World Precision Machinery: Ramping up the order flows (BWPM SP, UNRATED)
Leading supplier of metal stamping equipment. We visited World Precision Machinery’s manufacturing facilities in Danyang city, Jiangsu. Company is a leading metal stamping machine supplier with 8% share of the domestic market. Its stamping machines are used in the manufacture of cars, white goods and train bodies. BWPM makes more than 200 kinds of stamping machines under its World brand for customers such as Haier, Chery Automotive, Honda and BYD. Recently, the group also made inroads into the railway engine component space, clinching contracts to supply to China’s state-owned train manufacturer China CNR Corp.
Good profitability track record with earnings set to surpass pre-crisis levels. The group’s prospects are driven by increasing industrialisation and growing demand for consumer products. BWPM has a good track record, maintaining profitability through the financial crisis. Earnings are set to surpass pre-crisis levels this year with consensus earnings at RMB180m for FY11 with 1Q11 earnings meeting 25% of consensus estimates. New orders are being clinched at a runrate of RMB 120-150m per month, underpinning earning visibility. As of April 2011, the group has an orderbook of RM428m for delivery over the next 3-9 months. The company achieved better margins than peers through a vertically-integrated business model and its value proposition is offering quality products at a cheaper cost to imported models.
Price drivers. Catalysts for the stock include: 1) Building of a new manufacturing facility in Shenyang to extend its geographical reach and enabling it to serve the cluster of automotive customers in northern China. The new plant also enables it to save on logistics costs; 2) management expects more orders in the railway sector and expects this new segment to account for 5-10% of sales in 1-2 years’ time; 3) The group is a conglomerate with the listed company forming only 10% of group sales. Potential injection of unlisted businesses within the group in the farming equipment, construction machinery and car parts will raise the scale and profile of BWPM. Based on consensus estimates, the stock is trading at 6.4x FY11 P/E and 5.6x FY12 P/E. The consensus target price of $0.99 implies upside of 78% from current levels. The company has paid good dividends in the past two years, amounting to 100% payout of FY09 earnings and 38% of FY10 earnings.
Friday, 17 June 2011
Ezion Holdings (DMG)
Ezion Holdings: JV secured US$73m Denmark jackup rig deal (BUY, S$0.645, TP S$1.07)
Third major contract YTD; re-iterate BUY. Newsflow on new job wins remained strong as Ezion bagged its third major contract of the year. Ezion’s 50:50 Joint Venture (JV) with Treatmil Holdings, a European offshore service company, has secured a four-year charter contract worth US$73m from a European oil major in offshore Denmark and project will start by end 2011. We expect the contract to contribute US$5.5m to FY12F net profit. However, we have cut contributions from marine supply base projects due to further delays. Net impact on our FY12 EPS is ~1% higher than our previous estimates. Maintain BUY with an unchanged TP of S$1.07 based on 12x blended FY11-12F fully diluted EPS.
US$73m contract to begin by end-2011. The Ezion-Treatmil JV (Atlantic Labrador) will acquire, refurbish, upgrade and mobilise the accommodation jackup rig to the North Sea before end 2011. The JV will use an old jackup rig (>25 years old) purchased from Transocean called GSF Labrador and conversion of the rig will be carried out at a yard in Holland. Total project cost is estimated at US$85m. This the third major contract secured by Ezion after the US$109.5m time charter for one liftboat (announced on 24 Feb 2011) and the US$109.5m (announced on 5 April 2011) for the Alaska jackup rig (JV with Buccaneer). We understand that there are more such opportunities out there and management is keen to explore this type of projects given shorter time to market vs. newbuilds.
Separately, there could be more delay to the marine supply bases. We believe that there is further delay for the two marine supply bases in Australia given difficulty in finalising the development plans and regulatory hurdles and the projects are not likely to contribute in 1Q12 as we have initially expected. Hence, we are taking out our earnings estimate for the two projects until there is more clarity on when the project will start contributing. We still expect to see strong core net profit growth of 48% in FY12 mainly from its liftboat business and rigs.
Third major contract YTD; re-iterate BUY. Newsflow on new job wins remained strong as Ezion bagged its third major contract of the year. Ezion’s 50:50 Joint Venture (JV) with Treatmil Holdings, a European offshore service company, has secured a four-year charter contract worth US$73m from a European oil major in offshore Denmark and project will start by end 2011. We expect the contract to contribute US$5.5m to FY12F net profit. However, we have cut contributions from marine supply base projects due to further delays. Net impact on our FY12 EPS is ~1% higher than our previous estimates. Maintain BUY with an unchanged TP of S$1.07 based on 12x blended FY11-12F fully diluted EPS.
US$73m contract to begin by end-2011. The Ezion-Treatmil JV (Atlantic Labrador) will acquire, refurbish, upgrade and mobilise the accommodation jackup rig to the North Sea before end 2011. The JV will use an old jackup rig (>25 years old) purchased from Transocean called GSF Labrador and conversion of the rig will be carried out at a yard in Holland. Total project cost is estimated at US$85m. This the third major contract secured by Ezion after the US$109.5m time charter for one liftboat (announced on 24 Feb 2011) and the US$109.5m (announced on 5 April 2011) for the Alaska jackup rig (JV with Buccaneer). We understand that there are more such opportunities out there and management is keen to explore this type of projects given shorter time to market vs. newbuilds.
Separately, there could be more delay to the marine supply bases. We believe that there is further delay for the two marine supply bases in Australia given difficulty in finalising the development plans and regulatory hurdles and the projects are not likely to contribute in 1Q12 as we have initially expected. Hence, we are taking out our earnings estimate for the two projects until there is more clarity on when the project will start contributing. We still expect to see strong core net profit growth of 48% in FY12 mainly from its liftboat business and rigs.
SATS Ltd (OCBC)
Maintain BUY
Previous Rating: BUY
Current Price: S$2.54
Fair Value: S$3.02
New competition unlikely to affect SATS
Third ground handling license at Changi Airport awarded. Changi Airport Group (CAG) recently announced that it awarded a third ground handling license (for 10 years) at Singapore Changi Airport to US-based Aircraft Service International Group (ASIG). ASIG will now compete with SATS Ltd and Changi International Airport Services (CIAS) for airline customers in both full service and low-cost carrier segments to provide quality and cost competition for services that include passenger and cargo handling servicing, and ramp handling. In operation since 1947, ASIG has a wide portfolio of airline customers both in the US and Europe that include Vigin Atlantic, JetBlue and Ryanair. It also currently has refueling operations at Suvarnabhumi Airport in Bangkok. The third license comes two years following Swissport International's withdrawal of operations in Apr 2009 after sustaining losses in excess of US$50m over its four years of operations.
Price competition expected going forward. Based on precedence, we expect the two existing players to pose stiff competition to ASIG. In a press release issued by the Civil Aviation Authority of Singapore (CAAS) back in 2009 when Swissport withdraw its operations, it noted that ground handling rates fell by an average of 15% during the time Swissport was in operations. In a Business Times article on 31 Mar 2008, Swissport blamed "massive undercutting" as one of the key challenges it faced, although the allegations were refuted by its rivals. The re-emergence of a new handler will likely reignite and re-energize competition, and will provide airlines with more options as well as increase their leverage in price negotiations.
