource update for the Northern Leases in ~a year’s time. Management has a resource target of 30-50m tonnes, while we are using ~30m tonnes for our reserves assumptions. Higher than expected reserves/resources could serve as an immediate catalyst for the counter.
Downgrade to NEUTRAL as valuations appear fair. We forecast a strong 90/91% net profit growth for FY11/12 driven by both higher volumes and ASPs. However, trading at 16.4x FY11 P/E, the counter appears to be fully valued. Our TP is unchanged at S$3.08 and we downgrade our call to NEUTRAL.
LEE KIM TAH (Lim&Tan)
S$0.55-LKTS.SI
- The tightly-held stock was one of the very few firm spots in a generally weak market yesterday, with STI down 13 points or 0.4%.
- We would not rule out some taking the view LKT is a potential privatization candidate.
- Afterall, the Lee family has been buyers of the stock all these recent years. Their last purchase was of 32,000 sha r e s on Ma r 3rd a t 53.5 c ent s e a ch. Through the family holding company Lee Kim Tah Investments (LKTI), we believe they own about 347.52 mln shares or 68.76%.
- LKT’s latest NAV is 70.04 cents, implying 21.5% “discount”, which however is nothing extraordinary in the sector, as we have highlighted on several occasions. (LKT’s key assets are the 50% owned Jurong Point Shopping Centre and 25% owned adjacent retail mall. (Guthrie owns the remaining.) $27.6mln revaluation gains from these investment properties helped the company post net profit of $26 mln for Q1 ended Mar ’11, a 173% “surge” from $9.5 mln a year ago
- However, note that LKTI is a family holding company, ie attendant complexities / possible complications. (LKT is managed by Lee Soon Teck, one of the sons of the late founder, and his son Edwin.)
- Secondly, speculation of privatization has gone on for years, which is not to say it will never happen.
- But, based on dividend of 1 cent a share for at least the last 4 years, the 1.8% yield is no enticement for patience. (LKT paid a special dividend of 2.13 cents back in 2006, on top of the first & final normal 1 cents, arising from development profits.)
- We would give the stock a miss, especially given the current “enthusiasm” for potential privatization candidates in the property sector (eg SC Global, which if true, would make Simon Cheong generous in giving “advance notice” of his plans.
- The tightly-held stock was one of the very few firm spots in a generally weak market yesterday, with STI down 13 points or 0.4%.
- We would not rule out some taking the view LKT is a potential privatization candidate.
- Afterall, the Lee family has been buyers of the stock all these recent years. Their last purchase was of 32,000 sha r e s on Ma r 3rd a t 53.5 c ent s e a ch. Through the family holding company Lee Kim Tah Investments (LKTI), we believe they own about 347.52 mln shares or 68.76%.
- LKT’s latest NAV is 70.04 cents, implying 21.5% “discount”, which however is nothing extraordinary in the sector, as we have highlighted on several occasions. (LKT’s key assets are the 50% owned Jurong Point Shopping Centre and 25% owned adjacent retail mall. (Guthrie owns the remaining.) $27.6mln revaluation gains from these investment properties helped the company post net profit of $26 mln for Q1 ended Mar ’11, a 173% “surge” from $9.5 mln a year ago
- However, note that LKTI is a family holding company, ie attendant complexities / possible complications. (LKT is managed by Lee Soon Teck, one of the sons of the late founder, and his son Edwin.)
- Secondly, speculation of privatization has gone on for years, which is not to say it will never happen.
- But, based on dividend of 1 cent a share for at least the last 4 years, the 1.8% yield is no enticement for patience. (LKT paid a special dividend of 2.13 cents back in 2006, on top of the first & final normal 1 cents, arising from development profits.)
- We would give the stock a miss, especially given the current “enthusiasm” for potential privatization candidates in the property sector (eg SC Global, which if true, would make Simon Cheong generous in giving “advance notice” of his plans.
OSIM International (DMG)
OSIM International: Building a warchest for another M&A? (BUY, S$1.54, TP S$1.84)
OSIM announced that it has placed out S$120m convertible bonds to institutional investors at a conversion price of S$2.03, a 25% premium over last closing price of S$1.62. Potential dilution from full conversion of these CBs would be 8%. Net proceeds of S$118.3m will be earmarked for “potential value-added acquisitions.” Market has not taken news of the CB well and its share price has dived 5%. Its TDR listing has been approved which will see it raise S$76m. With healthy net operating cashflows of ~S$25m per quarter, it appears that OSIM is building a war chest for another M&A. We spoke to CFO Peter Lee and he stressed that “nothing specific has been identified at the moment.” We doubt OSIM would get into another Brookstone situation and its recent acquisition of a 35% stake in TWG for S$31.4m has been relatively minor in comparison to its cash hoard. We maintain our BUY call and TP of S$1.84, pegged to 18x FY11F earnings.
S$118.3m from CBs, potential 8% EPS dilution. The S$120m unsecured convertible bonds due 2016 were fully placed with institutional investors. Conversion price is set at S$2.025 per share, a 25% premium against last closing of S$1.62 on 7 June 2011 and will bear interest of 2.75% per annum, payable semi-annually. If fully converted, a total of 59.3m new ordinary shares will be issued hence we are looking at a potential 8% EPS dilution. If that happens, our TP would be reduced accordingly to S$1.70. Management has said that the proceeds will be used to “enhance general working capital” and “to finance potential value-added acquisitions.”
Criteria for “potential” acquisitions. We spoke to CFO Peter Lee and he says that “nothing specific has been identified at the moment.” He stressed that the Group has a strict set of criteria for any potential targets and will only consider speciality retailers in the well being/healthy lifestyle arena. They would have to be earnings accretive and have a strong brand name to which OSIM can strategically add value to. This is shown in its recent acquisition of a 35% stake in luxury tea retailer TWG for S$31.4m.
Maintain BUY. Stock price has fallen 5% following the news of the CB. We think the selloff is overdone as the CBs are currently not in the money and OSIM is unlikely to make another huge risky leveraged buyout after having learnt a painful lesson from its Brookstone acquisition. We like OSIM as it is a speciality retailer with a strong stable of brands and dominant market position in each of its businesses. Reiterate BUY with TP of S$1.84, pegged to 18x FY11F earnings.
OSIM announced that it has placed out S$120m convertible bonds to institutional investors at a conversion price of S$2.03, a 25% premium over last closing price of S$1.62. Potential dilution from full conversion of these CBs would be 8%. Net proceeds of S$118.3m will be earmarked for “potential value-added acquisitions.” Market has not taken news of the CB well and its share price has dived 5%. Its TDR listing has been approved which will see it raise S$76m. With healthy net operating cashflows of ~S$25m per quarter, it appears that OSIM is building a war chest for another M&A. We spoke to CFO Peter Lee and he stressed that “nothing specific has been identified at the moment.” We doubt OSIM would get into another Brookstone situation and its recent acquisition of a 35% stake in TWG for S$31.4m has been relatively minor in comparison to its cash hoard. We maintain our BUY call and TP of S$1.84, pegged to 18x FY11F earnings.
S$118.3m from CBs, potential 8% EPS dilution. The S$120m unsecured convertible bonds due 2016 were fully placed with institutional investors. Conversion price is set at S$2.025 per share, a 25% premium against last closing of S$1.62 on 7 June 2011 and will bear interest of 2.75% per annum, payable semi-annually. If fully converted, a total of 59.3m new ordinary shares will be issued hence we are looking at a potential 8% EPS dilution. If that happens, our TP would be reduced accordingly to S$1.70. Management has said that the proceeds will be used to “enhance general working capital” and “to finance potential value-added acquisitions.”
Criteria for “potential” acquisitions. We spoke to CFO Peter Lee and he says that “nothing specific has been identified at the moment.” He stressed that the Group has a strict set of criteria for any potential targets and will only consider speciality retailers in the well being/healthy lifestyle arena. They would have to be earnings accretive and have a strong brand name to which OSIM can strategically add value to. This is shown in its recent acquisition of a 35% stake in luxury tea retailer TWG for S$31.4m.
Maintain BUY. Stock price has fallen 5% following the news of the CB. We think the selloff is overdone as the CBs are currently not in the money and OSIM is unlikely to make another huge risky leveraged buyout after having learnt a painful lesson from its Brookstone acquisition. We like OSIM as it is a speciality retailer with a strong stable of brands and dominant market position in each of its businesses. Reiterate BUY with TP of S$1.84, pegged to 18x FY11F earnings.
Ascendas REIT (DMG)
Ascendas REIT awarded business park site at Fusionopolis for S$110m
The news: Ascendas REIT (A-REIT) has been awarded the business park site at Fusionopolis for S$110m by Jurong Town Corporation (JTC). Completion of the business park is expected in 3QFY14. The site will be a modern suburban business facility of 25k sqm GFA, comprising 60% business park space and 40% office space to cater to prospective tenants from IT and Media industries.
Our thoughts: Given that A-REIT’s bid was top of the list at ~S$4.4k psf ppr, a 29% premium to the closest bid, it came as no surprise that A-REIT has won the bid. We view A-REIT’s latest award positively as this will strengthen A-REIT’s leadership position in the Business & Science Parks segment. In addition, we believe the close proximity of the business park site at Fusionopolis with other A-REIT’s properties within the one-north region and Science Parks I & II will allow A-REIT to reap cost synergies. However, given the lack of immediate catalysts in the next 12 months, we believe A-REIT is currently fairly valued. Maintain NEUTRAL on A-REIT with unchanged TP of S$2.00.
The news: Ascendas REIT (A-REIT) has been awarded the business park site at Fusionopolis for S$110m by Jurong Town Corporation (JTC). Completion of the business park is expected in 3QFY14. The site will be a modern suburban business facility of 25k sqm GFA, comprising 60% business park space and 40% office space to cater to prospective tenants from IT and Media industries.
Our thoughts: Given that A-REIT’s bid was top of the list at ~S$4.4k psf ppr, a 29% premium to the closest bid, it came as no surprise that A-REIT has won the bid. We view A-REIT’s latest award positively as this will strengthen A-REIT’s leadership position in the Business & Science Parks segment. In addition, we believe the close proximity of the business park site at Fusionopolis with other A-REIT’s properties within the one-north region and Science Parks I & II will allow A-REIT to reap cost synergies. However, given the lack of immediate catalysts in the next 12 months, we believe A-REIT is currently fairly valued. Maintain NEUTRAL on A-REIT with unchanged TP of S$2.00.
Wednesday, 8 June 2011
Aviation Services (KimEng)
Event:
The International Air Transport Association (IATA) has slashed its 2011 profit forecast for the global airline industry in half. Due to the lag factor inherent in their businesses, any slowdown will not show up immediately in the results of SATS and SIA Engineering. Sentimentally however, the damage has been done as investors will generally take a cautious view, notwithstanding the companies’ actual financial performance in the next few quarters.
Our View:
IATA’s previous forecast of US$8.6b for global airline profitability is now out the window. Instead, just US$4b (a mere profit margin of 0.7%) stands between the 230 global airlines that form its membership base and the kind of losses last seen in 2008 and 2009 (when global losses hit US$16b and US$10b, respectively). Further, IATA noted that these kinds of losses could recur if fears of a slowdown in economic growth materialise following a recent run of poor economic data from the US.
Natural disasters in Japan and unrest in the
Middle East and North Africa were blamed but the main culprit was the sharp rise in oil prices. Brent crude has risen from an average of US$80/barrel to US$110/barrel this year. Also currently forming is an unpleasant combination of slowing passenger and cargo demand but rising capacity. The IATA cut its growth forecast for passenger traffic to 4.4% from 5.6% with forecast for cargo growth also cut to 5.1% from 6.1% previously. However, capacity is expected to rise by 5.8%.
IATA is usually quite good at flagging
industry peaks and troughs even though it is a laggard at pinpointing the numbers. For instance, although it started to flag 2008 as a downturn year as early as September 2007, it did not revise its profit forecast to a loss forecast until June 2008. So when IATA makes this kind of dramatic forecast revisions when aviation-related stocks are still trading near cycle peaks, we believe investors should pay serious attention.
Action & Recommendation
We downgrade SIA Engineering from HOLD to SELL as we see it being more vulnerable to an industry downturn, and advise lightening into strength. We keep SATS as a HOLD as 40% of its revenue comes from non-aviation businesses that may offset softer aviation profits. In the short term however, upcoming dividend payments may provide support.
The International Air Transport Association (IATA) has slashed its 2011 profit forecast for the global airline industry in half. Due to the lag factor inherent in their businesses, any slowdown will not show up immediately in the results of SATS and SIA Engineering. Sentimentally however, the damage has been done as investors will generally take a cautious view, notwithstanding the companies’ actual financial performance in the next few quarters.
Our View:
IATA’s previous forecast of US$8.6b for global airline profitability is now out the window. Instead, just US$4b (a mere profit margin of 0.7%) stands between the 230 global airlines that form its membership base and the kind of losses last seen in 2008 and 2009 (when global losses hit US$16b and US$10b, respectively). Further, IATA noted that these kinds of losses could recur if fears of a slowdown in economic growth materialise following a recent run of poor economic data from the US.
Natural disasters in Japan and unrest in the
Middle East and North Africa were blamed but the main culprit was the sharp rise in oil prices. Brent crude has risen from an average of US$80/barrel to US$110/barrel this year. Also currently forming is an unpleasant combination of slowing passenger and cargo demand but rising capacity. The IATA cut its growth forecast for passenger traffic to 4.4% from 5.6% with forecast for cargo growth also cut to 5.1% from 6.1% previously. However, capacity is expected to rise by 5.8%.
IATA is usually quite good at flagging
industry peaks and troughs even though it is a laggard at pinpointing the numbers. For instance, although it started to flag 2008 as a downturn year as early as September 2007, it did not revise its profit forecast to a loss forecast until June 2008. So when IATA makes this kind of dramatic forecast revisions when aviation-related stocks are still trading near cycle peaks, we believe investors should pay serious attention.
Action & Recommendation
We downgrade SIA Engineering from HOLD to SELL as we see it being more vulnerable to an industry downturn, and advise lightening into strength. We keep SATS as a HOLD as 40% of its revenue comes from non-aviation businesses that may offset softer aviation profits. In the short term however, upcoming dividend payments may provide support.
Olam International (DBSVickers)
HOLD S$2.73 STI : 3,115.95
(Downgrade from Buy)
Price Target : 12-Month S$ 3.00 (Prev S$ 3.30)
Reason for Report : Capital raising announcement
Potential Catalyst: Financial closing to Gabon urea project
Short term dilution
• Olam to raise S$740m in capital to implement strategic plan initially announced in 2009
• Proceeds to fund future acquisition and capex
• FY11-13F EPS revised down by 0.4% to 16.5%
• Rating cut to Hold given limited upside to revised S$3.00 TP
Raising net S$731.8m. Olam has announced a S$740m capital raising exercise, comprising S$245.5m placement at S$2.60 per share (c.94.4m shares) to institutional investors, S$249.1m as a 1 for 22 non renounceable preferential offering at S$2.56 per share (c.97.3m shares) and S$245.5m additional subscription at S$2.60 per share by Breedens Investments Pte Ltd (wholly-owned subsidiary of Temasek Holdings (Private) Limited) representing c.94.4m new shares. Net of capital raising fees, Olam would receive S$731.8m.
Proceeds to fund growth. Approximately 50% of the capital raised (or c.S$365.9m) will be used for future acquisitions, 30% (c.S$219.5m) for capital expenditure and 20% (c.S$146.4m) for general purposes. We note the company has c.US$362m (c.$445m) in capex/equity contributions to make over the coming years from previously announced projects (see page four of this report).
Adjust FY11-13F EPS down by 0.4% to 16.5%. While we are positive on the group’s stronger balance sheet post capital raising, we are slightly negative on the dilution impact. After accounting for the new shares from the capital raising, capex and earnings contribution from the Gabon palm plantation, Nigerian sugar refinery and Cote D’Ivoire cocoa processing projects and removal of previously assumed CB3 conversion, we have revised our FY11-13F lower by 0.4% to 16.5%. FY12 net gearing increases to 0.92x from 0.81x as a result.
Rating cut to Hold. We adjusted our TP to S$3.00 from S$3.30 due to an increase in number of issued shares and lower FY12F earnings due to removal of assumed CB3 conversion. With limited upside to our revised TP, we cut Olam’s rating to a Hold. Note than we have not imputed the Gabon urea project in our projections. A financial closing for this could be a catalyst for a re-rating; based on the enlarged number of shares, this could add S$0.46/share to our fair value
Olam raises new equity
There are three components to Olam’s capital raising
1. Placement shares – Private placement of 94,408,000 shares at issue price of S$2.60 to institutional and other investors. Gross proceeds of S$245.5m
2. Preferential offering - Pro-rata and non-renounceable preferential offering of 97,292,951 shares at issue price of S$2.56 based on one preferential offering shares for every 22 existing shares. Gross proceeds of S$249.1m
3. Proposed subscription – Issue of 94,408,000 shares at issue price of S$2.60 to Breedens Investments Pte Ltd (wholly-owned subsidiary of Temasek Holdings (Private) Limited). Gross proceeds of S$245.5m
Olam expects net proceeds of S$486.3m from the placement shares and preferential offering with a further S$245.5m net proceeds from the placement to Temasek. Total net proceeds from the capital raising will be S$731.8m.