SATS to maintain dominance but will face some price pressures. As the dominant player, SATS controls about 80% of the business in Changi. While we anticipate some potential customer losses and potential reduction in ground handling rates, we believe that its regional size advantage and operational experience will not only allow it to survive any price competitions but also to dictate the extent of any potential price reductions. As such, we expect similar reduction of ground handling rates of about 15% going forward once ASIG commences operations, especially given the somewhat stagnant global economic recovery where passenger traffic maybe affected in the near- to medium-term. Besides size advantage, SATS also provides a wide range of unique and integrated services that differentiates itself from its competition and may promote customer loyalty. This market leadership should continue to favour SATS in the face of new competition. We fine-tuned our fair value estimate to S$3.02 (S$3.06 previously) to incorporate anticipated price competition and maintain our BUY rating.
Oil & Gas sector (OCBC)
Overweight
Downstream EPC firms
Recovery in sight. Compared to a year ago, the outlook for the oil and gas (O&G) sector is more positive now. Oil companies are ramping up capex investments, and downstream engineering, procurement and construction (EPC) firms would benefit from increased business volume and higher margins. In Singapore, there are several large O&G infrastructure projects, including plans by PetroChina and Chervon to upgrade their Jurong Island refinery, construction of a rubber plant by Lanxess, and the resumption of a stalled ethylene cracker by Shell. Although the bulk of the engineering and construction contracts are likely to be taken up by the bigger firms, parts of these jobs are likely to flow down to downstream EPC firms such as Rotary Engineering (Rotary), PEC, Hiap Seng Engineering, Mun Siong Engineering and Tiong Woon Corporation.
Low orderbook visibility. Despite the improved outlook, the orderbooks of local EPC firms remained at a low level as compared to a year ago (see Exhibit 1). We believe it would take time for these large engineering/construction projects to flow down to downstream players. In addition, our channel checks indicate that competition for projects within Singapore's Jurong Island remains stiff and margins are thin. As such, it may take a while before the outlook for smaller EPC firms improves.
Overseas operations and geopolitical. Rotary and PEC have substantial overseas exposure, which helps the companies sustain their profitability margins in the face of stiff competition within Singapore. However, some investors may be concerned about geopolitical risks. For FY10, Rotary derived 72% of revenue from overseas, mainly in the Saudi Arabia (64%). As mentioned in our earlier report dated 31 May 2010, Rotary's operations have not been affected by civil unrest. The share prices of Rotary and PEC have fallen by 22% and 21% YTD, while its peers have fallen by between 24% to 33% YTD.
Focusing on value; BUY on Rotary. While the outlook for the O&G sector is positive, we remain cautious on the overall outlook for the smaller EPC companies. Orderbooks for these companies remained at a low level and competition within Singapore remains stiff. We continue to like Rotary for its large orderbook and overseas operations, which should help to sustain its margins. We also think that concerns about its Middle East exposure may be overblown because its operations are mainly in Saudi Arabia and UAE, which are less affected by civil unrest. We have a BUY on Rotary with a fair value estimate of S$0.99.
Q & M Dental Group (KimEng)
Background: Q & M has a network of 43 dental clinics in Singapore, commanding a 7% share of the market based on the total number of local dental outlets. It serves about 18% of the local population who visit dentists more than once a year. The group also operates nine dental outlets in China through joint ventures and two in Malaysia.
Recent development: Q & M attracted a US$15m financing from the International Finance Corporation (IFC) in April this year and proposed a TDR issue of up to US$50m on the Taiwan Stock Exchange in the following month. This target war chest of US$65m (or RMB400m) has been earmarked for the group’s expansion in China over the next five years.
Key ratios…
Price-to-earnings: 54.0x
Price-to-NTA: 8.6x
Dividend per share / yield: $0.012 / 1.5%
Net cash/(debt) per share: $0.05
Net cash as % of market cap: 6.7%
Everything else…
Share price S$0.81
Issued shares (m) 275.2
Market cap (S$m) 222.9
Free float (%) 27.2%
Recent fundraising activities IPO: November 2009 (IPO price of $0.27)
Financial YE December 31
Major shareholders 18 principal shareholders (dentists) – 71.2%
YTD change +62.0%
52-wk price range S$0.415-0.905
Our view:
Roadmap to success in Singapore. Q & M is gaining market share in the area of aesthetic dental solutions with two large-scale centres in Singapore. There is excess capacity at these centres for new dentists to capture the rising demand for specialist dental services. In addition, the group plans to increase its dental outlets in Singapore to 60 by 2015 through organic expansion or acquisitions. This implies profit growth of 44% in Singapore alone over the next five years, based on very conservative estimates of revenue per clinic per annum of $0.9k and net margin of 10%.
Gearing up for China listing. The group targets to operate 50 dental outlets and at least 20 laboratories in five years through JVs and build a combined profit base of at least RMB80m before seeking a separate listing, likely in China. Its share of the profit undertakings under the existing and proposed JVs currently amounts to RMB14.5m pa and will impact the bottomline from next year.
Price surge on news combo. The proposed TDR issue, coupled with the endorsement by IFC and plans for a separate China listing in the future, has sent Q & M’s share price surging by 62% year-to-date. The stock trades at 32x FY11 PER (consensus) and 8.3x P/B.
Ezion Holdings (KimEng)
Event:
Ezion has entered a partnership to provide an accommodation jackup for deployment off the coast of Denmark. This contract, while substantially lucrative on its own, also has the potential to open new doors for more such vessels to be used in the region. We estimate the venture could provide Ezion with over US$5m pa in recurring earnings over the next 20 years. Maintain BUY and target price of $0.99.
Our View:
The new 50:50 JV, Atlantic Labrador, has secured a charter contract with a value of up to US$73.0m over a four-year period to provide a North Sea Class accommodation jackup rig for a European oil major. The JV is incorporated in Singapore with Treatmil Holdings, a Europe-based firm that offers rig management services to the offshore oil and gas and offshore wind industries’ operators in the North Sea.
Atlantic will acquire, refurbish, upgrade and mobilise the accommodation jackup rig before the year-end. The rig is unique in that it is the only vessel that has single-man configured cabins only, for up to 140 personnel. The total cost of this vessel will be around US$85m, with US$53m for an existing rig, US$30m for conversion at a Dutch shipyard and US$2m in contingencies. The JV will have a paid-up capital of US$10m; however, each partner will contribute US$15m in total equity with the balance to be funded by bank borrowings.
The rig is a bareboat charter. With depreciation (over 20 years) estimated at US$4.3m pa and financing costs of around US$2.8m pa, Ezion should be able to generate associate tax-free earnings in excess of US$5m pa from FY12 onwards. Return of equity is estimated at around 35%, ahead of its hurdle rate of 30%.
Action & Recommendation:
We raise our earnings forecasts by 5.5% for FY12 and 8.3% for FY13. Reiterate BUY and target price of $0.99, based on PEG of just 0.5x or FY11F core PER of 12.5x.
EZION HOLDINGS (DMG)
BUY
Price S$0.645
Previous S$1.07
Target S$1.07
Ezion is involved in the provision of offshore and marine logistics and is owner of one of the largest liftboats in the world.
JV secured US$73m Denmark jackup rig deal
Third ma jor contract YTD; re-iterate BUY. Newsflow on new job wins remained strong as Ezion bagged its third major contract of the year. Ezion’s 50:50 Joint Venture (JV) with Treatmil Holdings, a European offshore service company, has secured a four-year charter contract worth US$73m from a European oil major in offshore Denmark and project will start by end 2011. We expect the contract to contribute US$5.5m to FY12F net profit. However, we have cut contributions from marine supply base projects due to further delays. Net impact on our FY12 EPS is ~1% higher than our previous estimates. Maintain BUY with an unchanged TP of S$1.07 based on 12x blended FY11-12F fully diluted EPS.
US$73m contract to begin by end-2011. The Ezion-Treatmil JV (Atlantic Labrador) will acquire, refurbish, upgrade and mobilise the accommodation jackup rig to the North Sea before end 2011. The JV will use an old jackup rig (>25 years old) purchased from Transocean called GSF Labrador and conversion of the rig will be carried out at a yard in Holland. Total project cost is estimated at US$85m. This the third major contract secured by Ezion after the US$109.5m time charter for one liftboat (announced on 24 Feb 2011) and the US$109.5m (announced on 5 April 2011) for the Alaska jackup rig (JV with Buccaneer). We understand that there are more such opportunities out there and management is keen to explore this type of projects given shorter time to market vs. newbuilds.
Separately, there could be more delay to the marine supply bases. We believe that there is further delay for the two marine supply bases in Australia given difficulty in finalising the development plans and regulatory hurdles and the projects are not likely to contribute in 1Q12 as we have initially expected. Hence, we are taking out our earnings estimate for the two projects until there is more clarity on when the project will start contributing. We still expect to see strong core net profit growth of 48% in FY12 mainly from its liftboat business and rigs.
The contract value of US$73m over four years implies a daily charter rate of US$50k/day or US$18.3m per annum. The rig will be on bareboat charter to the operating company owned by Treatmil Holdings and the end-customer is a European oil major operating offshore Denmark. We believe that the undisclosed oil major is Maersk.
The rig will cost US$85m (rig cost US$53m, conversion US$30m and contingency US$2m) and will be funded by US$55m debt and US$30m equity. Financing for the project is expected to be given by a domestic bank. The JV has been offered a five-year loan with effective interest rate of around 5% for the US$55m loan.
The project cost of US$85m will be amortised over a period of 20 years, equivalent to US$4.3m per annum.
The jackup rig to be converted is a Transocean rig called GSF Labrador and is more than 25 years old (based on data from Rigzone).
The project has a very tight timeline as the accommodation jackup rig is expected to be operational by end 2011.
Conversion of the project will be carried out in Holland at the Scheldepoort shipyard. The conversion work includes removal of the drilling package, conversion of the existing cabins into 140 single man cabin to meet North Sea standard, fire fighting equipment in accordance to North Sea standard, tubular inspection and repair, installation of lifeboats in accordance to North Sea standard, engines overhaul, cranes upgrades, upgrade of all major service equipments to meet the work requirement in the North Sea.
Ezion Holdings (DBSVickers)
BUY S$0.645 STI : 3,020.13
Price Target : 12-Month S$ 1.14 (Prev S$ 1.09)
Reason for Report : Raising earnings forecasts, TP
Potential Catalyst: Contract award
Heading North
• Ezion secures 2nd jackup project in 3 months via JV; project worth up to US$73m.
• Project generates 36% ROE and will add 8% to core FY12F.
• Partially offset by removal of South American support vessel contributions; FY11/12F earnings raised 6%/4%.
• Maintain BUY, TP raised to S$1.14.
Second jackup venture. Ezion, along with 50/50 JV partner, Treatmil Holdings, has secured a 2+2 year charter contract to provide a North Sea class accommodation jackup rig to an European oil major worth US$73m. The JV will acquire, refurbish, upgrade and mobilize the upgraded accommodation jackup rig to the North Sea before end FY11.
Earnings to kick in from FY12. We expect this jackup to add US$5.4m/year in associate contributions. With a ROE of 36%, this implies that its capital outlay will be fully recouped by the end of the 4-year contract.
Tweaking FY11/12F by 6%/4%. Ezion has placed a support vessel deployed to a South American client on standby due to a lack of payment. As we await further clarity on this matter, we have removed all earnings contributions from this asset. This impact is offset by adjusting for a robust 1Q11 performance and contributions from latest JV from FY12 onwards, leading to a 6%/4% adjustment to FY11/12F. Note that Ezion has changed its reporting currency to USD from SGD previously.
Maintain BUY, 75% upside to new TP of S$1.14. On the back of our earnings revisions, our TP is accordingly nudged up to S$1.14 (prev S$1.09). We continue to like Ezion for its attractive valuations (FY11/12F PE of 9x/6x) against a solid FY10-12 core EPS CAGR of 47%. This growth is supported by multiple visible drivers as well as a solid execution track record to date. Maintain BUY, with 75% potential upside to our revised TP of S$1.14.
Ezion’s second jackup venture. Ezion has announced its second jackup project in 3 months. Together with JV partner Treatmil Holdings, they have secured a 2+2 year charter contract worth up to US$73m for the provision of a North Sea class accommodation jackup rig to an undisclosed European oil major to support its oil and gas activities offshore Denmark. We suspect this could be Maersk Oil, given its dominance in that region.
This project will be executed via a 50/50 JV company, Atlantic Labrador (Atlantic), which will acquire an existing jackup rig, refurbish, upgrade and mobilize the upgraded accommodation jackup rig to the North Sea before end 2011. The jackup will be bareboat chartered by Atlantic to the Op Co. (which will be separately managed by Treatmil), earning a fixed day rate of US$50k/day.
Old partner with a local presence. Treatmil is an European based offshore service company that provides specialized rig management services to operators servicing the offshore oil and gas and wind industries in the North Sea. Its management team has over 20 years of experience in the European oil and gas market, and has a proven track record of operating and managing North Sea class accommodation jackup rigs. Further, we understand that certain members of Ezion’s management team have previously collaborated with Treatmil, successfully delivering a conversion project for Maersk in 2005.
Project expected to cost a total of US$85m, funding in place. The conversion work is set to commence within the week at a yard in the Netherlands, and is expected to be delivered before end 2011. The cost of the entire project has been estimated at US$85m, which includes the acquisition cost of US$53m for an existing jackup rig, and around US$32m for the conversion (inclusive of a US$2m contingency amount). We understand that around 65% of the total capex will be funded with debt, which has already been secured. The remaining US$30m will be equity funded in equal portions by the JV partners. At US$15m, Ezion can comfortably fund this with its cash horde of US$92.5m.
Converted jackup will be first North Sea class accommodation unit with 100% single-man cabins. The conversion work will result in the rig being converted from a drilling unit to a pure accommodation unit with 140 single-man cabins to meet the North Sea standard. We understand this will be the first North Sea class accommodation unit that will feature 100% one-man cabins.
Conversion work required
• Removal of drilling package
• Conversion of existing cabins to 140 single-man cabins to meet North Sea standards
• Fire fighting equipment in accordance to North Sea standards
• Tubular inspection and repair
• Installation of lifeboats in accordance to North Sea standards
• Engines overhaul
• Cranes upgrades
• Upgrade of all major service equipments to meet the work requirement in the North Sea
Earnings contributions to kick in ~6 months time. We expect this jackup unit, at the Atlantic JV company level, to generate annual net profits of US$10.8m on revenues of US$18.3m, based on our estimates of depreciation and financing costs. With Ezion holding a 50% stake in Atlantic, we expect this to boost associate contributions by c. US$5.4m/year, from FY12 onwards.