Details of the equity raising
Olam shares will trade on a “cum” basis on the SGX up to 5pm on 10 June 2011 prior to commencement of the preferential offering. Placement shares will not be entitled to participate in the preferential offering. The placement to Temasek is subjected to shareholder approval at an extraordinary general meeting (EGM). Kewalram Singapore Limited (major shareholder), Sunny Verghese (CEO) and Shekhar Anatharaman and Sridhar Krishan (Exceutive Directors) will be voting in favour of the issue of shares to Temasek.
Assuming approval by shareholders, post the capital raising, Temasek’s shareholding will increase from 12.95% to approximately 16.09%, based on our estimates.
Earning changes
We have made the following changes to our earnings forecasts:
1. To include earnings and capital expenditure requirements from Phase I of the Gabon oil palm plantations. We estimate the project to earn S$3.1m in FY15 rising to S$33.8m in FY18. Olam’s FY11-13 profitability is impacted from higher net interest payments from an increase in capital expenditure.
2. To include capital expenditure requirements for the Nigerian sugar refinery project.
3. To include capital expenditure requirements for the Cote D’Ivore cocoa processing facility.
4. To remove previously assumed conversion of CB3.
The net impact from these changes are downward revisions to our FY11, FY12 and FY13 EPS by 0.4%, 13.0% and 16.5% respectively.
Net gearing for FY11 and FY12 increases to 1.15x and 0.92x respectively from prior forecast of 0.95x and 0.81x mainly due to removal of previously assumed CB3 conversion.
A summary of the changes we have made are provided on the next page.
Downgrade to Hold
While we are cognizant that Olam requires capital to fund its value accretive growth plans in particular projects such as the Gabon oil palm plantation, sugar refinery in Nigeria, processing facility in Cote D’Ivoire as well as their equity share of the Gabon urea project (financial close expected in September 2011), we reduce our TP to S$3.00 from S$3.30 on the account of an increase in number of shares. Given limited upside to our revised TP, we downgrade the stock to a Hold.
There is potential upside if Olam and its partners achieve financial close on the Gabon urea project. We have not imputed this project in our numbers. Our valuation of the project stands at S$0.46 per share.
(Downgrade from Buy)
Price Target : 12-Month S$ 3.00 (Prev S$ 3.30)
Reason for Report : Capital raising announcement
Potential Catalyst: Financial closing to Gabon urea project
Short term dilution
• Olam to raise S$740m in capital to implement strategic plan initially announced in 2009
• Proceeds to fund future acquisition and capex
• FY11-13F EPS revised down by 0.4% to 16.5%
• Rating cut to Hold given limited upside to revised S$3.00 TP
Raising net S$731.8m. Olam has announced a S$740m capital raising exercise, comprising S$245.5m placement at S$2.60 per share (c.94.4m shares) to institutional investors, S$249.1m as a 1 for 22 non renounceable preferential offering at S$2.56 per share (c.97.3m shares) and S$245.5m additional subscription at S$2.60 per share by Breedens Investments Pte Ltd (wholly-owned subsidiary of Temasek Holdings (Private) Limited) representing c.94.4m new shares. Net of capital raising fees, Olam would receive S$731.8m.
Proceeds to fund growth. Approximately 50% of the capital raised (or c.S$365.9m) will be used for future acquisitions, 30% (c.S$219.5m) for capital expenditure and 20% (c.S$146.4m) for general purposes. We note the company has c.US$362m (c.$445m) in capex/equity contributions to make over the coming years from previously announced projects (see page four of this report).
Adjust FY11-13F EPS down by 0.4% to 16.5%. While we are positive on the group’s stronger balance sheet post capital raising, we are slightly negative on the dilution impact. After accounting for the new shares from the capital raising, capex and earnings contribution from the Gabon palm plantation, Nigerian sugar refinery and Cote D’Ivoire cocoa processing projects and removal of previously assumed CB3 conversion, we have revised our FY11-13F lower by 0.4% to 16.5%. FY12 net gearing increases to 0.92x from 0.81x as a result.
Rating cut to Hold. We adjusted our TP to S$3.00 from S$3.30 due to an increase in number of issued shares and lower FY12F earnings due to removal of assumed CB3 conversion. With limited upside to our revised TP, we cut Olam’s rating to a Hold. Note than we have not imputed the Gabon urea project in our projections. A financial closing for this could be a catalyst for a re-rating; based on the enlarged number of shares, this could add S$0.46/share to our fair value
Olam raises new equity
There are three components to Olam’s capital raising
1. Placement shares – Private placement of 94,408,000 shares at issue price of S$2.60 to institutional and other investors. Gross proceeds of S$245.5m
2. Preferential offering - Pro-rata and non-renounceable preferential offering of 97,292,951 shares at issue price of S$2.56 based on one preferential offering shares for every 22 existing shares. Gross proceeds of S$249.1m
3. Proposed subscription – Issue of 94,408,000 shares at issue price of S$2.60 to Breedens Investments Pte Ltd (wholly-owned subsidiary of Temasek Holdings (Private) Limited). Gross proceeds of S$245.5m
Olam expects net proceeds of S$486.3m from the placement shares and preferential offering with a further S$245.5m net proceeds from the placement to Temasek. Total net proceeds from the capital raising will be S$731.8m.
Details of the equity raising
Olam shares will trade on a “cum” basis on the SGX up to 5pm on 10 June 2011 prior to commencement of the preferential offering. Placement shares will not be entitled to participate in the preferential offering. The placement to Temasek is subjected to shareholder approval at an extraordinary general meeting (EGM). Kewalram Singapore Limited (major shareholder), Sunny Verghese (CEO) and Shekhar Anatharaman and Sridhar Krishan (Exceutive Directors) will be voting in favour of the issue of shares to Temasek.
Assuming approval by shareholders, post the capital raising, Temasek’s shareholding will increase from 12.95% to approximately 16.09%, based on our estimates.
Earning changes
We have made the following changes to our earnings forecasts:
1. To include earnings and capital expenditure requirements from Phase I of the Gabon oil palm plantations. We estimate the project to earn S$3.1m in FY15 rising to S$33.8m in FY18. Olam’s FY11-13 profitability is impacted from higher net interest payments from an increase in capital expenditure.
2. To include capital expenditure requirements for the Nigerian sugar refinery project.
3. To include capital expenditure requirements for the Cote D’Ivore cocoa processing facility.
4. To remove previously assumed conversion of CB3.
The net impact from these changes are downward revisions to our FY11, FY12 and FY13 EPS by 0.4%, 13.0% and 16.5% respectively.
Net gearing for FY11 and FY12 increases to 1.15x and 0.92x respectively from prior forecast of 0.95x and 0.81x mainly due to removal of previously assumed CB3 conversion.
A summary of the changes we have made are provided on the next page.
Downgrade to Hold
While we are cognizant that Olam requires capital to fund its value accretive growth plans in particular projects such as the Gabon oil palm plantation, sugar refinery in Nigeria, processing facility in Cote D’Ivoire as well as their equity share of the Gabon urea project (financial close expected in September 2011), we reduce our TP to S$3.00 from S$3.30 on the account of an increase in number of shares. Given limited upside to our revised TP, we downgrade the stock to a Hold.
There is potential upside if Olam and its partners achieve financial close on the Gabon urea project. We have not imputed this project in our numbers. Our valuation of the project stands at S$0.46 per share.
Residential Property Market (OCBC)
Maintain Neutral
Previous Rating: Neutral
Closer look at the possible BTO ceiling hike
An estimated 2.3k-unit demand shift to BTO. Given a possible BTO income ceiling increase from $8k to 10k later this year, we take a closer look at the numbers involved and examine the impact on the HDB resale and private residential markets. From the 2010 census, we estimate 89k households (with at least one citizen) in the S$8-10k bracket. In our methodology, we work off the overall national average and break down the group by dwelling categories. We then estimate a potential demand of 13k units for BTO flats from the group, of which we assume 30% would buy BTO flats. In addition, we assume 5% of 19.5k new households formed annually from first-time marriages would fall into the S$8-10k income bracket and buy BTO flats as well. This results in a combined demand shift of 2.3k units to the BTO market on an annual basis.
Demand would shift from HDB resale market. We believe the majority of this 2.3k-unit demand would shift from the HDB resale market. The HDB resale market has an average of 31.8k transactions over the last four years and the impact of the income limit hike alone could reduce annual resale volume by 6-8%. Additionally, the increase in BTO supply to 26k units this year would put even more downward pressure on HDB resale volume and prices. Note that 2011 would be the first in the last six years where BTO supply would exceed household formation (first-time marriages).
Impact on pr ivate pr imary market l ikely smal ler. The impact of demand shifting away from the private primary market would likely be smaller. We examined 11,037 new sales with caveats lodged with the URA over the last twelve months and found 1,330 sales for units >80 sqm and <$1.2m to buyers with HDB addresses. These are private units most suited to upgraders/first-time buyers in the $8-10k income group, for which BTO flats can be substitutes. If 200 to 400 units of this 1,330-unit demand shifted to BTO, we could see a 2-5% drop in annual private primary sales. Note that BTO flats are not substitutes for shoebox units typically bought for rental and capital appreciation.
Maintain NEUTRAL on sector; BUY UOL. With the liquidity in the market and residential unit sales still expected to hold in FY11, we maintain our NEUTRAL rating for the residential property sector at this juncture. Our pick in this sector is UOL due to its limited residential exposure and the potential to pick up accret ive acquisi t ions in a sof ter market ahead. Maintain BUY on UOL with a fair value estimate of $5.57 (at 20% discount to RNAV).
Previous Rating: Neutral
Closer look at the possible BTO ceiling hike
An estimated 2.3k-unit demand shift to BTO. Given a possible BTO income ceiling increase from $8k to 10k later this year, we take a closer look at the numbers involved and examine the impact on the HDB resale and private residential markets. From the 2010 census, we estimate 89k households (with at least one citizen) in the S$8-10k bracket. In our methodology, we work off the overall national average and break down the group by dwelling categories. We then estimate a potential demand of 13k units for BTO flats from the group, of which we assume 30% would buy BTO flats. In addition, we assume 5% of 19.5k new households formed annually from first-time marriages would fall into the S$8-10k income bracket and buy BTO flats as well. This results in a combined demand shift of 2.3k units to the BTO market on an annual basis.
Demand would shift from HDB resale market. We believe the majority of this 2.3k-unit demand would shift from the HDB resale market. The HDB resale market has an average of 31.8k transactions over the last four years and the impact of the income limit hike alone could reduce annual resale volume by 6-8%. Additionally, the increase in BTO supply to 26k units this year would put even more downward pressure on HDB resale volume and prices. Note that 2011 would be the first in the last six years where BTO supply would exceed household formation (first-time marriages).
Impact on pr ivate pr imary market l ikely smal ler. The impact of demand shifting away from the private primary market would likely be smaller. We examined 11,037 new sales with caveats lodged with the URA over the last twelve months and found 1,330 sales for units >80 sqm and <$1.2m to buyers with HDB addresses. These are private units most suited to upgraders/first-time buyers in the $8-10k income group, for which BTO flats can be substitutes. If 200 to 400 units of this 1,330-unit demand shifted to BTO, we could see a 2-5% drop in annual private primary sales. Note that BTO flats are not substitutes for shoebox units typically bought for rental and capital appreciation.
Maintain NEUTRAL on sector; BUY UOL. With the liquidity in the market and residential unit sales still expected to hold in FY11, we maintain our NEUTRAL rating for the residential property sector at this juncture. Our pick in this sector is UOL due to its limited residential exposure and the potential to pick up accret ive acquisi t ions in a sof ter market ahead. Maintain BUY on UOL with a fair value estimate of $5.57 (at 20% discount to RNAV).
Singapore Airlines (DBSVickers)
BUY; S$14.08; Price Target : 12-Month S$ 17.00
SIA signs code-share agreement with Virgin Australia
SIA has signed a code-share alliance agreement with Virgin Australia group of airlines providing access to each other's networks, coordinating schedules and pricing, engaging in joint marketing & distribution, and offering frequent flyer benefits and lounge access to each other's customers. This agreement will need to be approved by the Australian regulators.
For SIA, the code-share opens up connections to over 30 additional cities in Australia and the Pacific. SIA currently has a presence in Australia with services to Adelaide, Brisbane, Melbourne, Perth and Sydney but no access to the rest of Australia, including important business destinations for Australia's fast-growing mining industry.
According to CEO Mr Goh, the tie-up will boost SIA's corporate product in Australia and open up new options for SIA's frequent flyer members in Australia. Later on, SIA may also start to code-share on Virgin Australia's flights to the US, which may be easier to secure from the regulators than its own Australia-US flights, which the Australian regulators have thus far refused to hand out to SIA. SIA currently has more than 50% market share in Singapore-Australia routes, followed by Qantas at 26% and Emirates at 9% and this move should further consolidate its position in this market when coupled with its more aggressive expansion plan on these routes.
Overall, a mildly positive development for SIA as it will be able to enhance its service offerings further into Australia and also raises its competitiveness versus Qantas in the Asia-Australia market. Together with the recently announced low fare, mid and long haul airline, these are proactive steps taken by SIA to get back on the growth path and also fend off competition.
Maintain BUY, TP S$17.00.
SIA signs code-share agreement with Virgin Australia
SIA has signed a code-share alliance agreement with Virgin Australia group of airlines providing access to each other's networks, coordinating schedules and pricing, engaging in joint marketing & distribution, and offering frequent flyer benefits and lounge access to each other's customers. This agreement will need to be approved by the Australian regulators.
For SIA, the code-share opens up connections to over 30 additional cities in Australia and the Pacific. SIA currently has a presence in Australia with services to Adelaide, Brisbane, Melbourne, Perth and Sydney but no access to the rest of Australia, including important business destinations for Australia's fast-growing mining industry.
According to CEO Mr Goh, the tie-up will boost SIA's corporate product in Australia and open up new options for SIA's frequent flyer members in Australia. Later on, SIA may also start to code-share on Virgin Australia's flights to the US, which may be easier to secure from the regulators than its own Australia-US flights, which the Australian regulators have thus far refused to hand out to SIA. SIA currently has more than 50% market share in Singapore-Australia routes, followed by Qantas at 26% and Emirates at 9% and this move should further consolidate its position in this market when coupled with its more aggressive expansion plan on these routes.
Overall, a mildly positive development for SIA as it will be able to enhance its service offerings further into Australia and also raises its competitiveness versus Qantas in the Asia-Australia market. Together with the recently announced low fare, mid and long haul airline, these are proactive steps taken by SIA to get back on the growth path and also fend off competition.
Maintain BUY, TP S$17.00.
Wilmar International Ltd (CIMB)
OUTPERFORM Maintained
S$5.30 Target: S$6.20
Mkt.Cap: S$33,664m/US$27,358m
Palm Oil
China scraps price controls for cooking oils
Price controls in China lifted
According to Reuters, China has lifted price caps for retail vegetable oils. The removal is a nice surprise and could boost the profitability of Wilmar’s consumer products division in 2H11. This is because Wilmar would now be able to raise the retail prices of its packaged cooking oils to pass on higher feedstock costs and restore its profit margins. There is no change to our earnings forecasts pending confirmation of this news. We estimate that for every US$10/tonne increase in pretax margins for the consumer products division, Wilmar’s profit could gain by 1% or around US$15m, assuming a 6-month impact. Also intact is our target price of S$6.20, based on 16x forward P/E and Outperform rating. Potential re-rating catalysts are this news and stronger-than-expected earnings.
The news
China has lifted price caps for retail vegetable oils, according to Reuters, citing unidentified industry sources. A call to the Ministry of Commerce by Bloomberg had not been answered.
Comments
We are yet unable to verify this news with the company. The removal of the price caps should be positive for Wilmar, allowing it to raise its cooking-oil prices and restore profit margins for this division. Wilmar has not raised the prices of its branded cooking oil products since Oct 10 due to the price caps.
Wilmar is the largest owner of branded packaged edible oils in China, with about 45% share of the branded edible oils market in China in 2010. It derived 11% and 9% of its pretax profits from its consumer packs division (which comprises mainly branded cooking oil sales in China) in 2009 and 2010, respectively.
Pretax margins for this division had been pinched by price controls in 2008 and since 4Q10. Since Dec 10, the Chinese government had been restraining cooking-oil producers from raising their cooking-oil prices as part of its efforts to address inflation. To provide relief to the producers from rising feedstock costs, the government had been selling state reserves of soybeans to these producers at below international market prices. It is yet unclear whether the producers would be required to obtain government approval for raising their cooking-oil prices following this lifting.
Valuation and recommendation
Upside to earnings. Back in 1H08 when the government had slapped price controls on cooking oil, PBT margins for Wilmar’s consumer products division fell to a low of US$18/tonne against a 2009 pretax margin of US$70.60. We have conservatively assumed that pretax margins would average US$22/tonne for this division in 2011.For every US$10/tonne increase in pretax margins here, Wilmar’s profit could gain by 1% or around US$15m, assuming a 6-month impact.
Maintain Outperform. We are maintaining our profit forecasts for FY11-13 and target price of S$6.20, based on 16x forward P/E, a 10% premium to our market P/E target, pending clarification from management. We had turned positive on the group recently, convinced that the worst is over and that its 1Q strength is sustainable in light of softening feedstock prices, lower cost of soybeans from the Chinese government in 2Q, stronger sales volumes in the upcoming quarter as well as strong profit contributions from Sucrogen in 2H.