Reasonably high ROE despite apparently “low” day rates. The US$73m 4-year contract translates into day rates of US$50k/day. While this rate may appear low vs. the market rates for North Sea jackups, we note that 1) this rig will be utilized purely for accommodation purposes and would not be used for drilling; 2) the jackup is on a bareboat basis. Notwithstanding this, we estimate ROE on this project to be c. 36%, a reasonably high return vs. current group ROE of 30%.
Positives. We view this development positively as it provides another visible stream of earnings to Ezion, with its capital outlay to be fully recouped by the end of the 4-year contract (assuming the 2-year extension option is exercised). Also, with the successful execution of this project, Ezion would have successfully penetrated the North Sea market, characterized by the harsh operating environment offshore and stringent regulatory safety and environmental standards imposed by governments across Northern Europe.
South American supply vessel has stopped contributing to earnings. It has come to our attention that due to a lack of payment from its client, a South American NOC, Ezion has placed the support vessel on standby and is no longer contributing to earnings. Recall that this vessel has been working for this client since early 2009 on an initial 2-year charter worth US$38m. As we await further clarity on this matter, we have in the meantime removed all earnings contributions.
Adjusting numbers for new project, offset by removal of contributions from supply vessel. We have tweaked our recurring FY11/12F up by 6%/4% respectively to US$44.1m/US$66.8m, factoring in 1) a robust 1Q11 that came in 35% ahead of our expectations; 2) associate contributions from Atlantic commencing FY12, and partially offset by the removal of earnings contribution from the South American support vessel. Note that Ezion has changed its reporting currency to USD from SGD previously.
Maintain BUY, 75% upside to new TP of S$1.14. On the back of our earnings revisions, our TP is nudged up to S$1.14 (prev S$1.09), still based on 12x blended FY11/12 PE. We continue to like Ezion for its attractive valuations (FY11/12 PE of 9x/6x) against a solid FY10-12 core EPS CAGR of 47%. This growth is supported by multiple visible drivers, as well as a solid execution track record to date. Maintain BUY, with 75% upside to our revised TP of S$1.14.
Thursday, 16 June 2011
Neptune Orient Lines (DBSVickers)
HOLD; S$1.53, Price Target: S$2.10
NOL to order 12 new ships for delivery in 2013-14
NOL to expand owned fleet further. Close on the heels of its recently announced S$300m 4.40% notes issue, NOL Group announced the signing of LOIs for 12 new ships with Korean shipyards due for delivery in 2013-14. The new order would include i) ten 14,000 TEU vessels to be constructed at Hyundai Samho Heavy Industries, and ii) two 9,200 TEU vessels to be constructed by Daewoo Shipbuilding & Marine Engineering Co. (DSME). NOL would also be upgrading its existing order with DSME for ten 8,400 TEU ships to 9,200 TEU capacity, in line with the specs for the new 2-ship order at DSME. Taken together with its existing orders placed in 2007 and 2010, NOL will be adding about 350,000 TEUs in gross capacity over 2012-14. Given that about 150,000 TEU capacity ships come off charter during that period and will be replaced by the owned ships, net increase in capacity by 2014 will be around 200,000 TEUs or 35% from current levels. The owned-to-chartered fleet composition will also change from current 30:70 to about 50:50 by end-2014, in line with management’s targets.
The total consideration for new vessels and upgrades is around US$1.54bn. We estimate the 14,000 vessels to cost around US$130m each, the 9,200 TEU vessels to cost around US$100m and the upgrades to cost around US$5m each. The price looks fair to us and seems to be at a slight discount to OOCL's orders with Samsung in March'11 for six 13,000 vessels for US$138m each and Hamburg Sud's orders for six 9,700 TEU ships for US$118m each (as reported by Clarkson). The recent notes issue should help finance pre-delivery payments, while bank lending for the remainder can be arranged at a later stage. NOL has already secured bank-lending amounting to about 78% of value of its last batch of orders. Net gearing for the Group is, however, projected to increase from current levels of around 0.2x to 0.5x by end-FY12 and even higher, going forward, as more of the owned ships are delivered.
Indicative of change in strategy? The 14,000 TEU ships are the biggest that NOL has ordered to date, and is suitable for deployment on the Asia-Europe trade. The bigger players on the Asia-Europe trade like Maersk, MSC, CMA-CGM and CSCL have already deployed or ordered ships of this size/ class, and NOL would find it hard to compete effectively on this route without the cost advantages obtained from running these bigger and more efficient ships. The more aggressive intent to protect market share on Asia-Europe routes, where NOL has traditionally not been seen as a strong player, could be a sign of change in strategy as NOL has seen some recent changes in top management, including changes in Group CEO and the President of the container shipping division (APL). The smaller 9,200 TEU ships will however, be deployed on the Transpacific route, where NOL already has a premium position. We believe it is still very early days to call changes in the Group's longterm strategy, though.
Clouds building up in the horizon. While there is no immediate impact on earnings from these new orders, we view the industry-wide phenomenon of placing new orders to gain market share in the 2013-14 period with caution, as even the long-term demand-supply dynamics now begin to look increasingly fragile. In the near term, carriers continue to struggle with weakening freight rates across trade lanes, and there is no sign yet of a peak-season driven demand recovery. 2Q11 will likely be another loss-making quarter for NOL, as well as the industry at large, and whether 3Q11 will be strong enough to recover the losses will remain to be seen. As such, we maintain our HOLD call on the stock for now but see potential downside risks to our earnings assumptions for FY11/12.
NOL to order 12 new ships for delivery in 2013-14
NOL to expand owned fleet further. Close on the heels of its recently announced S$300m 4.40% notes issue, NOL Group announced the signing of LOIs for 12 new ships with Korean shipyards due for delivery in 2013-14. The new order would include i) ten 14,000 TEU vessels to be constructed at Hyundai Samho Heavy Industries, and ii) two 9,200 TEU vessels to be constructed by Daewoo Shipbuilding & Marine Engineering Co. (DSME). NOL would also be upgrading its existing order with DSME for ten 8,400 TEU ships to 9,200 TEU capacity, in line with the specs for the new 2-ship order at DSME. Taken together with its existing orders placed in 2007 and 2010, NOL will be adding about 350,000 TEUs in gross capacity over 2012-14. Given that about 150,000 TEU capacity ships come off charter during that period and will be replaced by the owned ships, net increase in capacity by 2014 will be around 200,000 TEUs or 35% from current levels. The owned-to-chartered fleet composition will also change from current 30:70 to about 50:50 by end-2014, in line with management’s targets.
The total consideration for new vessels and upgrades is around US$1.54bn. We estimate the 14,000 vessels to cost around US$130m each, the 9,200 TEU vessels to cost around US$100m and the upgrades to cost around US$5m each. The price looks fair to us and seems to be at a slight discount to OOCL's orders with Samsung in March'11 for six 13,000 vessels for US$138m each and Hamburg Sud's orders for six 9,700 TEU ships for US$118m each (as reported by Clarkson). The recent notes issue should help finance pre-delivery payments, while bank lending for the remainder can be arranged at a later stage. NOL has already secured bank-lending amounting to about 78% of value of its last batch of orders. Net gearing for the Group is, however, projected to increase from current levels of around 0.2x to 0.5x by end-FY12 and even higher, going forward, as more of the owned ships are delivered.
Indicative of change in strategy? The 14,000 TEU ships are the biggest that NOL has ordered to date, and is suitable for deployment on the Asia-Europe trade. The bigger players on the Asia-Europe trade like Maersk, MSC, CMA-CGM and CSCL have already deployed or ordered ships of this size/ class, and NOL would find it hard to compete effectively on this route without the cost advantages obtained from running these bigger and more efficient ships. The more aggressive intent to protect market share on Asia-Europe routes, where NOL has traditionally not been seen as a strong player, could be a sign of change in strategy as NOL has seen some recent changes in top management, including changes in Group CEO and the President of the container shipping division (APL). The smaller 9,200 TEU ships will however, be deployed on the Transpacific route, where NOL already has a premium position. We believe it is still very early days to call changes in the Group's longterm strategy, though.
Clouds building up in the horizon. While there is no immediate impact on earnings from these new orders, we view the industry-wide phenomenon of placing new orders to gain market share in the 2013-14 period with caution, as even the long-term demand-supply dynamics now begin to look increasingly fragile. In the near term, carriers continue to struggle with weakening freight rates across trade lanes, and there is no sign yet of a peak-season driven demand recovery. 2Q11 will likely be another loss-making quarter for NOL, as well as the industry at large, and whether 3Q11 will be strong enough to recover the losses will remain to be seen. As such, we maintain our HOLD call on the stock for now but see potential downside risks to our earnings assumptions for FY11/12.
Lippo-Mapletree Indonesia Retail (OCBC)
Maintain BUY
Previous Rating: BUY
Current Price: S$0.57
Fair Value: S$0.61
Favorable retail outlook ahead; reiterate BUY
Retail supply. According to Colliers International, no new retail supply entered the market in 4Q10. Retail supply growth throughout 2010 in Jakarta and the greater Jakarta area was the lowest since 2009. With only 0.3% growth, YoY growth was 0.2pp below last year. Limited supply will continue throughout this year. In Jakarta, there will be an additional 89,000 sqm of retail space by the end of 2011 contributed mainly by Kuningan City Lifestyle and Entertainment. Colliers expects another 439,3556 sqm of retail space within the next three years and all of these projected developments are a component within mixed-use developments. Retail supply around Greater Jakarta is projected to be far less than in Jakarta. The limited supply puts LMIR in a good stead to capitalize on growth opportunities arising from the robust economy recovery (Indonesia's economic growth forecast is 6.9-7.0% for 2011)
Occupancy rates & tenants. Up to the end of 1Q11, the occupancy rate of shopping malls in Jakarta was 85.04%, up 1.77% QoQ. We noted that occupancy rates have been steadily increasing for all regions of Jakarta since 2010. The average occupancy performance around the greater Jakarta area was also relatively stable, with occupancy standing at 82.9%. LMIR's overall occupancy of 98% as at 31 Mar, compared favorably against these benchmarks. The emerging concept in Indonesia of combining department stores with F&B outlets further boosted shopper traffic and uplifted tenants' performance. Some of the familiar tenants taking up new leases in Jakarta this year include Mad for Garlic, Marche, Muji, Yamaha Music School, Best Denki etc. In terms of the entry of new tenants, Payless Shoes, a shoe retailer from Kansas of the United States, also opened its first outlet in Indonesia. A giant retailer from Germany, Metro Group, also announced that it plans to invest as much as €300m in the next three years to establish 20 wholesale retail outlets in Indonesia.
Rental rates in Jakarta. There was no increase in rental rate in 1Q11. Strengthening occupancy performance has become more important for shopping malls at present. Retaining existing tenants by providing rents according to the lease agreement and offering reasonable rates for new tenants are common. In 1Q11, the average rental rate was recorded at Rp349,507 psm/mth. Despite showing no increase QoQ, the average rental rate was 1.16% higher YoY. With a population of more than 200 million, a fast-growing economy and strong domestic consumption, Indonesia offers abundant potential for retail business. Likewise for retail landlords, who are expecting rentals to pick up in 2012-2013. We believe LMIR is poised to benefit from the rising mall culture in Indonesia. Reiterate BUY with an increased fair value of S$0.61 (prev:S$0.59).on grounds of favorable outlook ahead.
Previous Rating: BUY
Current Price: S$0.57
Fair Value: S$0.61
Favorable retail outlook ahead; reiterate BUY
Retail supply. According to Colliers International, no new retail supply entered the market in 4Q10. Retail supply growth throughout 2010 in Jakarta and the greater Jakarta area was the lowest since 2009. With only 0.3% growth, YoY growth was 0.2pp below last year. Limited supply will continue throughout this year. In Jakarta, there will be an additional 89,000 sqm of retail space by the end of 2011 contributed mainly by Kuningan City Lifestyle and Entertainment. Colliers expects another 439,3556 sqm of retail space within the next three years and all of these projected developments are a component within mixed-use developments. Retail supply around Greater Jakarta is projected to be far less than in Jakarta. The limited supply puts LMIR in a good stead to capitalize on growth opportunities arising from the robust economy recovery (Indonesia's economic growth forecast is 6.9-7.0% for 2011)
Occupancy rates & tenants. Up to the end of 1Q11, the occupancy rate of shopping malls in Jakarta was 85.04%, up 1.77% QoQ. We noted that occupancy rates have been steadily increasing for all regions of Jakarta since 2010. The average occupancy performance around the greater Jakarta area was also relatively stable, with occupancy standing at 82.9%. LMIR's overall occupancy of 98% as at 31 Mar, compared favorably against these benchmarks. The emerging concept in Indonesia of combining department stores with F&B outlets further boosted shopper traffic and uplifted tenants' performance. Some of the familiar tenants taking up new leases in Jakarta this year include Mad for Garlic, Marche, Muji, Yamaha Music School, Best Denki etc. In terms of the entry of new tenants, Payless Shoes, a shoe retailer from Kansas of the United States, also opened its first outlet in Indonesia. A giant retailer from Germany, Metro Group, also announced that it plans to invest as much as €300m in the next three years to establish 20 wholesale retail outlets in Indonesia.
Rental rates in Jakarta. There was no increase in rental rate in 1Q11. Strengthening occupancy performance has become more important for shopping malls at present. Retaining existing tenants by providing rents according to the lease agreement and offering reasonable rates for new tenants are common. In 1Q11, the average rental rate was recorded at Rp349,507 psm/mth. Despite showing no increase QoQ, the average rental rate was 1.16% higher YoY. With a population of more than 200 million, a fast-growing economy and strong domestic consumption, Indonesia offers abundant potential for retail business. Likewise for retail landlords, who are expecting rentals to pick up in 2012-2013. We believe LMIR is poised to benefit from the rising mall culture in Indonesia. Reiterate BUY with an increased fair value of S$0.61 (prev:S$0.59).on grounds of favorable outlook ahead.
Popular Holdings Limited (KimEng)
Background: Founded in 1924, Popular is in the business of book retail and distribution, publishing, and sale of e‐Learning products with a strong regional presence. The group has ventured into property development in Singapore since 2006 in order to maximise returns for shareholders.
Company outlook: Popular distinguishes itself in a sunset industry by setting up modern, upscale stationery concept shops such as {prologue} at Ion Orchard. In publishing, the company sees opportunities in the supplementary educational book segment in Singapore, Hong Kong, China and Canada. In the property segment, it has begun to recognise profit from the sale of units in its second project, 18 Shelford, and will recognise revenue from 8 Raja upon project completion in 2013.