S$5.30 Target: S$6.20
Mkt.Cap: S$33,664m/US$27,358m
Palm Oil
China scraps price controls for cooking oils
Price controls in China lifted
According to Reuters, China has lifted price caps for retail vegetable oils. The removal is a nice surprise and could boost the profitability of Wilmar’s consumer products division in 2H11. This is because Wilmar would now be able to raise the retail prices of its packaged cooking oils to pass on higher feedstock costs and restore its profit margins. There is no change to our earnings forecasts pending confirmation of this news. We estimate that for every US$10/tonne increase in pretax margins for the consumer products division, Wilmar’s profit could gain by 1% or around US$15m, assuming a 6-month impact. Also intact is our target price of S$6.20, based on 16x forward P/E and Outperform rating. Potential re-rating catalysts are this news and stronger-than-expected earnings.
The news
China has lifted price caps for retail vegetable oils, according to Reuters, citing unidentified industry sources. A call to the Ministry of Commerce by Bloomberg had not been answered.
Comments
We are yet unable to verify this news with the company. The removal of the price caps should be positive for Wilmar, allowing it to raise its cooking-oil prices and restore profit margins for this division. Wilmar has not raised the prices of its branded cooking oil products since Oct 10 due to the price caps.
Wilmar is the largest owner of branded packaged edible oils in China, with about 45% share of the branded edible oils market in China in 2010. It derived 11% and 9% of its pretax profits from its consumer packs division (which comprises mainly branded cooking oil sales in China) in 2009 and 2010, respectively.
Pretax margins for this division had been pinched by price controls in 2008 and since 4Q10. Since Dec 10, the Chinese government had been restraining cooking-oil producers from raising their cooking-oil prices as part of its efforts to address inflation. To provide relief to the producers from rising feedstock costs, the government had been selling state reserves of soybeans to these producers at below international market prices. It is yet unclear whether the producers would be required to obtain government approval for raising their cooking-oil prices following this lifting.
Valuation and recommendation
Upside to earnings. Back in 1H08 when the government had slapped price controls on cooking oil, PBT margins for Wilmar’s consumer products division fell to a low of US$18/tonne against a 2009 pretax margin of US$70.60. We have conservatively assumed that pretax margins would average US$22/tonne for this division in 2011.For every US$10/tonne increase in pretax margins here, Wilmar’s profit could gain by 1% or around US$15m, assuming a 6-month impact.
Maintain Outperform. We are maintaining our profit forecasts for FY11-13 and target price of S$6.20, based on 16x forward P/E, a 10% premium to our market P/E target, pending clarification from management. We had turned positive on the group recently, convinced that the worst is over and that its 1Q strength is sustainable in light of softening feedstock prices, lower cost of soybeans from the Chinese government in 2Q, stronger sales volumes in the upcoming quarter as well as strong profit contributions from Sucrogen in 2H.
Amtek Engineering Ltd (CIMB)
OUTPERFORM Maintained
S$0.96 @07/06/11
Target: S$1.43
Technology Components
No road blocks to growth
• Recent weakness throws up buying opportunity. Our conversations with management suggest that business had remained healthy in the June quarter and Amtek is on track to meet our full-year profit forecast, representing a solid 129% yoy jump. We remain positive on its earnings prospects, underpinned by new programme wins in the automotive and electronics & electrical segments. We maintain our earnings estimates and target price of S$1.43, pegging the stock at only 9x CY12 P/E, which we deem undemanding against its healthy earnings prospects and divided yields. We see catalysts from strong 4QFY11 results, further penetration of high-margin businesses, and a possible recovery of its storage business in 2H11.
• Growth from automotive and electronics & electrical segments. The group continues to gain traction in these two segments on the back of greater outsourcing and the relocation of manufacturing facilities to Asia by OEMs.
• Data storage still weak, but may start seasonal uptick in 2H11. This is in line with the muted guidance from major drive makers for the June quarter. However, business from this segment may improve as we enter the seasonally stronger half.
No slowdown in business
Business remained healthy in the June quarter. From our discussions with the company, Amtek appears on track for sequential growth in 4QFY11, with growth coming from most sectors except data storage and enterprise server enclosures. We understand that orders have not been pushed back or cut despite earlier fears of disruptions in the global supply chain following the Japanese earthquake and tsunami. The higher sales should result in margin expansion from operating leverage. We are projecting a 42% qoq and 371% yoy jump in 4QFY11 profit (due to the absence of oneoffs) to US$14.1m.
Growth from automotive and electronics & electrical segments. The group continues to gain traction in automotive parts on the back of greater outsourcing and the relocation of manufacturing facilities to Asia by OEMs. Management remains bullish on this segment, supported by its new customer and programme wins and increased volumes from existing products as customers increasingly source parts more locally, especially in China. Despite recent disruptions to the supply chain as reported for some automotive makers, Amtek’s automotive components business continues to grow yoy. Additionally, we believe its focus on safety-related automotive components will help create greater stickiness among customers as production qualification here takes a long time. Like Amtek, we have assumed healthy double-digit yoy growth p.a. over the next few years, lifting contributions from this segment to about 20% of group sales by FY14, from 12% in FY10.
In the electronics & electrical sector, Amtek’s growth has been largely powered by the relocation efforts of one of its major customers from Europe to Asia. This had helped to lift contributions from this segment to 13.6% of group revenue in 3QFY11 from less than 10% in FY10. We expect the momentum to persist as we understand that this major customer wants to work more closely with Amtek in Asia.
Other potential sectors Amtek is hoping to harness are medical and life sciences. The group is already in discussions with a few candidates, but has admitted that gestation will take much longer in these fields, with any meaningful contributions unlikely in the near term. However, we believe the group is moving in the right direction to expand sales in the automotive, industrial, medical and life science sectors, where margins are definitely better and orders, less volatile.
Data storage remains weak, but may start seasonal uptick in 2H11. This is in line with the muted guidance from major drive makers for the June quarter as 2Q is traditionally the weakest for the HDD industry. However, business could improve hoh as we enter the seasonally stronger half. Based on consensus forecasts, sales for both Seagate and WD are expected to expand 9% and 12% hoh respectively. These figures do not include any contributions from Samsung to Seagate and HGST to WD, as their proposed acquisitions are still subject to approvals from government bodies.
Recent price weakness could have stemmed from fears of share overhang as the moratorium for its major shareholders (private equity) on stake unloading had expired on 1 Jun. Although we do not rule out any share sales, we believe Amtek is attractively priced now, at only 6.3x CY12 P/E with a 6.6% projected yield.
Risks
Potential disruptions for the automotive sector that may eventually filter down to the supply chain and affect the sales of its customers. This in turn may affect its automotive components business. So far, orders have not been pushed back for the group.
Rising material and labour costs, which may pinch margins if Amtek fails to pass on the higher costs to customers. So far, it has been able to pass on costs, and is actively working on improving its automation for some processes to tackle rising labour costs in China.
Valuation and recommendation
No change to our forecasts; maintain OUTPERFORM. We leave our FY11-13 profit forecasts, OUTPERFORM rating and target price of S$1.43 intact, pegging Amtek at 9x CY12 P/E, 1 standard deviation above its valuations before its privatisation in 2007. We see this as reasonable in view of its healthy earnings outlook and decent dividend yields. We see catalysts from strong 4QFY11 results, further penetration of high-margin businesses, and a possible recovery of its storage business in 2H11.
S$0.96 @07/06/11
Target: S$1.43
Technology Components
No road blocks to growth
• Recent weakness throws up buying opportunity. Our conversations with management suggest that business had remained healthy in the June quarter and Amtek is on track to meet our full-year profit forecast, representing a solid 129% yoy jump. We remain positive on its earnings prospects, underpinned by new programme wins in the automotive and electronics & electrical segments. We maintain our earnings estimates and target price of S$1.43, pegging the stock at only 9x CY12 P/E, which we deem undemanding against its healthy earnings prospects and divided yields. We see catalysts from strong 4QFY11 results, further penetration of high-margin businesses, and a possible recovery of its storage business in 2H11.
• Growth from automotive and electronics & electrical segments. The group continues to gain traction in these two segments on the back of greater outsourcing and the relocation of manufacturing facilities to Asia by OEMs.
• Data storage still weak, but may start seasonal uptick in 2H11. This is in line with the muted guidance from major drive makers for the June quarter. However, business from this segment may improve as we enter the seasonally stronger half.
No slowdown in business
Business remained healthy in the June quarter. From our discussions with the company, Amtek appears on track for sequential growth in 4QFY11, with growth coming from most sectors except data storage and enterprise server enclosures. We understand that orders have not been pushed back or cut despite earlier fears of disruptions in the global supply chain following the Japanese earthquake and tsunami. The higher sales should result in margin expansion from operating leverage. We are projecting a 42% qoq and 371% yoy jump in 4QFY11 profit (due to the absence of oneoffs) to US$14.1m.
Growth from automotive and electronics & electrical segments. The group continues to gain traction in automotive parts on the back of greater outsourcing and the relocation of manufacturing facilities to Asia by OEMs. Management remains bullish on this segment, supported by its new customer and programme wins and increased volumes from existing products as customers increasingly source parts more locally, especially in China. Despite recent disruptions to the supply chain as reported for some automotive makers, Amtek’s automotive components business continues to grow yoy. Additionally, we believe its focus on safety-related automotive components will help create greater stickiness among customers as production qualification here takes a long time. Like Amtek, we have assumed healthy double-digit yoy growth p.a. over the next few years, lifting contributions from this segment to about 20% of group sales by FY14, from 12% in FY10.
In the electronics & electrical sector, Amtek’s growth has been largely powered by the relocation efforts of one of its major customers from Europe to Asia. This had helped to lift contributions from this segment to 13.6% of group revenue in 3QFY11 from less than 10% in FY10. We expect the momentum to persist as we understand that this major customer wants to work more closely with Amtek in Asia.
Other potential sectors Amtek is hoping to harness are medical and life sciences. The group is already in discussions with a few candidates, but has admitted that gestation will take much longer in these fields, with any meaningful contributions unlikely in the near term. However, we believe the group is moving in the right direction to expand sales in the automotive, industrial, medical and life science sectors, where margins are definitely better and orders, less volatile.
Data storage remains weak, but may start seasonal uptick in 2H11. This is in line with the muted guidance from major drive makers for the June quarter as 2Q is traditionally the weakest for the HDD industry. However, business could improve hoh as we enter the seasonally stronger half. Based on consensus forecasts, sales for both Seagate and WD are expected to expand 9% and 12% hoh respectively. These figures do not include any contributions from Samsung to Seagate and HGST to WD, as their proposed acquisitions are still subject to approvals from government bodies.
Recent price weakness could have stemmed from fears of share overhang as the moratorium for its major shareholders (private equity) on stake unloading had expired on 1 Jun. Although we do not rule out any share sales, we believe Amtek is attractively priced now, at only 6.3x CY12 P/E with a 6.6% projected yield.
Risks
Potential disruptions for the automotive sector that may eventually filter down to the supply chain and affect the sales of its customers. This in turn may affect its automotive components business. So far, orders have not been pushed back for the group.
Rising material and labour costs, which may pinch margins if Amtek fails to pass on the higher costs to customers. So far, it has been able to pass on costs, and is actively working on improving its automation for some processes to tackle rising labour costs in China.
Valuation and recommendation
No change to our forecasts; maintain OUTPERFORM. We leave our FY11-13 profit forecasts, OUTPERFORM rating and target price of S$1.43 intact, pegging Amtek at 9x CY12 P/E, 1 standard deviation above its valuations before its privatisation in 2007. We see this as reasonable in view of its healthy earnings outlook and decent dividend yields. We see catalysts from strong 4QFY11 results, further penetration of high-margin businesses, and a possible recovery of its storage business in 2H11.
Healthcare REITs (OCBC)
Overweight
Maintain OVERWEIGHT on continued resilience
Promising 1Q11 results. First REIT (FREIT) and Parkway Life REIT (PLREIT) [NOT RATED] both reported healthy 1Q11 r e s u l t s r e c e n t l y, d r i v e n b y b o t h o r g a n i c g r o w t h a n d contributions from newly acquired healthcare properties. For FREIT, gross revenue surged 95.6% YoY to S$14.6m while total distributable income jumped 88.5% YoY to S$9.9m. PLREIT's gross revenue grew 15.2% YoY to S$21.5m and income available for distribution increased 14.4% YoY to S$14.3m. We believe that both healthcare REITs would be key beneficiaries of current inflationary pressures in Singapore. FREIT's base rental revision for its Indonesian assets are based on Singapore's CPI (albeit being capped at 2%), while 66% of PLREIT's total portfolio are pegged to a CPI-linked revision formula. This signifies the likelihood of positive rental reversions for PREIT in Aug 2011.
Acquisitions to fund growth ahead. We believe that both FREIT and PLREIT have sufficient capacity to undertake more acquisitions to boost their portfolio. This is likely to be funded by debt given the current low interest rate environment and ample debt headroom that exists for both REITs. FREIT and PLREIT are able to take on S$218.0m and S$864.6m of additional leverage before hitting their regulatory gearing limit of 35% and 60% respectively.
Maintain OVERWEIGHT on continued resilience. Besides the strong sponsor support and favourable master lease terms enjoyed by healthcare REITs as highlighted in our previous report dated 10 Mar 2011, we note that both FREIT and PLREIT have cont inued to showcase thei r resi l ience in t imes of increasing global uncertainty. The share prices of both stocks have outperformed the FTSE ST RE Invest Trust Index and broader market substantially YTD. In addition, PLREIT and FREIT have helmed the top two performing positions in the SREIT universe YTD, returning 9.7% and 9.2% respectively. For the latter, we are maintaining our BUY rating although its share price has recently inched closer to our S$0.80 fair value estimate. This is due to the still attractive 8.0% prospective distribution yield offered by the counter, resulting in projected total returns of 11.9%. PLREIT's share price has also rebounded after initial fears about the impact of the Japanese earthquake and tsunami on its nursing homes were allayed. Management h i g h l i g h t e d t h a t a l l o f i t s 3 0 J a p a n p r o p e r t i e s we r e n o t structurally affected by the disaster and continue to be in operation. Given the defensive nature of healthcare REITs and the still sanguine outlook on the private healthcare scene in both Singapore and Indonesia, we maintain our OVERWEIGHT rating on the sector.
Maintain OVERWEIGHT on continued resilience
Promising 1Q11 results. First REIT (FREIT) and Parkway Life REIT (PLREIT) [NOT RATED] both reported healthy 1Q11 r e s u l t s r e c e n t l y, d r i v e n b y b o t h o r g a n i c g r o w t h a n d contributions from newly acquired healthcare properties. For FREIT, gross revenue surged 95.6% YoY to S$14.6m while total distributable income jumped 88.5% YoY to S$9.9m. PLREIT's gross revenue grew 15.2% YoY to S$21.5m and income available for distribution increased 14.4% YoY to S$14.3m. We believe that both healthcare REITs would be key beneficiaries of current inflationary pressures in Singapore. FREIT's base rental revision for its Indonesian assets are based on Singapore's CPI (albeit being capped at 2%), while 66% of PLREIT's total portfolio are pegged to a CPI-linked revision formula. This signifies the likelihood of positive rental reversions for PREIT in Aug 2011.
Acquisitions to fund growth ahead. We believe that both FREIT and PLREIT have sufficient capacity to undertake more acquisitions to boost their portfolio. This is likely to be funded by debt given the current low interest rate environment and ample debt headroom that exists for both REITs. FREIT and PLREIT are able to take on S$218.0m and S$864.6m of additional leverage before hitting their regulatory gearing limit of 35% and 60% respectively.
Maintain OVERWEIGHT on continued resilience. Besides the strong sponsor support and favourable master lease terms enjoyed by healthcare REITs as highlighted in our previous report dated 10 Mar 2011, we note that both FREIT and PLREIT have cont inued to showcase thei r resi l ience in t imes of increasing global uncertainty. The share prices of both stocks have outperformed the FTSE ST RE Invest Trust Index and broader market substantially YTD. In addition, PLREIT and FREIT have helmed the top two performing positions in the SREIT universe YTD, returning 9.7% and 9.2% respectively. For the latter, we are maintaining our BUY rating although its share price has recently inched closer to our S$0.80 fair value estimate. This is due to the still attractive 8.0% prospective distribution yield offered by the counter, resulting in projected total returns of 11.9%. PLREIT's share price has also rebounded after initial fears about the impact of the Japanese earthquake and tsunami on its nursing homes were allayed. Management h i g h l i g h t e d t h a t a l l o f i t s 3 0 J a p a n p r o p e r t i e s we r e n o t structurally affected by the disaster and continue to be in operation. Given the defensive nature of healthcare REITs and the still sanguine outlook on the private healthcare scene in both Singapore and Indonesia, we maintain our OVERWEIGHT rating on the sector.
Singapore Airline (DMG)
In tie-up with Virgin Australia (SELL, S$14.26, TP S$12.35)
Singapore Airlines and Virgin Australia have struck up a code sharing alliance to feed into each other's international and domestic routes. We see the deal as more beneficial to Virgin Australia as it will lure corporate travel passengers to the latter, which targets to increase its market share from 10% to 20%. However, the agreement excludes the trans-Pacific routes sought by SIA although we note that the latter hopes to secure one of these routes given their value to Australia. Mildly positive, but the impact will not be significant to SIA. We are making no changes in earnings and reiterate our SELL recommendation, with an unchanged FV of SGD12.35 (15x FY12 EPS) in view of the challenging macro outlook for SIA.