Our view:
Resilient core book retailing business. Despite being in a sunset industry, Popular has seen revenue from its core retail and distribution and publishing businesses growing steadily at a CAGR of 7% over the past five years. These segments accounted for 92% of group revenue in FY Apr10.
Undervalued gem with downside protection. The steady organic growth in retail and distribution, as well as the resilience of the publishing business, seems to have gone unnoticed. The stock trades at 0.7x NTA and FY10 PER of just 3.6x against the peer average of 12x. The company is backed by $0.11/share in net cash and has a track record of high dividend payout. There is a high likelihood of more bumper dividends in the future as the company will recognise profit from its remaining two development projects over the next 3‐4 years (estimated $100m in revenue).
Company outlook: Popular distinguishes itself in a sunset industry by setting up modern, upscale stationery concept shops such as {prologue} at Ion Orchard. In publishing, the company sees opportunities in the supplementary educational book segment in Singapore, Hong Kong, China and Canada. In the property segment, it has begun to recognise profit from the sale of units in its second project, 18 Shelford, and will recognise revenue from 8 Raja upon project completion in 2013.
Our view:
Resilient core book retailing business. Despite being in a sunset industry, Popular has seen revenue from its core retail and distribution and publishing businesses growing steadily at a CAGR of 7% over the past five years. These segments accounted for 92% of group revenue in FY Apr10.
Undervalued gem with downside protection. The steady organic growth in retail and distribution, as well as the resilience of the publishing business, seems to have gone unnoticed. The stock trades at 0.7x NTA and FY10 PER of just 3.6x against the peer average of 12x. The company is backed by $0.11/share in net cash and has a track record of high dividend payout. There is a high likelihood of more bumper dividends in the future as the company will recognise profit from its remaining two development projects over the next 3‐4 years (estimated $100m in revenue).
ST Engineering (KimEng)
Event:
ST Engineering’s (STE) share price has hit new one‐year lows and is off by 13.5% year‐to‐date. While some recent negative news has had an impact, its earnings were relatively intact. Its current forecast dividend yield of 5.7% warrants a relook at the stock. However, we maintain our HOLD recommendation as its forward PER still stands at 15.7x. Our target price of $3.15 is unchanged, with upside of 9%.
Our View:
ST Marine has been issued a $63.5m letter of claim from Louis Dreyfus regarding its $179m shipbuilding contract for a Roll‐on/Roll‐off Passenger Ferry (Ropax). This is for an alleged delay of delivery and claim that the vessel is not up to specifications. STE is disputing this and is countering with a breach of contract claim. While this matter will take some time to be settled in court, STE has also stated that if liable, its total liability under the terms of the Ropax contract is capped at 10% of the contract price, or $17.9m.
STE has still been steadily securing new contracts across all its operating divisions. This included a recent contract worth $171m (exequipment) for ST Marine for the construction of four AHTS vessels. ST Aerospace, too, has secured some $320m worth of maintenance contracts in 1Q11 for both military and civilian aircraft, despite a soft market.
STE expects to achieve better PBT in FY11 versus FY10. Excluding the possible provision for the Ropax contract, we are maintaining our forecasts and expect earnings to grow by 14% in FY11.
Action & Recommendation:
STE’s orderbook of $11.3b forms a strong baseload for FY11 earnings. Though currently trading at the low‐end of its recent PER band, the stock still looks well‐priced at 15.7x FY11F PER. Our target price of $3.15 is based on 17x PER. STE’s forward dividend yield of 5.7% remains attractive and we assume a continuation of the 90% payout ratio. Maintain HOLD.
ST Engineering’s (STE) share price has hit new one‐year lows and is off by 13.5% year‐to‐date. While some recent negative news has had an impact, its earnings were relatively intact. Its current forecast dividend yield of 5.7% warrants a relook at the stock. However, we maintain our HOLD recommendation as its forward PER still stands at 15.7x. Our target price of $3.15 is unchanged, with upside of 9%.
Our View:
ST Marine has been issued a $63.5m letter of claim from Louis Dreyfus regarding its $179m shipbuilding contract for a Roll‐on/Roll‐off Passenger Ferry (Ropax). This is for an alleged delay of delivery and claim that the vessel is not up to specifications. STE is disputing this and is countering with a breach of contract claim. While this matter will take some time to be settled in court, STE has also stated that if liable, its total liability under the terms of the Ropax contract is capped at 10% of the contract price, or $17.9m.
STE has still been steadily securing new contracts across all its operating divisions. This included a recent contract worth $171m (exequipment) for ST Marine for the construction of four AHTS vessels. ST Aerospace, too, has secured some $320m worth of maintenance contracts in 1Q11 for both military and civilian aircraft, despite a soft market.
STE expects to achieve better PBT in FY11 versus FY10. Excluding the possible provision for the Ropax contract, we are maintaining our forecasts and expect earnings to grow by 14% in FY11.
Action & Recommendation:
STE’s orderbook of $11.3b forms a strong baseload for FY11 earnings. Though currently trading at the low‐end of its recent PER band, the stock still looks well‐priced at 15.7x FY11F PER. Our target price of $3.15 is based on 17x PER. STE’s forward dividend yield of 5.7% remains attractive and we assume a continuation of the 90% payout ratio. Maintain HOLD.
Berlian Laju Tanker (CIMB)
OUTPERFORM Maintained
RP340 Target: Rp480
Mkt.Cap: Rp3,927,282m/US$460m
Tanker Shipping
Oil tanker losses spoilt 4Q numbers
• Below; but maintain OUTPERFORM. 4Q10 core net loss was US$50.9m, against our expectation of a profit of US$9.5m. Consequently, full-year core net loss amounted to US$75.5m against our US$15.1m loss forecast. While the chemical division performed according to expectations, the oil tanker & FPSO segment unexpectedly plunged into a 4Q operating loss of US$26.5m, from a US$1.5m loss in 3Q. We reflect the tough operating conditions in the oil tanker market by slashing core net profit by 266% for 2011 to a loss of US$46m, and by 90% for 2012 to just US$4m. We introduce 2013 forecasts. We maintain OUTPERFORM because chemical tanker rates should recover in 2012 and beyond, potentially providing catalysts, though we lower our target price to Rp480 from Rp495, still based on a 20% discount to SOP, following our earnings adjustments.
• Chemical shipping met forecasts; other divisions did not. The chemical shipping division earned US$93m in operating profit for the full year, meeting our forecast of US$94m. Chemical revenue was up 11% yoy, but EBIT was down 7% yoy on a 37% rise in bunker costs. On the other hand, gas tanker operating earnings were US$11m for 2010, against our US$15m expectation, due in part to an unexpected rise in depreciation in 4Q10 and higher-than-expected staff costs. Gas revenue was up 16% yoy for the full year, but EBIT was down 30% on higher depreciation and operating costs. The worst-performing segment was oil tankers, where the operating loss was a massive US$33.2m in 4Q against an operating profit of US$1m in 3Q. Tanker revenue collapsed to virtually nothing in 4Q, although costs were still being incurred. This loss more than offset the better FPSO performance, which earned US$6.7m in 4Q against a loss of US$2.6m in 3Q.