More on the alliance. Singapore Airlines and Virgin Australia yesterday signed a code sharing alliance to feed into each other's international and domestic routes. This tie-up covers their frequent flyer programs and engagement in joint sales, marketing and distribution activities. The alliance, which is subject to approvals from the relevant authorities, will benefit customers via the new code share alliance after 1 Aug this year. The tie-up gives SIA access to 30 routes served by Virgin Australia, which would be able to tap into 70 routes from SIA's network. Passengers will benefit from route connectivity and this will allow them to earn and redeem frequent flyer points. This would also pave the way towards luring corporate travel to the Australia-Asia routes currently being dominated by Qantas. With this alliance, Virgin Atlantic aims to increase its share of corporate travel in the Australian market from 10% to 20%.
Trans-Pacific route excluded. However, the fine print in the code share agreement does not give SIA access to Virgin Australia's trans-Pacific routes (from Australia to the US West Coast). The trans-Pacific routes have been long sought by SIA, which up to now has been denied access by the Australian government due to strong opposition from Qantas. SIA's CEO is hopeful that the tie-up will boost SIA’s chances (of winning Australian Government approval) in accessing the trans-Pacific route given its value proposition in the alliance with Virgin.
More beneficial to Virgin Australia, for now. Virgin Australia has also alliances with Etihad (Middle East), Delta (US) and Air New Zealand (New Zealand). Its alliance with SIA somewhat completes the picture as SIA will give it access to the Asian region. Hence, we perceive this alliance as being more beneficial to Virgin Australia than SIA, unless the Australian government opens the door to the profitable trans-Pacific route sought by SIA.
Singapore Airlines and Virgin Australia have struck up a code sharing alliance to feed into each other's international and domestic routes. We see the deal as more beneficial to Virgin Australia as it will lure corporate travel passengers to the latter, which targets to increase its market share from 10% to 20%. However, the agreement excludes the trans-Pacific routes sought by SIA although we note that the latter hopes to secure one of these routes given their value to Australia. Mildly positive, but the impact will not be significant to SIA. We are making no changes in earnings and reiterate our SELL recommendation, with an unchanged FV of SGD12.35 (15x FY12 EPS) in view of the challenging macro outlook for SIA.
More on the alliance. Singapore Airlines and Virgin Australia yesterday signed a code sharing alliance to feed into each other's international and domestic routes. This tie-up covers their frequent flyer programs and engagement in joint sales, marketing and distribution activities. The alliance, which is subject to approvals from the relevant authorities, will benefit customers via the new code share alliance after 1 Aug this year. The tie-up gives SIA access to 30 routes served by Virgin Australia, which would be able to tap into 70 routes from SIA's network. Passengers will benefit from route connectivity and this will allow them to earn and redeem frequent flyer points. This would also pave the way towards luring corporate travel to the Australia-Asia routes currently being dominated by Qantas. With this alliance, Virgin Atlantic aims to increase its share of corporate travel in the Australian market from 10% to 20%.
Trans-Pacific route excluded. However, the fine print in the code share agreement does not give SIA access to Virgin Australia's trans-Pacific routes (from Australia to the US West Coast). The trans-Pacific routes have been long sought by SIA, which up to now has been denied access by the Australian government due to strong opposition from Qantas. SIA's CEO is hopeful that the tie-up will boost SIA’s chances (of winning Australian Government approval) in accessing the trans-Pacific route given its value proposition in the alliance with Virgin.
More beneficial to Virgin Australia, for now. Virgin Australia has also alliances with Etihad (Middle East), Delta (US) and Air New Zealand (New Zealand). Its alliance with SIA somewhat completes the picture as SIA will give it access to the Asian region. Hence, we perceive this alliance as being more beneficial to Virgin Australia than SIA, unless the Australian government opens the door to the profitable trans-Pacific route sought by SIA.
Eu Yan Sang (DMG)
Key takeaways from meeting with CEO (BUY, S$0.80, TP S$0.99)
We met up with CEO Richard Eu this morning and here are some of the key takeaways: 1) EYS intends to leverage on HZL’s extensive distribution network of 127 retail stores in Australia by placing its products on their shelves. Likewise, it will be retailing some of HZL’s Healthy Life’s products in its stores. The objective is to offer customers a wider variety of products and to transition from a pure TCM company to a health wellness company. 2) Although HZL has only three HealthyLife outlets in Shanghai, it owns the Aurinda brand which is sold through 1,600 retail counters in China. The Aurinda brand consists of more than 45 vitamin and dietary supplements products. 3) Management does not rule out a Hong Kong listing if its China business does well or if it further engages in another M&A. We continue to recommend BUY on EYS with a TP of S$0.99.
Ups stake in HZL to 19.99%. EYS has agreed to acquire an additional 7.3m ordinary shares in ASX-listed Healthzone (HZL AU) for A$0.38/share for a total purchase consideration of A$2.8m (~S$3.7m), thereby increasing its stake in the latter from 14.99% to 19.99%. This is just below the 20% threshold that would trigger a General Offer (GO) according to Australian law. Purchase price is a 9% premium over HZL’s last closing and includes one free unlisted warrant for every five ordinary shares, giving EYS 1.5m warrants exercisable at A$0.48, which expires on 3 June 2016. It has an additional 4m warrants with a strike price of A$0.38 which expires on 28 February 2015. At A$0.38/share, it is valuing HZL at 4.8x FY10 P/E. Under the “creep provision” in Australia, it will be able to accumulate up to 3% of the company every six months without triggering a GO. We believe that this will be the intention of management.
Background on Healthzone. HZL is a distributor, retailer and brand owner of health, beauty and natural health products. It owns a wide number of brands including Healthy Life, Australia’s leading health food retail franchise which was established more than 20 years ago. It has three HealthyLife stores in China but operates more than 1,600 retail counters for its Aurinda brand, a well-known Australian wellness brand in China which offers more than 45 vitamin and dietary supplement products. Listed on the Australian Stock Exchange, it has a market cap of A$31m. For FYE 30 June 2010, HZL registered a 47% YoY growth in PATMI to A$4.4m on the back of an 8% growth in revenue to A$113m. EPS was up 16% to A$0.08 per share. For 1H11, it posted a 25.4% growth in earnings.
Re-iterate BUY with TP of S$0.99. The stock has risen 7% since our initiation on 27 May 2011. We remain bullish on the counter as its resilient TCM business grows on the back of stronger consumer discretionary income in its main markets and remain excited over its prospects of further penetration into China and Australia via Healthzone. Re-iterate BUY with unchanged TP of S$0.99, pegged to 15x FY12F earnings.
We met up with CEO Richard Eu this morning and here are some of the key takeaways: 1) EYS intends to leverage on HZL’s extensive distribution network of 127 retail stores in Australia by placing its products on their shelves. Likewise, it will be retailing some of HZL’s Healthy Life’s products in its stores. The objective is to offer customers a wider variety of products and to transition from a pure TCM company to a health wellness company. 2) Although HZL has only three HealthyLife outlets in Shanghai, it owns the Aurinda brand which is sold through 1,600 retail counters in China. The Aurinda brand consists of more than 45 vitamin and dietary supplements products. 3) Management does not rule out a Hong Kong listing if its China business does well or if it further engages in another M&A. We continue to recommend BUY on EYS with a TP of S$0.99.
Ups stake in HZL to 19.99%. EYS has agreed to acquire an additional 7.3m ordinary shares in ASX-listed Healthzone (HZL AU) for A$0.38/share for a total purchase consideration of A$2.8m (~S$3.7m), thereby increasing its stake in the latter from 14.99% to 19.99%. This is just below the 20% threshold that would trigger a General Offer (GO) according to Australian law. Purchase price is a 9% premium over HZL’s last closing and includes one free unlisted warrant for every five ordinary shares, giving EYS 1.5m warrants exercisable at A$0.48, which expires on 3 June 2016. It has an additional 4m warrants with a strike price of A$0.38 which expires on 28 February 2015. At A$0.38/share, it is valuing HZL at 4.8x FY10 P/E. Under the “creep provision” in Australia, it will be able to accumulate up to 3% of the company every six months without triggering a GO. We believe that this will be the intention of management.
Background on Healthzone. HZL is a distributor, retailer and brand owner of health, beauty and natural health products. It owns a wide number of brands including Healthy Life, Australia’s leading health food retail franchise which was established more than 20 years ago. It has three HealthyLife stores in China but operates more than 1,600 retail counters for its Aurinda brand, a well-known Australian wellness brand in China which offers more than 45 vitamin and dietary supplement products. Listed on the Australian Stock Exchange, it has a market cap of A$31m. For FYE 30 June 2010, HZL registered a 47% YoY growth in PATMI to A$4.4m on the back of an 8% growth in revenue to A$113m. EPS was up 16% to A$0.08 per share. For 1H11, it posted a 25.4% growth in earnings.
Re-iterate BUY with TP of S$0.99. The stock has risen 7% since our initiation on 27 May 2011. We remain bullish on the counter as its resilient TCM business grows on the back of stronger consumer discretionary income in its main markets and remain excited over its prospects of further penetration into China and Australia via Healthzone. Re-iterate BUY with unchanged TP of S$0.99, pegged to 15x FY12F earnings.
Perennial Retail China Trust (DMG)
The news: Pua Seck Guan’s PERENNIAL China Retail Trust (PCRT) has successfully raised $776.2 million from its initial public offering, with the IPO 1.6 times subscribed. The balloting outcome for the public offer will be released today while trading will commence at 2pm tomorrow. PCRT’s initial S$1.1 billion property portfolio comprises five properties in 2nd-tier Chinese cities in Shenyang, Foshan and Chengdu with a gross floor area of approximately 960,000 square metres. The trust has also secured options to invest in a number of commercial development sites which are directly connected to High-Speed Railway stations with . These pipeline assets are collectively worth around S$3.0 billion. PCRT is being pitched as a pure-play PRC retail mall owner and developer benefitting from retail growth opportunities in China, providing unitholders an attractive total return of net asset value growth and stable distributions.
Our thoughts: The most direct comparable for PCRT is Capitaland’s Capital Retail China Trust (CRCT) with its portfolio of eight retail malls in China’s 1 st and 2nd -tier cities. Based on the annualized 1Q11 yield, CRCT is trading at a distribution yield of 7%, while PCRT is projecting a lower annualised distribution yield of 5.30% for 2011 and 5.51% for 2012. Beyond the yield angle, however, investors will be interested in the trust’s growth potential, based on its ability to drive accretive growth, execute on asset enhancement initiatives and lease renewal upside. Pua Seck Guan’s track record in Singapore is well-established in these areas, having successfully grown CMT into the largest S-REIT during his tenure. The challenge now is to translate that skills set in a vastly different market.
Our thoughts: The most direct comparable for PCRT is Capitaland’s Capital Retail China Trust (CRCT) with its portfolio of eight retail malls in China’s 1 st and 2nd -tier cities. Based on the annualized 1Q11 yield, CRCT is trading at a distribution yield of 7%, while PCRT is projecting a lower annualised distribution yield of 5.30% for 2011 and 5.51% for 2012. Beyond the yield angle, however, investors will be interested in the trust’s growth potential, based on its ability to drive accretive growth, execute on asset enhancement initiatives and lease renewal upside. Pua Seck Guan’s track record in Singapore is well-established in these areas, having successfully grown CMT into the largest S-REIT during his tenure. The challenge now is to translate that skills set in a vastly different market.
Tuesday, 7 June 2011
AusGroup (KimEng)
Background: AusGroup provides fabrication, manufacturing, construction and asset maintenance services for the natural resources sector such as iron ore, oil and gas, LNG and other mineral commodities. The company has a strong exposure in Western Australia.
Recent development: Since April, the stock has generated significant trading volume following management’s announcement for a possible secondary listing in Australia. The country accounts for 93% of its revenue generation. However, the uptrend was reversed with the sudden resignation of CEO John Sheridan. Mr Stuart Kenny, who owns 2.96% of the company, is the acting CEO in the meantime.
Our view:
Results show recovery. AusGroup’s 9M11 results showed improvement from FY10 with net profit up by 5.2% YoY to A$8.1m and revenue rising by 86.4% YoY to A$453.8m. This was boosted by higher revenue recognition with several projects reaching peak stages. However, the gross margins remained depressed at 8.8% and this trend could continue as the orderbook becomes depleted in the wake of the global crisis and keen competition in the region.
Boost for orderbook. AusGroup’s orderbook currently stands at A$288m, boosted by the recent award of a A$60m contract for the early works of Karara mining and another $50m from Chevron Australia to manufacture 7,500 tonnes of pip spools for Gorgon liquefied gas project, one of the world’s largest natural gas projects. The company is also bidding for the main contract for the Karara mining, which is estimated to worth A$200m. If successful, the tender results will be announced at end-4Q11. As the iron ore market in Australia is expected to stay robust in the next 12 months, there will be more opportunities for new contracts.
CEO steps down but business as usual. The sudden resignation of Mr Sheridan caused a selldown to S$0.39 (-7%) on the day of the announcement. Mr Kenny, the new acting CEO, is a veteran of the company, having held the positions of CEO and managing director for 10 years before taking a more behind-the-scenes role. The stock currently trades at historical PER of 18.8x and P/B of 1.0x.
Recent development: Since April, the stock has generated significant trading volume following management’s announcement for a possible secondary listing in Australia. The country accounts for 93% of its revenue generation. However, the uptrend was reversed with the sudden resignation of CEO John Sheridan. Mr Stuart Kenny, who owns 2.96% of the company, is the acting CEO in the meantime.
Our view:
Results show recovery. AusGroup’s 9M11 results showed improvement from FY10 with net profit up by 5.2% YoY to A$8.1m and revenue rising by 86.4% YoY to A$453.8m. This was boosted by higher revenue recognition with several projects reaching peak stages. However, the gross margins remained depressed at 8.8% and this trend could continue as the orderbook becomes depleted in the wake of the global crisis and keen competition in the region.
Boost for orderbook. AusGroup’s orderbook currently stands at A$288m, boosted by the recent award of a A$60m contract for the early works of Karara mining and another $50m from Chevron Australia to manufacture 7,500 tonnes of pip spools for Gorgon liquefied gas project, one of the world’s largest natural gas projects. The company is also bidding for the main contract for the Karara mining, which is estimated to worth A$200m. If successful, the tender results will be announced at end-4Q11. As the iron ore market in Australia is expected to stay robust in the next 12 months, there will be more opportunities for new contracts.
CEO steps down but business as usual. The sudden resignation of Mr Sheridan caused a selldown to S$0.39 (-7%) on the day of the announcement. Mr Kenny, the new acting CEO, is a veteran of the company, having held the positions of CEO and managing director for 10 years before taking a more behind-the-scenes role. The stock currently trades at historical PER of 18.8x and P/B of 1.0x.
Yangzijiang Shipbuilding (KimEng)
Event:
We initiate coverage on Yangzijiang Shipbuilding (YZJ) with a BUY rating and target price of $2.15, pegged at 13x FY12F PER. From its humble beginnings, YZJ has morphed into one of the world’s 20 largest shipbuilders in a relatively short span of time. Its rise as a formidable contender rests on its aggressive acquisitions and strong production capabilities to meet the market’s ever-changing demands.
Our View:
Despite keen competition from domestic and international shipyards, YZJ achieved an impressive 200% YoY jump in new shipbuilding orders last year to US$1.38b. In contrast, total orders secured by China as a country were up by 189% YoY. To stay ahead of the curve, YZJ is taking steps to augment its shipbuilding capacity, as well as build energy-saving vessels to capture better margins.
Management plans to invest RMB4b over the next three years to convert the 60%-owned Xinfu yard into one that has an annual capacity of up to 3m DWT. The group has also paid RMB108m for a plot of land near its New Yangzi yard, which will increase the yard’s capacity by another 1m DWT next year. These investments will put YZJ on track to double its production capacity in five years.
YZJ has already signed a Letter of Intent with Seaspan Corp to build 22 units of 10,000 TEU containerships worth up to US$2.2b. But it has not made a formal announcement in view of the ongoing negotiations as details on financing have yet to be finalised, according to management.
Action & Recommendation:
We peg our target price at $2.15, based on 13x FY12F PER. This is in line with the regional shipyards and implies about 40% upside from the current price. Near-term catalysts include robust order wins and a successful foray into the offshore marine sector. Initiate with BUY.
We initiate coverage on Yangzijiang Shipbuilding (YZJ) with a BUY rating and target price of $2.15, pegged at 13x FY12F PER. From its humble beginnings, YZJ has morphed into one of the world’s 20 largest shipbuilders in a relatively short span of time. Its rise as a formidable contender rests on its aggressive acquisitions and strong production capabilities to meet the market’s ever-changing demands.
Our View:
Despite keen competition from domestic and international shipyards, YZJ achieved an impressive 200% YoY jump in new shipbuilding orders last year to US$1.38b. In contrast, total orders secured by China as a country were up by 189% YoY. To stay ahead of the curve, YZJ is taking steps to augment its shipbuilding capacity, as well as build energy-saving vessels to capture better margins.
Management plans to invest RMB4b over the next three years to convert the 60%-owned Xinfu yard into one that has an annual capacity of up to 3m DWT. The group has also paid RMB108m for a plot of land near its New Yangzi yard, which will increase the yard’s capacity by another 1m DWT next year. These investments will put YZJ on track to double its production capacity in five years.
YZJ has already signed a Letter of Intent with Seaspan Corp to build 22 units of 10,000 TEU containerships worth up to US$2.2b. But it has not made a formal announcement in view of the ongoing negotiations as details on financing have yet to be finalised, according to management.
Action & Recommendation:
We peg our target price at $2.15, based on 13x FY12F PER. This is in line with the regional shipyards and implies about 40% upside from the current price. Near-term catalysts include robust order wins and a successful foray into the offshore marine sector. Initiate with BUY.
Tat Hong Holdings Ltd (OCBC)
Maintain HOLD
Previous Rating: HOLD
Current Price: S$0.835
Fair Value: S$0.76
Waiting for recovery…
Completion of acquisition. Tat Hong announced that its associate company, THL Foundation Equipment Pte Ltd, has completed the acquisition of a 70% interest in Ice Far East Pte Ltd last week. The latter, which has offices in Singapore and Malaysia, is engaged in the trading and rental of foundation engineering equipment in South East Asia, Hong Kong and India. This acquisition is expected to strengthen Tat Hong's position within the foundation engineering segment and deepen its geographical footprint across the region. In addition, Tat Hong believes that there are opportunities for cross selling of products.
Increasing competition. Competition within the industry is stiff and has intensified over the past few years, largely due to an influx of overseas players entering the regional market. Rental and utilization rates have fallen and remained low. As of 31/3/2011, Tat Hong's utilization rates for crawler/mobile f l e e t a n d t o w e r c r a n e f l e e t a r e a t 5 9 . 8 % a n d 6 6 . 5 % , respectively. This situation may persist in the near term as the industry remains over-supplied in terms of cranes, and demand has yet to pick up substantially since the financial crisis.
Waiting for Australia's recovery. The recent natural disasters in Aust ral ia have resul ted in disrupt ions to a number of inf rast ructure projects. Several of Tat Hong's plants and equipment were also damaged by the floods. As the impact of the natural disasters recedes, reconstruction activities should provide some earnings upside in the near term. However, actual construction work may come through later rather than earlier because (i) plants and equipment that were damaged need to be replaced / repaired, and (ii) planning and tender processes would require time.
Watch the costs. Another area to look out is the costs of doing business. Over the near term, rising inflation may result in higher distribution costs. Given the intense competition within the industry, Tat Hong may not be able to pass on the increased prices to its customers. Staff costs have also risen sharply due to increased hiring in Australia and reinstatement o f s a l a r i e s f o r t h o s e a f f e c t e d b y c o s t c u t t i n g me a s u r e s implemented during the previous financial year.
Reiterate HOLD. We have tweaked our estimates to reflect the stiff competition and weak demand in the industry. Although we expect Australia to provide some earnings upside, the timing of recovery remains uncertain. We reiterate our HOLD rating with fair value estimate of S$0.76, valuing the company at 12x its FY12 EPS.
Previous Rating: HOLD
Current Price: S$0.835
Fair Value: S$0.76
Waiting for recovery…
Completion of acquisition. Tat Hong announced that its associate company, THL Foundation Equipment Pte Ltd, has completed the acquisition of a 70% interest in Ice Far East Pte Ltd last week. The latter, which has offices in Singapore and Malaysia, is engaged in the trading and rental of foundation engineering equipment in South East Asia, Hong Kong and India. This acquisition is expected to strengthen Tat Hong's position within the foundation engineering segment and deepen its geographical footprint across the region. In addition, Tat Hong believes that there are opportunities for cross selling of products.
Increasing competition. Competition within the industry is stiff and has intensified over the past few years, largely due to an influx of overseas players entering the regional market. Rental and utilization rates have fallen and remained low. As of 31/3/2011, Tat Hong's utilization rates for crawler/mobile f l e e t a n d t o w e r c r a n e f l e e t a r e a t 5 9 . 8 % a n d 6 6 . 5 % , respectively. This situation may persist in the near term as the industry remains over-supplied in terms of cranes, and demand has yet to pick up substantially since the financial crisis.
Waiting for Australia's recovery. The recent natural disasters in Aust ral ia have resul ted in disrupt ions to a number of inf rast ructure projects. Several of Tat Hong's plants and equipment were also damaged by the floods. As the impact of the natural disasters recedes, reconstruction activities should provide some earnings upside in the near term. However, actual construction work may come through later rather than earlier because (i) plants and equipment that were damaged need to be replaced / repaired, and (ii) planning and tender processes would require time.
Watch the costs. Another area to look out is the costs of doing business. Over the near term, rising inflation may result in higher distribution costs. Given the intense competition within the industry, Tat Hong may not be able to pass on the increased prices to its customers. Staff costs have also risen sharply due to increased hiring in Australia and reinstatement o f s a l a r i e s f o r t h o s e a f f e c t e d b y c o s t c u t t i n g me a s u r e s implemented during the previous financial year.
Reiterate HOLD. We have tweaked our estimates to reflect the stiff competition and weak demand in the industry. Although we expect Australia to provide some earnings upside, the timing of recovery remains uncertain. We reiterate our HOLD rating with fair value estimate of S$0.76, valuing the company at 12x its FY12 EPS.
Olam International Ltd (CIMB)
NEUTRAL Maintained
S$2.83 Target: S$3.08
Mkt.Cap: S$6,051m/US$4,918m
Logistics
Raising S$740m in fresh equity
Growth at the expense of dilution. Olam will be raising S$740m by issuing 286.1m new shares, implying 13.4% dilution for existing shareholders (assuming nonparticipation in the preferential issue). The funds will be sed mainly for future acquisitions, with the remainder for capital expenditure and general corporate purposes. We have cut our FY11-13 EPS estimates by 7-10% to account for a larger share base, partially offset by higher interest income. We have a lower target price of S$3.08 (from S$3.34) following our earnings adjustments, still based on 18.7x CY12 P/E. Maintain Neutral in view of the earnings dilution which may result in a negative knee-jerk reaction, though stable earnings growth and the announcement of earningsaccretive acquisitions further out may serve as re-ating catalysts.
The news:
Raising funds in three tranches. The offer to raise S$740m contains three tranches:
(i) Tranche 1: placement of 94.4m new shares at S$2.60 per share (8.4% discount to 3 Jun VWAP) to institutional and other investors;
(ii) Tranche 2: preferential offering of 97.3m new shares at S$2.56 per share (9.8% discount to 3 Jun VWAP) to entitled shareholders on the basis of one new share for every 22 existing shares;
(iii) Tranche 3: proposed subscription of 94.4m new shares at S$2.60 per share by Temasek (subject to EGM approval).
The second tranche has a guaranteed take-up of no less than 39.8% by major shareholders Kewalram, Temasek and CEO Mr Sunny Verghese, while the fundraising exercise has been fully underwritten by joint lead anagers JP Morgan, Credit Suisse, HSBC and Standard Chartered. Proceeds will be used for potential acquisitions (50% of net proceeds), capital expenditure (30%) and general corporate purposes (20%).
Comments:
Dilutive for shareholders. The issue of 286.1m new shares will enlarge Olam’s share base by 13.4%. Pricing represents 8.4-9.8% discounts to Olam’s VWAP on 3 Jun (last day before trading halt). However, Olam’s shares had been falling in the days leading to the trading halt amid fears of dilution. If we were to refer to its oneweek VWAP prior to the trading halt, the placement actually represents larger 11.8-13.1% discounts. We expect the significant dilution and discounts to result in a negative knee-jerk reaction on the resumption of trading.
Valuation and recommendation
Cutting FY11-13 EPS estimates by 7-10% to account for a larger share base, partially offset by higher interest income. Pending deployment, net proceeds of S$731.8m may be deposited with banks or in short-term money markets. Maintain Neutral for now; lower target price of S$3.08 (previously S$3.34), still based on 18.7x CY12 P/E. While the earnings dilution is not positive, we recognise that a stronger balance sheet after equity-raising should help the group execute its medium-term growth strategy. Beyond the immediate knee-jerk reaction, we see catalysts from the announcement of earnings-accretive acquisitions as well as continued earnings growth.
S$2.83 Target: S$3.08
Mkt.Cap: S$6,051m/US$4,918m
Logistics
Raising S$740m in fresh equity
Growth at the expense of dilution. Olam will be raising S$740m by issuing 286.1m new shares, implying 13.4% dilution for existing shareholders (assuming nonparticipation in the preferential issue). The funds will be sed mainly for future acquisitions, with the remainder for capital expenditure and general corporate purposes. We have cut our FY11-13 EPS estimates by 7-10% to account for a larger share base, partially offset by higher interest income. We have a lower target price of S$3.08 (from S$3.34) following our earnings adjustments, still based on 18.7x CY12 P/E. Maintain Neutral in view of the earnings dilution which may result in a negative knee-jerk reaction, though stable earnings growth and the announcement of earningsaccretive acquisitions further out may serve as re-ating catalysts.
The news:
Raising funds in three tranches. The offer to raise S$740m contains three tranches:
(i) Tranche 1: placement of 94.4m new shares at S$2.60 per share (8.4% discount to 3 Jun VWAP) to institutional and other investors;
(ii) Tranche 2: preferential offering of 97.3m new shares at S$2.56 per share (9.8% discount to 3 Jun VWAP) to entitled shareholders on the basis of one new share for every 22 existing shares;
(iii) Tranche 3: proposed subscription of 94.4m new shares at S$2.60 per share by Temasek (subject to EGM approval).
The second tranche has a guaranteed take-up of no less than 39.8% by major shareholders Kewalram, Temasek and CEO Mr Sunny Verghese, while the fundraising exercise has been fully underwritten by joint lead anagers JP Morgan, Credit Suisse, HSBC and Standard Chartered. Proceeds will be used for potential acquisitions (50% of net proceeds), capital expenditure (30%) and general corporate purposes (20%).
Comments:
Dilutive for shareholders. The issue of 286.1m new shares will enlarge Olam’s share base by 13.4%. Pricing represents 8.4-9.8% discounts to Olam’s VWAP on 3 Jun (last day before trading halt). However, Olam’s shares had been falling in the days leading to the trading halt amid fears of dilution. If we were to refer to its oneweek VWAP prior to the trading halt, the placement actually represents larger 11.8-13.1% discounts. We expect the significant dilution and discounts to result in a negative knee-jerk reaction on the resumption of trading.
Valuation and recommendation
Cutting FY11-13 EPS estimates by 7-10% to account for a larger share base, partially offset by higher interest income. Pending deployment, net proceeds of S$731.8m may be deposited with banks or in short-term money markets. Maintain Neutral for now; lower target price of S$3.08 (previously S$3.34), still based on 18.7x CY12 P/E. While the earnings dilution is not positive, we recognise that a stronger balance sheet after equity-raising should help the group execute its medium-term growth strategy. Beyond the immediate knee-jerk reaction, we see catalysts from the announcement of earnings-accretive acquisitions as well as continued earnings growth.
Wilmar Int’l Ltd (OCBC)
Maintain HOLD
Previous Rating: HOLD
Current Price: S$5.26
Fair Value: S$5.68
Acquires more sugar assets in Australia
International Limited (WIL) has recently announced that its Australian-based subsidiary Sucrogen plans to acquire the business assets of Prosperpine Co-operative Sugar Milling Association (PCSMA) for A$115m (S$151m) on a "debt-free and cash-free" basis. WIL adds that the move will boost Sucrogen's milling capacity by 2m tonnes to 17m tonnes. It will also increase the sugar giant's raw sugar production by 10% to 2.2m tonnes. In addition, it will increase its presence in the Mackay central region, where it already has operations in raw sugar production, sugar refining, ethanol and liquid fertilizer production. The deal is subject to approval of PCSMA members - consisting of 214 sugarcane suppliers; and the Australian Competition and Consumer Commission (ACCC).
Good strategic fit… Overall, we think that the latest move would be a good strategic fit for Sucrogen. Besides increasing i ts c a pa c i t y, we n o t e t h a t t h e mo v e wi l l a l s o a d d t o i ts capabilities; this as PCSMA has recently invested in facilities to manufacture and market furfural, which is a globally traded industrial chemical used in solvent extraction, foundry resins and pharmaceuticals. Last but not least, Sucrogen believes that there is great potential in the region for expansion of the cane-growing area.
but no immediate boost expected. We note that we are unlikely to see any immediate boost, given that the deal may take some time to push through. WIL expects to only hold a postal ballot for the 214 members to vote in late July. And recall its previous Sucrogen acquisition, which took a much longer-than-expected time for the regulators to give their approval. Meanwhile, Sucrogen's own operations are expected to be back-end loaded due to seasonality. As such, WIL expects sugar milling to incur losses in the first half of the year (posted a 1Q11 pre-tax loss of US$7.2m); but remains confident that Sucrogen should be able to achieve an EBITDA target of US$100m for this year.
No change to estimates. Given that it may still take a while before the conclusion of the deal, we hold off adjusting our e s t i m a t e s f o r n o w. A n d w e e x p e c t W I L t o b e a b l e t o comfortably finance the acquisition with internal resources and debt. While we saw a bottoming out of WIL's consumer pack margins in 1Q11, we will continue to keep a close watch on the inflation story in China. Maintain HOLD with S$5.68 fair value. We would still be buyers closer to S$5.
Previous Rating: HOLD
Current Price: S$5.26
Fair Value: S$5.68
Acquires more sugar assets in Australia
International Limited (WIL) has recently announced that its Australian-based subsidiary Sucrogen plans to acquire the business assets of Prosperpine Co-operative Sugar Milling Association (PCSMA) for A$115m (S$151m) on a "debt-free and cash-free" basis. WIL adds that the move will boost Sucrogen's milling capacity by 2m tonnes to 17m tonnes. It will also increase the sugar giant's raw sugar production by 10% to 2.2m tonnes. In addition, it will increase its presence in the Mackay central region, where it already has operations in raw sugar production, sugar refining, ethanol and liquid fertilizer production. The deal is subject to approval of PCSMA members - consisting of 214 sugarcane suppliers; and the Australian Competition and Consumer Commission (ACCC).
Good strategic fit… Overall, we think that the latest move would be a good strategic fit for Sucrogen. Besides increasing i ts c a pa c i t y, we n o t e t h a t t h e mo v e wi l l a l s o a d d t o i ts capabilities; this as PCSMA has recently invested in facilities to manufacture and market furfural, which is a globally traded industrial chemical used in solvent extraction, foundry resins and pharmaceuticals. Last but not least, Sucrogen believes that there is great potential in the region for expansion of the cane-growing area.
but no immediate boost expected. We note that we are unlikely to see any immediate boost, given that the deal may take some time to push through. WIL expects to only hold a postal ballot for the 214 members to vote in late July. And recall its previous Sucrogen acquisition, which took a much longer-than-expected time for the regulators to give their approval. Meanwhile, Sucrogen's own operations are expected to be back-end loaded due to seasonality. As such, WIL expects sugar milling to incur losses in the first half of the year (posted a 1Q11 pre-tax loss of US$7.2m); but remains confident that Sucrogen should be able to achieve an EBITDA target of US$100m for this year.
No change to estimates. Given that it may still take a while before the conclusion of the deal, we hold off adjusting our e s t i m a t e s f o r n o w. A n d w e e x p e c t W I L t o b e a b l e t o comfortably finance the acquisition with internal resources and debt. While we saw a bottoming out of WIL's consumer pack margins in 1Q11, we will continue to keep a close watch on the inflation story in China. Maintain HOLD with S$5.68 fair value. We would still be buyers closer to S$5.
Sino Grandness Food Industry Group Ltd (POEMS)
BUY (Maintained)
Closing Price S$0.455
Target Price S$0.75 (+64.8%)
• Concerns over DEHP tainted products in Taiwan and drought in China
• Management says operations unaffected
• Maintained Buy
Share price has weakened almost 20% since our last report on 12 May 2011. Although overall market weakness may be partly the cause, however we feel that there might be concerns over the 2 mentioned factors. We have sought clarifications from the management on the impacts and nothing adverse has been seen yet.
DEHP
In recent weeks, the F&B scene got another scare when DEHP tainted products were discovered in Taiwan. DEHP (Bis(2-ethylhexyl)phthalate) is an organic compound widely used as a plasticizer. The reason why it found its way into F&B products is that it is being used to substitute natural vegetable oil in the manufacturing of clouding agent. Clouding agents or emulsifiers are used to mix otherwise immiscible contents in beverages such as juices or sports drinks and act as emulsifiers to give products a more appealing appearance. As opposed to clouding agents made with natural vegetable oil, DEHP clouding agents have a longer shelf live and give a more pleasing look to the finished product. Besides, cheaper cost could also be a reason manufacturers resort to using chemical substitutes.
As an F&B company selling bottled juices, we believe there are concerns in Sino Grandness being affected. We had checked with the company and were informed that the ingredients are all stated on the bottle packaging and it does not use clouding agent. Juice concentration ranges from 30% to 100%. Currently the company has one OEM manufacturer and in order to ensure production quality, one staff is stationed at the OEM site to monitor the process. Furthermore, the company has started construction of a new plant for the production of bottled juices. This will ensure better control over product quality. Point of sales has expanded rapidly from convenience stores to large scale supermarkets and includes Walmart, Carrefour, Jusco and Tesco. As such, the company stresses product quality and industrial qualifications are all stated on the bottle packaging.