• Buana listed in May. PT Buana Listya Tama was listed at Rp155/share on 23 May and we have reflected the listing in our forecasts and valuation. We expect BLTA to recognise a gain on disposal of US$48m in 2011, but minority interest representing a 37.7% stake in Buana will also be recognised against Buana’s earnings. We have not imputed any cabotage contract wins in our numbers.
RP340 Target: Rp480
Mkt.Cap: Rp3,927,282m/US$460m
Tanker Shipping
Oil tanker losses spoilt 4Q numbers
• Below; but maintain OUTPERFORM. 4Q10 core net loss was US$50.9m, against our expectation of a profit of US$9.5m. Consequently, full-year core net loss amounted to US$75.5m against our US$15.1m loss forecast. While the chemical division performed according to expectations, the oil tanker & FPSO segment unexpectedly plunged into a 4Q operating loss of US$26.5m, from a US$1.5m loss in 3Q. We reflect the tough operating conditions in the oil tanker market by slashing core net profit by 266% for 2011 to a loss of US$46m, and by 90% for 2012 to just US$4m. We introduce 2013 forecasts. We maintain OUTPERFORM because chemical tanker rates should recover in 2012 and beyond, potentially providing catalysts, though we lower our target price to Rp480 from Rp495, still based on a 20% discount to SOP, following our earnings adjustments.
• Chemical shipping met forecasts; other divisions did not. The chemical shipping division earned US$93m in operating profit for the full year, meeting our forecast of US$94m. Chemical revenue was up 11% yoy, but EBIT was down 7% yoy on a 37% rise in bunker costs. On the other hand, gas tanker operating earnings were US$11m for 2010, against our US$15m expectation, due in part to an unexpected rise in depreciation in 4Q10 and higher-than-expected staff costs. Gas revenue was up 16% yoy for the full year, but EBIT was down 30% on higher depreciation and operating costs. The worst-performing segment was oil tankers, where the operating loss was a massive US$33.2m in 4Q against an operating profit of US$1m in 3Q. Tanker revenue collapsed to virtually nothing in 4Q, although costs were still being incurred. This loss more than offset the better FPSO performance, which earned US$6.7m in 4Q against a loss of US$2.6m in 3Q.
• Buana listed in May. PT Buana Listya Tama was listed at Rp155/share on 23 May and we have reflected the listing in our forecasts and valuation. We expect BLTA to recognise a gain on disposal of US$48m in 2011, but minority interest representing a 37.7% stake in Buana will also be recognised against Buana’s earnings. We have not imputed any cabotage contract wins in our numbers.
Singapore Airlines (DMG)
AVIATION: Singapore Airlines is Singapore’s national flagship carrier which is also one of the largest air carrier in the world.
SELL
Price S$14.00
Previous S$12.35
Target S$12.35
May '11 Stats: Load Factor Dips
SIA’s load factor for the month of May continued to weaken as forward bookings levelled off. We expect flat yields for FY12 given that high air fares owing to fuel surcharges are likely to cause passengers to switch to cheaper airlines, and the fact that low cost carriers are aggressively expanding their fleet. We are skeptical on SIA’s move to venture into the long haul low cost carrier segment as we think it would be value destructive to the airline’s premium branding and potentially dilute yields. Maintain SELL with the stock’s FV unchanged at S$12.35.
Passenger load factor weakens. SIA registered a YoY RPK growth of 4.3% (2 months YTD: 6%) in the month of May 2011 on the back of capacity growth of 6%, which further weakened its load factor by 1.2-ppts to 73.6%. Passengers carried was higher by 4% YoY (2M YTD: 5%) while capacity originally directed to the Tokyo route was diverted by adding frequency on routes to Hong Kong, Taipei and Male. SIA has been flying thrice-weekly to Sao Paulo via Barcelona since March but take-up has been poor. Its weaker passenger load factor was attributed to the East Asia and Americas region.
Cargo - Fragile economic recovery. FTK for the month of May was marginally flat on the back a 3.6% YoY increase in capacity as the cargo market braces itself for a faltering global economic recovery amid intensifying competition from other cargo carriers, which suggests that yields would continue to be trend down. This resulted in a YoY drop of 1.9-ppts in its cargo load factor to 64.7%, which was worse across all regions except the South West Pacific region.
Load factor to lighten further. On the back of a forecast 6% growth in capacity for FY12, we expect load factor to continue to dip as high air fares due to fuel surcharges send passengers running to cheaper airlines amid aggressive fleet expansion among low cost carriers that is chipping away market share given their added frequency on short haul routes. As a result, passenger yields are likely to remain flat. The intensifying competition has prompted a review of SIA’s strategy, whereby to maintain market share, SIA is targeting to set up a long haul low cost carrier within the next 12 months. We are skeptical on this move as we think it would be value destructive to SIA’s premium branding and would potentially dilute yields. In our view, the key to succeeding in the low cost business is generating passenger volume, and we believe this could work for shorter haul routes as revenue and high margins are primarily driven by ancillary income initiatives. Separately, recent ash clouds from Chile have halted flights headed for New Zealand and we understand that to date, none of SIA’s flights have been grounded, although flights to Christchurch and Wellington have been diverted to Auckland.
VALUATION AND RECOMMENDATION
Reiterate SELL. SIA's near-term challenges are weakening load factor, flattening yields amid a fragile recovery in the global economy and soaring jet fuel prices, which will also be investors’ primary concern. We are making no changes to our earnings forecast and reiterate our SELL recommendation, with an unchanged FV of S$12.35, premised on 15x FY12 EPS. Since our downgrade last month, SIA’s share price has declined by 4.5% and we anticipate more downward pressure.
SELL
Price S$14.00
Previous S$12.35
Target S$12.35
May '11 Stats: Load Factor Dips
SIA’s load factor for the month of May continued to weaken as forward bookings levelled off. We expect flat yields for FY12 given that high air fares owing to fuel surcharges are likely to cause passengers to switch to cheaper airlines, and the fact that low cost carriers are aggressively expanding their fleet. We are skeptical on SIA’s move to venture into the long haul low cost carrier segment as we think it would be value destructive to the airline’s premium branding and potentially dilute yields. Maintain SELL with the stock’s FV unchanged at S$12.35.
Passenger load factor weakens. SIA registered a YoY RPK growth of 4.3% (2 months YTD: 6%) in the month of May 2011 on the back of capacity growth of 6%, which further weakened its load factor by 1.2-ppts to 73.6%. Passengers carried was higher by 4% YoY (2M YTD: 5%) while capacity originally directed to the Tokyo route was diverted by adding frequency on routes to Hong Kong, Taipei and Male. SIA has been flying thrice-weekly to Sao Paulo via Barcelona since March but take-up has been poor. Its weaker passenger load factor was attributed to the East Asia and Americas region.
Cargo - Fragile economic recovery. FTK for the month of May was marginally flat on the back a 3.6% YoY increase in capacity as the cargo market braces itself for a faltering global economic recovery amid intensifying competition from other cargo carriers, which suggests that yields would continue to be trend down. This resulted in a YoY drop of 1.9-ppts in its cargo load factor to 64.7%, which was worse across all regions except the South West Pacific region.