China Drought
Interestingly, newspaper article had termed this as the worst drought to hit China in 50 years. The prolong drought which started in April has depleted much of the lower reaches of the Yangtze River, a rich source of irrigation for nearby farmland. According to a news article on Chinadaily.com, affected areas include Hubei, Hunan, Jiangxi, Anhui, Jiangsu and Zhejiang provinces. Last we check, the China Meteorological Administration says heavy rainfall is expected soon over these areas.
For Sino Grandness, the April-June period marks the planting and harvesting season of Asparagus which the plantation areas are in Shanxi and Shandong. Management says there is no disruption to the planting and harvesting. Asparagus is one of the main products and accounted for 32% of revenue in FY2010.
Comparatively, second half of the year will record higher sales from the export segment. At the price of $0.455, the stock is trading at slightly over 4x forward earnings. We are maintaining our Buy recommendation with a target price of $0.75, peg to 7x earnings.
Closing Price S$0.455
Target Price S$0.75 (+64.8%)
• Concerns over DEHP tainted products in Taiwan and drought in China
• Management says operations unaffected
• Maintained Buy
Share price has weakened almost 20% since our last report on 12 May 2011. Although overall market weakness may be partly the cause, however we feel that there might be concerns over the 2 mentioned factors. We have sought clarifications from the management on the impacts and nothing adverse has been seen yet.
DEHP
In recent weeks, the F&B scene got another scare when DEHP tainted products were discovered in Taiwan. DEHP (Bis(2-ethylhexyl)phthalate) is an organic compound widely used as a plasticizer. The reason why it found its way into F&B products is that it is being used to substitute natural vegetable oil in the manufacturing of clouding agent. Clouding agents or emulsifiers are used to mix otherwise immiscible contents in beverages such as juices or sports drinks and act as emulsifiers to give products a more appealing appearance. As opposed to clouding agents made with natural vegetable oil, DEHP clouding agents have a longer shelf live and give a more pleasing look to the finished product. Besides, cheaper cost could also be a reason manufacturers resort to using chemical substitutes.
As an F&B company selling bottled juices, we believe there are concerns in Sino Grandness being affected. We had checked with the company and were informed that the ingredients are all stated on the bottle packaging and it does not use clouding agent. Juice concentration ranges from 30% to 100%. Currently the company has one OEM manufacturer and in order to ensure production quality, one staff is stationed at the OEM site to monitor the process. Furthermore, the company has started construction of a new plant for the production of bottled juices. This will ensure better control over product quality. Point of sales has expanded rapidly from convenience stores to large scale supermarkets and includes Walmart, Carrefour, Jusco and Tesco. As such, the company stresses product quality and industrial qualifications are all stated on the bottle packaging.
China Drought
Interestingly, newspaper article had termed this as the worst drought to hit China in 50 years. The prolong drought which started in April has depleted much of the lower reaches of the Yangtze River, a rich source of irrigation for nearby farmland. According to a news article on Chinadaily.com, affected areas include Hubei, Hunan, Jiangxi, Anhui, Jiangsu and Zhejiang provinces. Last we check, the China Meteorological Administration says heavy rainfall is expected soon over these areas.
For Sino Grandness, the April-June period marks the planting and harvesting season of Asparagus which the plantation areas are in Shanxi and Shandong. Management says there is no disruption to the planting and harvesting. Asparagus is one of the main products and accounted for 32% of revenue in FY2010.
Comparatively, second half of the year will record higher sales from the export segment. At the price of $0.455, the stock is trading at slightly over 4x forward earnings. We are maintaining our Buy recommendation with a target price of $0.75, peg to 7x earnings.
ARMSTRONG (Lim&Tan)
S$0.305-ARMS.SI
- Armstrong spent $87,340.70 yesterday having bought 281,000 shares in the open market at 31 cents each.
- This would be the company’s first share buy back since its last done in Jan 2008 when it last bought 667,000 shares at an average price of 34 cents each.
- Based on the maximum allowable buy back of 50,220,735 shares, 281,000 would represent 0.56%.
- And based on yesterday’s total volume of 574,000 shares traded, the share buy back represented a significant 49%.
- Armstrong had previously bought back shares from Aug 2005 - Oct 2005, Jan 2006-Aug 2006, Mar 2007-Jan 2008, having acquired a total of 24,505,000 shares ranging from a low of 14.5 cents to high of 42 cents each, but with the majority done below the 20 cents level.
- Based on its previous share buy back track record, when done over a consistent period of time it has benefitted or at least stabilized the stock price.
- The latest share buy back is done on the back of the stock price having declined a sharp 23% since it reported a disappointing 1Q 2011 performance and provided an equally disappointing 2Q 2011 outlook in mid-May 2011.
- We, together with consensus had downgraded our profit forecast for this year from $25mln to $16mln and had then advised investors to “Take Profit”.
- With the stock having dropped sharply since then coupled with the company having instituted its share buy back program (backed by its still healthy cash position of $26.4mln) and with its share price close to consensus average target price 32-33 cents, we are changing to HOLD now and would await better clarity on positive earnings catalyst before recommitting to a BUY.
- Armstrong spent $87,340.70 yesterday having bought 281,000 shares in the open market at 31 cents each.
- This would be the company’s first share buy back since its last done in Jan 2008 when it last bought 667,000 shares at an average price of 34 cents each.
- Based on the maximum allowable buy back of 50,220,735 shares, 281,000 would represent 0.56%.
- And based on yesterday’s total volume of 574,000 shares traded, the share buy back represented a significant 49%.
- Armstrong had previously bought back shares from Aug 2005 - Oct 2005, Jan 2006-Aug 2006, Mar 2007-Jan 2008, having acquired a total of 24,505,000 shares ranging from a low of 14.5 cents to high of 42 cents each, but with the majority done below the 20 cents level.
- Based on its previous share buy back track record, when done over a consistent period of time it has benefitted or at least stabilized the stock price.
- The latest share buy back is done on the back of the stock price having declined a sharp 23% since it reported a disappointing 1Q 2011 performance and provided an equally disappointing 2Q 2011 outlook in mid-May 2011.
- We, together with consensus had downgraded our profit forecast for this year from $25mln to $16mln and had then advised investors to “Take Profit”.
- With the stock having dropped sharply since then coupled with the company having instituted its share buy back program (backed by its still healthy cash position of $26.4mln) and with its share price close to consensus average target price 32-33 cents, we are changing to HOLD now and would await better clarity on positive earnings catalyst before recommitting to a BUY.
OLAM (Lim&Tan)
Olam has confirmed it is raising S$731.78 mln net of expenses (of which 50% will be used for acquisitions) via:
- Placement of 94.408 mln shares to institutional investors at $2.60 each to raise $245.46 mln gross (6x subscribed by >100 institutional and other investors).
- Preferential offering of 97,292,,951 shares to existing shareholders on a 1-for-22 basis at $2.56 each to raise $249.07 mln. Kewalram Singapore, Temasek and George Varghese have undertaken to subscribe in full for their combined 39.84% entitlement.
- Subscription by Temasek for 94.408 mln shares at $2.60 each, to raise $245.46 mln. Temasek will raise its stake from 12.95% before the exercise to 15.8% after.
- Olam’s issued capital will increase by 286,108,951 shares to 2,426,553,869 shares.
- Like other players in the commodities arena, additional and sizeable capital has become, in recent times, even more essential, to fund acquisitions and other capital expenditures, which tend to run into hundreds and hundreds of million dollars. Glencore for instance raised almost US$10 bln in its recent IPO.
- Olam too has been making acquisitions in recent years, which have helped boost the bottom-line. Indeed, management said they have “significantly exceeded expectations” on their 6-year strategic plan that was put in place in 2009.
- We would reinstate BUY, especially after the recent weakness (in tandem with the overall sector) and now that equity funding is “out of the way”, and which had also contributed to the recent weakness. (Our last call, a technical one was made last September, at the time of merger talks between Olam and Louis Dreyfus. The stock’s closing high in Nov ‘10 was $3.38, 2 cents short of our target.)
- Placement of 94.408 mln shares to institutional investors at $2.60 each to raise $245.46 mln gross (6x subscribed by >100 institutional and other investors).
- Preferential offering of 97,292,,951 shares to existing shareholders on a 1-for-22 basis at $2.56 each to raise $249.07 mln. Kewalram Singapore, Temasek and George Varghese have undertaken to subscribe in full for their combined 39.84% entitlement.
- Subscription by Temasek for 94.408 mln shares at $2.60 each, to raise $245.46 mln. Temasek will raise its stake from 12.95% before the exercise to 15.8% after.
- Olam’s issued capital will increase by 286,108,951 shares to 2,426,553,869 shares.
- Like other players in the commodities arena, additional and sizeable capital has become, in recent times, even more essential, to fund acquisitions and other capital expenditures, which tend to run into hundreds and hundreds of million dollars. Glencore for instance raised almost US$10 bln in its recent IPO.
- Olam too has been making acquisitions in recent years, which have helped boost the bottom-line. Indeed, management said they have “significantly exceeded expectations” on their 6-year strategic plan that was put in place in 2009.
- We would reinstate BUY, especially after the recent weakness (in tandem with the overall sector) and now that equity funding is “out of the way”, and which had also contributed to the recent weakness. (Our last call, a technical one was made last September, at the time of merger talks between Olam and Louis Dreyfus. The stock’s closing high in Nov ‘10 was $3.38, 2 cents short of our target.)
APB (DMG)
APB acquires majority stake in Solomon Breweries
The news: ASIA Pacific Breweries (APB) has acquired a 97.69% stake in Solomon Breweries in the Solomon Islands for around $21.5 million. Solomon Breweries is the only brewery in the Solomon Islands and has a facility located in Guadalcanal, one of the most populated islands out of the nearly one thousand which make up the state. It has a production capacity of 140,000 hectolitres and is behind local brands SB and Solbrew Lager. Beer consumption in the country was 67,000 hectolitres last year, working out to per capita consumption of around 12 litres. The country has a growing population and its economy has expanded at a compounded annual growth rate of 5.7 per cent from 2006 to 2010.
Our thoughts: This latest acquisition further strengthened APB’s brewery network in the Asia Pacific region, already the most dominant with over 30 brewery operations in 14 countries. In 2009, APB had also acquired 2 companies, a 80.6% stake in PT Multi Bintang (Indonesia) and a 87.3% stake in GBNC (New Caledonia) from Heineken, one of the major shareholders. That transformational deal gave the group access to two large markets and propelled earnings of the group by more than 50% (net profit grew from $172m in FY09 to $263m in FY10). We continue to be positive on the prospects of APB and given the low liquidity of the shares, an alternative means of getting exposure to the stock is via F&N (Buy, Target Price $6.33).
The news: ASIA Pacific Breweries (APB) has acquired a 97.69% stake in Solomon Breweries in the Solomon Islands for around $21.5 million. Solomon Breweries is the only brewery in the Solomon Islands and has a facility located in Guadalcanal, one of the most populated islands out of the nearly one thousand which make up the state. It has a production capacity of 140,000 hectolitres and is behind local brands SB and Solbrew Lager. Beer consumption in the country was 67,000 hectolitres last year, working out to per capita consumption of around 12 litres. The country has a growing population and its economy has expanded at a compounded annual growth rate of 5.7 per cent from 2006 to 2010.
Our thoughts: This latest acquisition further strengthened APB’s brewery network in the Asia Pacific region, already the most dominant with over 30 brewery operations in 14 countries. In 2009, APB had also acquired 2 companies, a 80.6% stake in PT Multi Bintang (Indonesia) and a 87.3% stake in GBNC (New Caledonia) from Heineken, one of the major shareholders. That transformational deal gave the group access to two large markets and propelled earnings of the group by more than 50% (net profit grew from $172m in FY09 to $263m in FY10). We continue to be positive on the prospects of APB and given the low liquidity of the shares, an alternative means of getting exposure to the stock is via F&N (Buy, Target Price $6.33).
Monday, 6 June 2011
Global Logistic Properties (KimEng)
Background: Global Logistic Properties (GLP) is a market leader in developing, owning, managing and leasing logistics facilities in China and Japan. It has a presence in 20 cities in China with 8m sqm of GFA, and seven cities in Japan with 2.8m sqm of completed GFA. The Government of Singapore Investment Corporation (GIC) has a 50.6% shareholding in the company.
Recent development: GLP recently raised RMB3b (S$570m) of financing, via its MTN programme, comprising RMB2.65b in 5-year notes at 3.375% fixed coupon and RMB350m in 7-year notes at 4% fixed coupon, underlining its strong credit standing.
Our view:
Strengthening foothold in China. Since its listing, GLP has announced two major acquisitions. The first is the strategic acquisition of a 19.9% stake in Shenzhen Chiwan Petroleum Supply Base Co, which in turn owns BLOGIS, the second-largest modern logistics facility provider in China after GLP. GLP then acquired a 53.1% stake in Airport City Development (ACL), the sole developer in the Beijing Capital International Airport airside cargo handling and bonded logistics area.
Riding the wave of domestic consumption. GLP is in the best position to capture the benefits of China’s economic transformation into a domestic consumption market. Demand for consumable products, automobiles and other durable goods will spur the need for highquality logistics facilities which are in short supply. Excluding land reserves, GLP’s China portfolio comprises 8.0m sq m in GFA, with an effective interest valuation of US$2.8b (S$3.4b).
Strong balance sheet to seek further growth. The RMB3b financing raised recently in the MTN programme will mainly go towards refinancing existing loans. As of 31 March, GLP’s net gearing stood at a comfortable 0.3x, allowing it the financial flexibility to seek new acquisitions. GLP targets to maintain 1.5-2 years’ worth of development starts in its landbank and will also consider acquiring third-party assets.
Recent development: GLP recently raised RMB3b (S$570m) of financing, via its MTN programme, comprising RMB2.65b in 5-year notes at 3.375% fixed coupon and RMB350m in 7-year notes at 4% fixed coupon, underlining its strong credit standing.
Our view:
Strengthening foothold in China. Since its listing, GLP has announced two major acquisitions. The first is the strategic acquisition of a 19.9% stake in Shenzhen Chiwan Petroleum Supply Base Co, which in turn owns BLOGIS, the second-largest modern logistics facility provider in China after GLP. GLP then acquired a 53.1% stake in Airport City Development (ACL), the sole developer in the Beijing Capital International Airport airside cargo handling and bonded logistics area.
Riding the wave of domestic consumption. GLP is in the best position to capture the benefits of China’s economic transformation into a domestic consumption market. Demand for consumable products, automobiles and other durable goods will spur the need for highquality logistics facilities which are in short supply. Excluding land reserves, GLP’s China portfolio comprises 8.0m sq m in GFA, with an effective interest valuation of US$2.8b (S$3.4b).
Strong balance sheet to seek further growth. The RMB3b financing raised recently in the MTN programme will mainly go towards refinancing existing loans. As of 31 March, GLP’s net gearing stood at a comfortable 0.3x, allowing it the financial flexibility to seek new acquisitions. GLP targets to maintain 1.5-2 years’ worth of development starts in its landbank and will also consider acquiring third-party assets.
CWT (Kim Eng)
Event:
CWT announced the sale-leaseback of Jinshan Chemical Warehouse to Cache REIT last week. This asset has a balance sheet value of S$6.7m against a sale price of S$13.5m, a difference of 101%. The move is another solid piece of evidence that supports our argument that there is substantial value yet to be unlocked from CWT’s balance sheet. Our warehouse portfolio value assumption of $380m (vs PPE balance sheet value of $260m) looks unaggressive. Maintain BUY.
Our View:
This type of sale should not be interpreted as CWT selling its family jewels for a quick gain, as the company will always seek opportunities to replenish its “landbank”. Since the current management took over in 2005, it has consistently netted such gains in 2006 ($10.6m), 2007 ($9m), 2008 ($46m) and 2010 ($147.6m).
Although the market has traditionally discounted this warehouse development aspect of CWT’s business, deeming such earnings exceptional and lumpy, we see value in it. It is no different from commercial or residential property development, except that there are greater barriers to entry in this space as accompanying logistics expertise and client network is needed here.
As an example, CWT sold and leased back the Cold Hub (340,000 sq ft) in 2009 for $122m. The reinvestment into CWT Cold Hub 2 (725,000 sqft) will likely cost about the same amount. We anticipate major divestment gains in 2012 again.
Action & Recommendation:
CWT has a current market cap of $767m. We estimate its warehouse portfolio, ongoing warehouse development projects, financial assets and net cash to be already worth $600m. Furthermore, management has a good track record of sharing its gains. We see deep value and maintain our BUY recommendation with a target price of $1.90, based on sum-of-the-parts valuation.
CWT announced the sale-leaseback of Jinshan Chemical Warehouse to Cache REIT last week. This asset has a balance sheet value of S$6.7m against a sale price of S$13.5m, a difference of 101%. The move is another solid piece of evidence that supports our argument that there is substantial value yet to be unlocked from CWT’s balance sheet. Our warehouse portfolio value assumption of $380m (vs PPE balance sheet value of $260m) looks unaggressive. Maintain BUY.
Our View:
This type of sale should not be interpreted as CWT selling its family jewels for a quick gain, as the company will always seek opportunities to replenish its “landbank”. Since the current management took over in 2005, it has consistently netted such gains in 2006 ($10.6m), 2007 ($9m), 2008 ($46m) and 2010 ($147.6m).
Although the market has traditionally discounted this warehouse development aspect of CWT’s business, deeming such earnings exceptional and lumpy, we see value in it. It is no different from commercial or residential property development, except that there are greater barriers to entry in this space as accompanying logistics expertise and client network is needed here.
As an example, CWT sold and leased back the Cold Hub (340,000 sq ft) in 2009 for $122m. The reinvestment into CWT Cold Hub 2 (725,000 sqft) will likely cost about the same amount. We anticipate major divestment gains in 2012 again.
Action & Recommendation:
CWT has a current market cap of $767m. We estimate its warehouse portfolio, ongoing warehouse development projects, financial assets and net cash to be already worth $600m. Furthermore, management has a good track record of sharing its gains. We see deep value and maintain our BUY recommendation with a target price of $1.90, based on sum-of-the-parts valuation.
Ezra Holdings (DBSVickers)
BUY S$1.52 STI : 3,145.67
Price Target : 12-Month S$ 2.20
Reason for Report : Post conference update
Potential Catalyst: Contract awards
Poised for a re-rating
• Positioned for more orders amid buoyant subsea market.
• New charters in FY11 despite weak OSV market underscore its competitive strengths.
• Possible rationalization of non-core businesses to free balance sheet and reduce gearing.
• Maintain BUY, S$2.20 TP.
Positioning itself for more subsea orders. We note that 3 major subsea EPIC peers have posted robust 1Q2011 new orders, +89% y-o-y on aggregate, and see strong order momentum in the quarters ahead. This bodes well for Ezra as it positions itself to add to its current subsea backlog of US$276m, with AMC’s integration on track, vessel fleet expansion and continued solid project execution.
Offshore support business’ competitive strengths shine amid weak market. Despite the still challenging OSV market, Ezra has announced new charters for 12 vessels worth US$189m in FY11 YTD; its fleet utilisation rate of >90% is far superior vs. the global OSV fleet at c. 66%. We believe this underscores Ezra’s competitive strength of operating a diverse fleet of young, deepwater capable vessels.
Rationalisation of business would free up balance sheet. The group plans to rationalize the business over the next 12 months, potentially divesting its non-core units to free up its balance sheet. This could raise c. US$150-200m cash for the group and reduce FY12 net gearing to 0.84-0.89x, without the need for new equity.
Maintain BUY, S$2.20 TP. Confidence in AMC builds with the integration progressing on track, a growing subsea order backlog and successful execution of 2 projects recently. Ezra is well positioned to build up its order backlog, providing positive catalysts and enhancing earnings visibility going forward. No change to forecasts. Maintain BUY, TP of S$2.20 implies 45% upside.
Deepwater Subsea division to lead Ezra’s growth
Major subsea EPIC players record robust order intake in 1Q 2011… The major subsea EPIC players, namely, Subsea 7 SA (the merged entity of Acergy SA and Subsea 7 Inc), Saipem and Technip have earlier reported a sustained, high level of tendering activity. (For a more detailed analysis on the deepwater subsea market, refer to our 5 April 2011 note on Ezra, “More than the sum of its parts”.) Our latest checks reveal robust subsea order intakes in 1Q2011: this was up between 65-224% y-o-y and 6-40% q-o-q; on an aggregated basis, 1Q2011’s order intake by the trio was US$5.0bn, +89% y-o-y and +27% q-o-q, leading to swelling order backlogs, up between 10-33% y-o-y.
… and continue to guide for robust order book momentum. Looking ahead, these players continue to guide for strong order book momentum in the coming quarters, underpinned by sustained high oil prices and high levels of tendering activities. A number of major SURF (subsea, umbilicals, risers, flowlines) contracts are expected to be awarded in 2011, with the offshore installation phase to commence in 2012 or later. Regions of high activity include Australia, Brazil, West Africa and the North Sea while activity levels in the Gulf of Mexico are also expected to pick up, following the resumption in the issue of drilling permits. However, timing of recovery remains uncertain.
Sizeable backlog just 3 months from completion of acquisition. EMAS-AMC’s announced order backlog currently stands at US$276m, up from US$254m as of midApril. This was due to the upsizing of the Noble Energy Tamar project by US$22m to US$110m from the expansion in work scope. If we were to include the US$32m LOI for the provision of subsea support services announced in April 2011, this will bring order backlog to US$308m – a sizeable backlog in just 3 months following the completion of the AMC acquisition.
Bidding for c. US$3bn worth of projects; maintains 12 months order backlog target of US$1bn. Notwithstanding the ongoing integration between the two companies, EMASAMC continues to actively bid for subsea construction and installation contracts globally, with c. US$3bn worth of projects under tender. Management remains confident in achieving its order backlog target of US$1bn within 12 months, which implies a >3x increase in order book from current levels if it materialises.
Positioning to take on more projects. We see several factors in play which we believe will set up EMAS-AMC well to build up its order backlog amid a sustained, robust outlook for subsea order flows.
1) Integration on track; combined entities to boast expanded capabilities against an enhanced asset base. The integration of Ezra and AMC remains on track, which will see the combination of AMC’s capabilities and track record in the subsea EPIC/SURF market combined with Ezra’s larger and growing fleet of installation vessels covering all IMR and SURF installation segments (including flexible and rigid pipelay capabilities deployable in up to 3,500m water depths). This will enable EMAS-AMC to penetrate a market characterised by high barriers to entry on high technical complexity and high capital intensity. Indeed, the market is highly consolidated, with typically only 3 to 4 other players competing for the same contracts.
2) Strengthened management team. Ezra has appointed Mr CJ D’Cort as CEO of EMAS-AMC. Mr D’Cort is veteran of the industry with >30 years of experience and was most recently the CEO of SapuraAcergy, where he had amassed an order backlog of US$1.7bn with a single asset. His diverse experience includes the offshore construction/ marine operations, engineering, platform, pipeline and subsea installations (shallow and deep water), project and corporate management. He also has an extensive track record of working with oil majors and national oil companies.
3) Expanding asset base to support expected build up in order backlog. The Lewek Crusader, a newbuild DP3 subsea construction vessel, was finally delivered in April, bringing the subsea fleet size to 3 units. By late FY11/early FY12, we expect the subsea fleet to grow to 6-7 units with the addition of another 3-4 vessels. These include the Lewek Ambassador (IMR vessel, currently under refurbishment), Lewek Falcon (newbuild deepwater multi-function construction vessel), Lewek Champion (heavy lift pipelay barge, currently deployed on a project till late FY11, to be bareboat chartered-in from EOC), and the Lewek Toucan (AHTS with deepwater installation and construction capabilities; to be re-designated to the subsea division following the conclusion of its current charter under the Offshore Support division). Delivery of the newbuilds AMC Connector in early 2012 and the Lewek Constellation in 2013 will provide further boost to the asset base, and will allow EMAS-AMC to build and execute a larger backlog.
4) Building on solid project execution track record. The recent successful completion of the Popeye project for Shell in the GOM and the installation of the Skarv FPSO for BP in Norway continue to build on EMAS-AMC’s solid project execution track record.
Subsea division to lead growth of the Ezra group. We project FY11/12/13F revenue for the Deepwater Subsea division of US$140m/US$294m/US$532m, on assumed subsea order wins of US$350m/US$500m/US$600m. This will underpin our projected 38% FY10-13 revenue CAGR for the Ezra group.
Subsea revenue can be lumpy. Management guides that while the engineering work typically commences 6-9 months ahead of actual project execution, revenue recognition for subsea contracts will only commence once the vessels are mobilised to the project site. With actual project execution typically 3-4 months long, this makes revenue on subsea projects inherently lumpy. Note that for modelling purposes, we have assumed a recognition period of 18 months from date of contract award – this is to take into account projects that commence at a later date.
But cash flow impact generally neutral to positive. On cash flow, EMAS-AMC would typically receive 10-20% downpayment upon contract signing, and another 10-20% upon the mobilisation of vessels to the project site, with the remainder upon project completion. This ensures projects are typically cash flow neutral to positive.
Offshore Support division remains a core business; targeting annual revenue growth of 10-20%
OSV market remains challenging overall. The overall AHTS market is still nursing a hangover from the newbuilding party of 2005-2010. Since 2005, this segment has seen 769 AHTS delivered, vs. 486 PSVs. The AHTS to rig ratio jumped from 2.3x in 2004 to 2.9x currently, driven mainly by the <8,000 BHP AHTS category. The increase in PSV to rig ratio was more moderate, at 2.5x from 2.2x over the same period.
As such, it is not surprising that the utilisation rate in the global AHTS market continues to decline, at c. 68% as of end 2010, according to ODS Petrodata. For PSVs, the decline in global utilisation rates appears to have bottomed at around 72% at end 2010, likely due to a healthier demand/supply balance.
Some bright spots for PSVs and large AHTS. The demand/supply scenario is also reflected in vessel day rates, with all classes of PSVs now fetching higher day rates vs. the recent trough. This is not the case across the whole AHTS market, with day rates for the <10,000 BHP category still languishing near the bottom. However, we note some bright spots for the larger vessels (i.e. >10,000 BHP), which have been fetching improved day rates. We believe this can be attributed to the healthier demand/supply balance vs. the smaller AHTS categories, with vessel to rig ratio of 2.4x (>8,000 BHP AHTS) vs. 3.2x (<8,000 BHP AHTS).
Demand for OSVs expected to grow across 2011, in line with higher projected rig count. We use contracted offshore rig count as a proxy for OSV (both AHTS and PSVs) demand. According to data from ODS Petrodata, the demand for offshore rigs (jackups, semisubmersibles and drillships) is projected to grow by 93 units by end 2011, representing a growth of 18% from current levels. We believe this will underpin near term growth in demand for OSVs.
PSV market to pick up ahead of AHTS. We believe any pickup in demand for OSVs will have a more significant impact on the PSV market vs. the AHTS market given 1) the current healthier demand/supply balance of PSVs to rigs (2.5x), vs. AHTS (2.9x); 2) smaller orderbook to existing fleet (10.9% vs. 12.2% for AHTS); and 3) more staggered delivery profile of the outstanding orderbook across 2011-2014.
We expect a more significant recovery in AHTS demand from 2012 onwards, as the market continues to digest the additional capacity still being delivered from the orderbook.
We expect this to be led by the >8,000 BHP sized categories as E&P activities move into more demanding environments, supported by a healthier demand/supply ratio of 2.4x AHTS (>8,000 BHP) per rig (floater) vs. 3.2x for the smaller AHTS (<8,000 BHP) category.
Ezra well positioned to benefit from recovery in OSV market.
1) Young fleet averaging 4 years old. Ezra boasts a young offshore support fleet averaging 4 years old, vs. the industry average of c. 17 years. We believe this is a significant competitive advantage as the continued delivery of newbuilds from the yards into an already saturated market enable end users to choose from a wider pool of available assets, favouring younger, more reliable tonnage and resulting in the idling of old tonnage (i.e. 20 years and older). Further, older assets could present a greater possibility for equipment failure and compromise safety during operations offshore. Younger vessels, on the other hand, are less prone to technical issues which can lead to costly vessel downtime and high maintenance and repair costs. This translates into high efficiency and utilisation rates for both the vessel owner and charterer.
Indeed, data from ODS Petrodata reveals a growing divergence in utilisation rates between younger and older vessels, similar to what has been observed in the rig market (refer to our 10 March 2011 Offshore & Marine report “Offshore on the radar”).
2) Focus on deepwater capable assets. Around 70% of Ezra’s fleet is deepwater capable, vs. 29% of the global AHTS fleet. Its fleet of 30 AHT/AHTS/MFSV averages c. 9,645 BHP, with 18 units >8,000 BHP capacity. More recently, Ezra took delivery of its first newbuild MFSV, Lewek Fulmar, from the yard on 25 April 2011. It is the world’s first multifunctional ultra deepwater AHTS of the UT788 CD design, which also achieved a record-breaking bollard pull of 402.4 tonnes. We understand that it has also been deployed on term charter. We believe Ezra’s focus on deepwater capable assets positions it well to leverage on the broader industry trend which is gravitating towards E&P activities in deeper waters and harsher environments.
3) Expanding PSV fleet to meet growing popularity in Asia Pac. In addition to the better demand/supply balance of PSVs vs. AHTS, data from ODS Petrodata reveals that PSVs are becoming more widely used in Asia Pacific, accounting for 13% of global term demand vs. just 7% 10 years ago. Ezra has grown its fleet of PSVs to 6 units currently, in a span of around 12 months. In addition to these existing units and the two 5,200 dwt PSVs being built by Remontowa in Poland, the group is building another two 3,200 dwt PSVs, with scheduled delivery in 2H2012. These will expand Ezra’s PSV fleet to 10 units by end 2012. We understand these 2 units will not have any capex implications as they will be bareboat chartered in under sale and leaseback arrangements.
New charters for 12 vessels in FY11 YTD underscore Ezra’s competitive strengths in the offshore support segment. Despite the still challenging conditions in the OSV market, Ezra has secured new charters for 12 vessels in FY11 YTD worth a total of US$189m. These charters cover 6 AHTS and 6 PSVs for deployment across the Asia Pacific region and have a blended average charter duration of >2.7 years, vs. the overall charter duration of c. 3 years for the fleet. Indeed, Ezra continues to post superior fleet utilisation rate of >90%, vs. ODS Petrodata’s estimate of current global OSV fleet utilisation at c. 66%. We believe this underscores Ezra’s competitive strengths of operating a diverse fleet of young, deepwater capable vessels.
Targeting stable 10-20% annual revenue growth for the Offshore Support division. Going forward, the Offshore Support division will remain a core business of the group. However, given that this part of the business is more mature, the group is targeting a more stable annual revenue growth of 10-20%. We believe this is not unreasonable – we project y-o-y growth of 18% / 14% / 12% across FY11/12/13F, supported by an expanded fleet with 8 additions in FY11 (5 PSVs, 2 AHTS, 1 MFSV), 2 newbuild PSVs in FY12 and another 2 PSVs in FY13.
Fabrication yards to play supporting role, help manage group’s costs.
Yards to play supporting role, help manage group’s costs. Going forward, Ezra guides that its fabrication business will play a more complementary role in the group. The yards will be used to support the group’s subsea and offshore support divisions, executing repair and maintenance (i.e. the mandatory vessel surveys and dry dockings) for Ezra’s vessels as well as serving as a mobilization and logistics base. This is expected to enhance cost control for the group overall.
Flattish revenue to be expected. While being a complementary business, the yards will continue executing third party fabrication contracts. However, management has guided for flattish revenue from this division (booked under Marine Services). We estimate the yards’ orderbook as of end 2Q11 stood at c. US$200m, with around FY11 YTD order wins of US$90-120m vs. our order wins assumption of US$130m for FY11.
Capex requirements funded
Outstanding capex of US$380m. Ezra’s committed capex plan calls for another US$80m to be incurred in 2H11, and US$150m each in FY12 and FY13. This will be for outstanding amounts for Lewek Falcon and the AMC Connector, the 2 newbuild PSVs at Remontowa, and the Lewek Constellation. Management guides that there is no more significant capex plans beyond current commitments.
Funding for Constellation secured. The newbuild Lewek Constellation will be Ezra’s second DP3 subsea construction vessel with ice-class, deepwater subsea multi-lay, heavy-lift capabilities. Construction is underway, with delivery scheduled for 1Q2013. Total capex for this asset is c. US$400m, of which 75% will be debt funded. We understand that funding for the asset has been secured.
Possible rationalization of non-core businesses could free up balance sheet, reduce gearing
Possible rationalisation of non-core businesses could raise cash proceeds US$150-200m. Net gearing currently stands at 0.90x, and is projected to increase to 0.98x by end FY11. While debt covenants in place allow a net gearing ceiling of 2.5x, management intends to keep this below 1x. To this end, management has been guiding that it is looking towards rationalizing its businesses, focusing on those in which the group has the potential to be a leading player within the industry (i.e. the offshore support and deepwater subsea businesses), while potentially divesting (partial or fully) those in which is unlikely (i.e. the yards and the energy services units). This rationalization process is expected to be executed over the next 12 months, and could raise cash proceeds of US$150-200m for the group.
Net gearing could be reduced within internal threshold without requiring any capital markets exercise to raise new funds. Assuming the rationalization process is completed in FY12 with no gains from disposal, we estimate net gearing could be reduced to 0.84-0.89x from our 1.04x projection. This would bring net gearing down to within Ezra’s internal threshold, without needing to tap the market for more funds.
Financials and valuation
Earnings visibility on EMAS-AMC is weak in near term, but improves in the medium term. Earnings visibility on EMAS-AMC is weak in the near term but improves in the medium term as order backlog builds. We estimate that 34%/70%/12% of our revenue projection for EMAS-AMC over FY11/12/13F is backed by its US$276m announced subsea order backlog.
No change to numbers, introduce FY13F. We have kept our FY11/12F estimates and introduce our FY13 projections. We expect FY12/13F growth of 71%/12% to be underpinned by 1) AMC’s return to profitability on a larger expected subsea order backlog and an expanded offshore fleet; and 2) higher associate/JV contributions with full year contributions from the Chim Sao FPSO project.
BUY maintained, +45% upside to TP of S$2.20. Maintain BUY on Ezra as confidence in the acquisition of AMC continues to build with the integration progressing on track, a growing subsea order backlog and successful execution of 2 projects recently. We believe Ezra is well positioned to build up its order backlog amidst a buoyant deepwater subsea market characterized with high tendering activity and contract awards. This will not only provide positive catalysts for the stock, but also improve earnings visibility of the group going forward. Our TP for Ezra is unchanged at S$2.20. This is based on 14x and 12x PE for its core businesses and EOC respectively, on a fully diluted FY12 EPS.
Price Target : 12-Month S$ 2.20
Reason for Report : Post conference update
Potential Catalyst: Contract awards
Poised for a re-rating
• Positioned for more orders amid buoyant subsea market.
• New charters in FY11 despite weak OSV market underscore its competitive strengths.
• Possible rationalization of non-core businesses to free balance sheet and reduce gearing.
• Maintain BUY, S$2.20 TP.
Positioning itself for more subsea orders. We note that 3 major subsea EPIC peers have posted robust 1Q2011 new orders, +89% y-o-y on aggregate, and see strong order momentum in the quarters ahead. This bodes well for Ezra as it positions itself to add to its current subsea backlog of US$276m, with AMC’s integration on track, vessel fleet expansion and continued solid project execution.
Offshore support business’ competitive strengths shine amid weak market. Despite the still challenging OSV market, Ezra has announced new charters for 12 vessels worth US$189m in FY11 YTD; its fleet utilisation rate of >90% is far superior vs. the global OSV fleet at c. 66%. We believe this underscores Ezra’s competitive strength of operating a diverse fleet of young, deepwater capable vessels.
Rationalisation of business would free up balance sheet. The group plans to rationalize the business over the next 12 months, potentially divesting its non-core units to free up its balance sheet. This could raise c. US$150-200m cash for the group and reduce FY12 net gearing to 0.84-0.89x, without the need for new equity.
Maintain BUY, S$2.20 TP. Confidence in AMC builds with the integration progressing on track, a growing subsea order backlog and successful execution of 2 projects recently. Ezra is well positioned to build up its order backlog, providing positive catalysts and enhancing earnings visibility going forward. No change to forecasts. Maintain BUY, TP of S$2.20 implies 45% upside.
Deepwater Subsea division to lead Ezra’s growth
Major subsea EPIC players record robust order intake in 1Q 2011… The major subsea EPIC players, namely, Subsea 7 SA (the merged entity of Acergy SA and Subsea 7 Inc), Saipem and Technip have earlier reported a sustained, high level of tendering activity. (For a more detailed analysis on the deepwater subsea market, refer to our 5 April 2011 note on Ezra, “More than the sum of its parts”.) Our latest checks reveal robust subsea order intakes in 1Q2011: this was up between 65-224% y-o-y and 6-40% q-o-q; on an aggregated basis, 1Q2011’s order intake by the trio was US$5.0bn, +89% y-o-y and +27% q-o-q, leading to swelling order backlogs, up between 10-33% y-o-y.
… and continue to guide for robust order book momentum. Looking ahead, these players continue to guide for strong order book momentum in the coming quarters, underpinned by sustained high oil prices and high levels of tendering activities. A number of major SURF (subsea, umbilicals, risers, flowlines) contracts are expected to be awarded in 2011, with the offshore installation phase to commence in 2012 or later. Regions of high activity include Australia, Brazil, West Africa and the North Sea while activity levels in the Gulf of Mexico are also expected to pick up, following the resumption in the issue of drilling permits. However, timing of recovery remains uncertain.
Sizeable backlog just 3 months from completion of acquisition. EMAS-AMC’s announced order backlog currently stands at US$276m, up from US$254m as of midApril. This was due to the upsizing of the Noble Energy Tamar project by US$22m to US$110m from the expansion in work scope. If we were to include the US$32m LOI for the provision of subsea support services announced in April 2011, this will bring order backlog to US$308m – a sizeable backlog in just 3 months following the completion of the AMC acquisition.
Bidding for c. US$3bn worth of projects; maintains 12 months order backlog target of US$1bn. Notwithstanding the ongoing integration between the two companies, EMASAMC continues to actively bid for subsea construction and installation contracts globally, with c. US$3bn worth of projects under tender. Management remains confident in achieving its order backlog target of US$1bn within 12 months, which implies a >3x increase in order book from current levels if it materialises.
Positioning to take on more projects. We see several factors in play which we believe will set up EMAS-AMC well to build up its order backlog amid a sustained, robust outlook for subsea order flows.
1) Integration on track; combined entities to boast expanded capabilities against an enhanced asset base. The integration of Ezra and AMC remains on track, which will see the combination of AMC’s capabilities and track record in the subsea EPIC/SURF market combined with Ezra’s larger and growing fleet of installation vessels covering all IMR and SURF installation segments (including flexible and rigid pipelay capabilities deployable in up to 3,500m water depths). This will enable EMAS-AMC to penetrate a market characterised by high barriers to entry on high technical complexity and high capital intensity. Indeed, the market is highly consolidated, with typically only 3 to 4 other players competing for the same contracts.
2) Strengthened management team. Ezra has appointed Mr CJ D’Cort as CEO of EMAS-AMC. Mr D’Cort is veteran of the industry with >30 years of experience and was most recently the CEO of SapuraAcergy, where he had amassed an order backlog of US$1.7bn with a single asset. His diverse experience includes the offshore construction/ marine operations, engineering, platform, pipeline and subsea installations (shallow and deep water), project and corporate management. He also has an extensive track record of working with oil majors and national oil companies.
3) Expanding asset base to support expected build up in order backlog. The Lewek Crusader, a newbuild DP3 subsea construction vessel, was finally delivered in April, bringing the subsea fleet size to 3 units. By late FY11/early FY12, we expect the subsea fleet to grow to 6-7 units with the addition of another 3-4 vessels. These include the Lewek Ambassador (IMR vessel, currently under refurbishment), Lewek Falcon (newbuild deepwater multi-function construction vessel), Lewek Champion (heavy lift pipelay barge, currently deployed on a project till late FY11, to be bareboat chartered-in from EOC), and the Lewek Toucan (AHTS with deepwater installation and construction capabilities; to be re-designated to the subsea division following the conclusion of its current charter under the Offshore Support division). Delivery of the newbuilds AMC Connector in early 2012 and the Lewek Constellation in 2013 will provide further boost to the asset base, and will allow EMAS-AMC to build and execute a larger backlog.
4) Building on solid project execution track record. The recent successful completion of the Popeye project for Shell in the GOM and the installation of the Skarv FPSO for BP in Norway continue to build on EMAS-AMC’s solid project execution track record.
Subsea division to lead growth of the Ezra group. We project FY11/12/13F revenue for the Deepwater Subsea division of US$140m/US$294m/US$532m, on assumed subsea order wins of US$350m/US$500m/US$600m. This will underpin our projected 38% FY10-13 revenue CAGR for the Ezra group.
Subsea revenue can be lumpy. Management guides that while the engineering work typically commences 6-9 months ahead of actual project execution, revenue recognition for subsea contracts will only commence once the vessels are mobilised to the project site. With actual project execution typically 3-4 months long, this makes revenue on subsea projects inherently lumpy. Note that for modelling purposes, we have assumed a recognition period of 18 months from date of contract award – this is to take into account projects that commence at a later date.
But cash flow impact generally neutral to positive. On cash flow, EMAS-AMC would typically receive 10-20% downpayment upon contract signing, and another 10-20% upon the mobilisation of vessels to the project site, with the remainder upon project completion. This ensures projects are typically cash flow neutral to positive.
Offshore Support division remains a core business; targeting annual revenue growth of 10-20%
OSV market remains challenging overall. The overall AHTS market is still nursing a hangover from the newbuilding party of 2005-2010. Since 2005, this segment has seen 769 AHTS delivered, vs. 486 PSVs. The AHTS to rig ratio jumped from 2.3x in 2004 to 2.9x currently, driven mainly by the <8,000 BHP AHTS category. The increase in PSV to rig ratio was more moderate, at 2.5x from 2.2x over the same period.
As such, it is not surprising that the utilisation rate in the global AHTS market continues to decline, at c. 68% as of end 2010, according to ODS Petrodata. For PSVs, the decline in global utilisation rates appears to have bottomed at around 72% at end 2010, likely due to a healthier demand/supply balance.
Some bright spots for PSVs and large AHTS. The demand/supply scenario is also reflected in vessel day rates, with all classes of PSVs now fetching higher day rates vs. the recent trough. This is not the case across the whole AHTS market, with day rates for the <10,000 BHP category still languishing near the bottom. However, we note some bright spots for the larger vessels (i.e. >10,000 BHP), which have been fetching improved day rates. We believe this can be attributed to the healthier demand/supply balance vs. the smaller AHTS categories, with vessel to rig ratio of 2.4x (>8,000 BHP AHTS) vs. 3.2x (<8,000 BHP AHTS).
Demand for OSVs expected to grow across 2011, in line with higher projected rig count. We use contracted offshore rig count as a proxy for OSV (both AHTS and PSVs) demand. According to data from ODS Petrodata, the demand for offshore rigs (jackups, semisubmersibles and drillships) is projected to grow by 93 units by end 2011, representing a growth of 18% from current levels. We believe this will underpin near term growth in demand for OSVs.
PSV market to pick up ahead of AHTS. We believe any pickup in demand for OSVs will have a more significant impact on the PSV market vs. the AHTS market given 1) the current healthier demand/supply balance of PSVs to rigs (2.5x), vs. AHTS (2.9x); 2) smaller orderbook to existing fleet (10.9% vs. 12.2% for AHTS); and 3) more staggered delivery profile of the outstanding orderbook across 2011-2014.
We expect a more significant recovery in AHTS demand from 2012 onwards, as the market continues to digest the additional capacity still being delivered from the orderbook.
We expect this to be led by the >8,000 BHP sized categories as E&P activities move into more demanding environments, supported by a healthier demand/supply ratio of 2.4x AHTS (>8,000 BHP) per rig (floater) vs. 3.2x for the smaller AHTS (<8,000 BHP) category.
Ezra well positioned to benefit from recovery in OSV market.
1) Young fleet averaging 4 years old. Ezra boasts a young offshore support fleet averaging 4 years old, vs. the industry average of c. 17 years. We believe this is a significant competitive advantage as the continued delivery of newbuilds from the yards into an already saturated market enable end users to choose from a wider pool of available assets, favouring younger, more reliable tonnage and resulting in the idling of old tonnage (i.e. 20 years and older). Further, older assets could present a greater possibility for equipment failure and compromise safety during operations offshore. Younger vessels, on the other hand, are less prone to technical issues which can lead to costly vessel downtime and high maintenance and repair costs. This translates into high efficiency and utilisation rates for both the vessel owner and charterer.
Indeed, data from ODS Petrodata reveals a growing divergence in utilisation rates between younger and older vessels, similar to what has been observed in the rig market (refer to our 10 March 2011 Offshore & Marine report “Offshore on the radar”).
2) Focus on deepwater capable assets. Around 70% of Ezra’s fleet is deepwater capable, vs. 29% of the global AHTS fleet. Its fleet of 30 AHT/AHTS/MFSV averages c. 9,645 BHP, with 18 units >8,000 BHP capacity. More recently, Ezra took delivery of its first newbuild MFSV, Lewek Fulmar, from the yard on 25 April 2011. It is the world’s first multifunctional ultra deepwater AHTS of the UT788 CD design, which also achieved a record-breaking bollard pull of 402.4 tonnes. We understand that it has also been deployed on term charter. We believe Ezra’s focus on deepwater capable assets positions it well to leverage on the broader industry trend which is gravitating towards E&P activities in deeper waters and harsher environments.
3) Expanding PSV fleet to meet growing popularity in Asia Pac. In addition to the better demand/supply balance of PSVs vs. AHTS, data from ODS Petrodata reveals that PSVs are becoming more widely used in Asia Pacific, accounting for 13% of global term demand vs. just 7% 10 years ago. Ezra has grown its fleet of PSVs to 6 units currently, in a span of around 12 months. In addition to these existing units and the two 5,200 dwt PSVs being built by Remontowa in Poland, the group is building another two 3,200 dwt PSVs, with scheduled delivery in 2H2012. These will expand Ezra’s PSV fleet to 10 units by end 2012. We understand these 2 units will not have any capex implications as they will be bareboat chartered in under sale and leaseback arrangements.
New charters for 12 vessels in FY11 YTD underscore Ezra’s competitive strengths in the offshore support segment. Despite the still challenging conditions in the OSV market, Ezra has secured new charters for 12 vessels in FY11 YTD worth a total of US$189m. These charters cover 6 AHTS and 6 PSVs for deployment across the Asia Pacific region and have a blended average charter duration of >2.7 years, vs. the overall charter duration of c. 3 years for the fleet. Indeed, Ezra continues to post superior fleet utilisation rate of >90%, vs. ODS Petrodata’s estimate of current global OSV fleet utilisation at c. 66%. We believe this underscores Ezra’s competitive strengths of operating a diverse fleet of young, deepwater capable vessels.
Targeting stable 10-20% annual revenue growth for the Offshore Support division. Going forward, the Offshore Support division will remain a core business of the group. However, given that this part of the business is more mature, the group is targeting a more stable annual revenue growth of 10-20%. We believe this is not unreasonable – we project y-o-y growth of 18% / 14% / 12% across FY11/12/13F, supported by an expanded fleet with 8 additions in FY11 (5 PSVs, 2 AHTS, 1 MFSV), 2 newbuild PSVs in FY12 and another 2 PSVs in FY13.
Fabrication yards to play supporting role, help manage group’s costs.
Yards to play supporting role, help manage group’s costs. Going forward, Ezra guides that its fabrication business will play a more complementary role in the group. The yards will be used to support the group’s subsea and offshore support divisions, executing repair and maintenance (i.e. the mandatory vessel surveys and dry dockings) for Ezra’s vessels as well as serving as a mobilization and logistics base. This is expected to enhance cost control for the group overall.
Flattish revenue to be expected. While being a complementary business, the yards will continue executing third party fabrication contracts. However, management has guided for flattish revenue from this division (booked under Marine Services). We estimate the yards’ orderbook as of end 2Q11 stood at c. US$200m, with around FY11 YTD order wins of US$90-120m vs. our order wins assumption of US$130m for FY11.
Capex requirements funded
Outstanding capex of US$380m. Ezra’s committed capex plan calls for another US$80m to be incurred in 2H11, and US$150m each in FY12 and FY13. This will be for outstanding amounts for Lewek Falcon and the AMC Connector, the 2 newbuild PSVs at Remontowa, and the Lewek Constellation. Management guides that there is no more significant capex plans beyond current commitments.
Funding for Constellation secured. The newbuild Lewek Constellation will be Ezra’s second DP3 subsea construction vessel with ice-class, deepwater subsea multi-lay, heavy-lift capabilities. Construction is underway, with delivery scheduled for 1Q2013. Total capex for this asset is c. US$400m, of which 75% will be debt funded. We understand that funding for the asset has been secured.
Possible rationalization of non-core businesses could free up balance sheet, reduce gearing
Possible rationalisation of non-core businesses could raise cash proceeds US$150-200m. Net gearing currently stands at 0.90x, and is projected to increase to 0.98x by end FY11. While debt covenants in place allow a net gearing ceiling of 2.5x, management intends to keep this below 1x. To this end, management has been guiding that it is looking towards rationalizing its businesses, focusing on those in which the group has the potential to be a leading player within the industry (i.e. the offshore support and deepwater subsea businesses), while potentially divesting (partial or fully) those in which is unlikely (i.e. the yards and the energy services units). This rationalization process is expected to be executed over the next 12 months, and could raise cash proceeds of US$150-200m for the group.
Net gearing could be reduced within internal threshold without requiring any capital markets exercise to raise new funds. Assuming the rationalization process is completed in FY12 with no gains from disposal, we estimate net gearing could be reduced to 0.84-0.89x from our 1.04x projection. This would bring net gearing down to within Ezra’s internal threshold, without needing to tap the market for more funds.
Financials and valuation
Earnings visibility on EMAS-AMC is weak in near term, but improves in the medium term. Earnings visibility on EMAS-AMC is weak in the near term but improves in the medium term as order backlog builds. We estimate that 34%/70%/12% of our revenue projection for EMAS-AMC over FY11/12/13F is backed by its US$276m announced subsea order backlog.
No change to numbers, introduce FY13F. We have kept our FY11/12F estimates and introduce our FY13 projections. We expect FY12/13F growth of 71%/12% to be underpinned by 1) AMC’s return to profitability on a larger expected subsea order backlog and an expanded offshore fleet; and 2) higher associate/JV contributions with full year contributions from the Chim Sao FPSO project.
BUY maintained, +45% upside to TP of S$2.20. Maintain BUY on Ezra as confidence in the acquisition of AMC continues to build with the integration progressing on track, a growing subsea order backlog and successful execution of 2 projects recently. We believe Ezra is well positioned to build up its order backlog amidst a buoyant deepwater subsea market characterized with high tendering activity and contract awards. This will not only provide positive catalysts for the stock, but also improve earnings visibility of the group going forward. Our TP for Ezra is unchanged at S$2.20. This is based on 14x and 12x PE for its core businesses and EOC respectively, on a fully diluted FY12 EPS.
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