Load factor to lighten further. On the back of a forecast 6% growth in capacity for FY12, we expect load factor to continue to dip as high air fares due to fuel surcharges send passengers running to cheaper airlines amid aggressive fleet expansion among low cost carriers that is chipping away market share given their added frequency on short haul routes. As a result, passenger yields are likely to remain flat. The intensifying competition has prompted a review of SIA’s strategy, whereby to maintain market share, SIA is targeting to set up a long haul low cost carrier within the next 12 months. We are skeptical on this move as we think it would be value destructive to SIA’s premium branding and would potentially dilute yields. In our view, the key to succeeding in the low cost business is generating passenger volume, and we believe this could work for shorter haul routes as revenue and high margins are primarily driven by ancillary income initiatives. Separately, recent ash clouds from Chile have halted flights headed for New Zealand and we understand that to date, none of SIA’s flights have been grounded, although flights to Christchurch and Wellington have been diverted to Auckland.
VALUATION AND RECOMMENDATION
Reiterate SELL. SIA's near-term challenges are weakening load factor, flattening yields amid a fragile recovery in the global economy and soaring jet fuel prices, which will also be investors’ primary concern. We are making no changes to our earnings forecast and reiterate our SELL recommendation, with an unchanged FV of S$12.35, premised on 15x FY12 EPS. Since our downgrade last month, SIA’s share price has declined by 4.5% and we anticipate more downward pressure.
Wednesday, 15 June 2011
S’pore Press Holdings (OCBC)
Upgrade to BUY
Previous Rating: HOLD
Current Price: S$3.81
Fair Value: S$4.32
Upgrade to BUY; awaiting capital deployment
Almost got the Jurong Gateway site... A consortium, made up of Singapore Press Holdings (SPH) and United Engineers Limited, recently bid S$917m for a site beside Jurong East MRT station, and only 5.4% below the winning bid. This outcome was similar to a Bedok site auction in Sep 10. We think these strong tenders from SPH underline its desire to expand their retail landlord business. As of 2Q11, we estimate SPH to have a sizeable acquisition war-chest of S$1,265m, assuming a net gearing ceiling of 70%.
…but more GLS auctions to come. We think there are three sites in the 2H11 GLS supply that could be of interest to SPH. The commercial site beside Paya Lebar MRT, with a large GFA of 86,940 sqm, could have a significant retail component after setting aside the minimum office and hotel requirements. In addition, the commercial site beside Fernvale LRT could house a retail development with 26,400 sqm GFA - around the size of Clementi Mall. There is also a white site on the reserve list beside Novena MRT with potentially 19,400 sqm retail GFA after taking out the estimated minimum hotel requirement.
TripleOne and 313@Somerset potential targets? Market talk is that TripleOne Somerset is on the market for about S$1.2b ($2,132 psf NLA) and that 313@Somerset could be for sale as well. These may be interesting targets for SPH who could derive operational synergies between managing Paragon and any one of these assets, particularly 313@Somerset. Given the sizes of these assets, however, it is more l ikely for SPH to consider acqui r ing a stake or participating in a joint venture instead of acquiring these assets wholly.
Successful execution at Clementi Mall. Clementi Mall has opened for operations smoothly. The mall is fully leased with an average monthly rent of S$14 psf. Clementi Mall highlights SPH's retail management capabilities in a suburban location and the market would likely view similar acquisitions favorably. We forecast annual revenue at around S$30m from Clementi Mall after 4Q11.
Upgrade to BUY on valuation. The current price of S$3.81 indicates an upside of 13.4% against our S$4.32 fair value. In addition, the downside is limited by an attractive dividend yield of 7.1%, which is underpinned by a core newspaper segment yielding solid recurrent cash. Look for accretive acquisitions to be positive catalysts in FY11-12. We are upgrading SPH to BUY with a fair value estimate of S$4.32.
Came close for Jurong Gateway site tender... A consortium, made up of Singapore Press Holdings (SPH) and United Engineers Limited, recently bid S$917m (S$957 psf GFA) for a 99-year white site beside Jurong East MRT station. SPH's bid came in only 5.4% below the winning bid from a CapitaLand (CAPL) consortium and was significantly higher (16.7%) than the next highest bidder. This outcome was similar to a Bedok white site auction in Sep 10 when SPH's bid came in second after CAPL as well. In our view, these strong tenders from SPH underline management's continued desire to expand their retail landlord business. As of 2Q11, SPH's liquid capital (cash and ST investments) is estimated at S$1,034m with a net gearing of 13%. Assuming a net gearing ceiling of 70%, this translates to a sizeable acquisition war-chest of S$1,265m with limited need for additional debt-raising.
…and more GLS auctions to come. We think there are three sites in the 2H11 GLS supply that could be of interest to SPH. On the confirmed list, there is a 2.07-ha commercial site on Sims Ave beside Paya Lebar MRT station. With a large GFA of 86,940 sqm, a developer could possibly build a retail mall component after setting aside the minimum office and hotel quantum requirements. In addition, there is a 0.88-ha commercial site at Sengkang West Ave beside Fernvale LRT station that could yield a retail development with 26,400 sqm GFA - around the size of Clementi Mall. On the reserve list, there is also a white site at Thomson Rd beside Novena MRT station with potentially 19,400 sqm retail GFA after taking out the estimated minimum hotel requirement.
TripleOne and 313@Somerset potential targets? It has been reported recently that TripleOne Somerset is on the market for about S$1.2b (S$2,132 psf NLA) and that 313@Somerset could be for sale as well. These assets may be interesting targets for SPH who could derive operational synergies between managing Paragon and any one of these assets, particularly 313@Somerset. Given the sizes of these assets, however, it is more likely for SPH to consider acquiring a stake or participating in a joint venture instead of acquiring them wholly.
Successful execution at Clementi Mall. We visited Clementi Mall yesterday evening and found that it has opened for operations smoothly, with strong foot traffic from the captive flow of people between the mall, MRT station and bus interchange. (A recent report has pegged the daily number of visitors at Clementi Mall at 49k.) We also found that all retail stores have started sales, including the anchor tenants on every floor. Management had indicated that the mall is fully leased with an average monthly rent of S$14 psf. We expect rental revenues to roll in progressively as lease concessions wean off and forecast full annual revenue contributions at around S$30m after 4Q11. In our view, the successful execution at Clementi Mall highlights SPH's retail management capabilities outside of the high-end segment (Paragon) and the market would likely view SPH's suburban acquisitions favorably going forward.
Upgrade to BUY on valuation. SPH's current share price of S$3.81 indicates an upside of 13.4% to our fair value estimate of S$4.32. We value the core newspaper and magazine segment at S$4.2bn using a DCF methodology - this translates to an estimated 13.7 times FY11 segment earnings. We value Paragon and Clementi Mall at S$2.3bn and S$0.5bn respectively at cap rates of between 5-6% (FY12 net rental income).
Moreover, note that SPH's attractive dividend yield (27 cents) of 7.1% at this price is underpinned by the core newspaper and magazine segment, which throws out solid recurrent cash, and will likely limit share price downside. Look for accretive acquisitions to be positive catalysts in FY11-12 as SPH deploys its considerable capital into expanding its retail landlord business. We are upgrading SPH to BUY with a fair value estimate of S$4.32.
Previous Rating: HOLD
Current Price: S$3.81
Fair Value: S$4.32
Upgrade to BUY; awaiting capital deployment
Almost got the Jurong Gateway site... A consortium, made up of Singapore Press Holdings (SPH) and United Engineers Limited, recently bid S$917m for a site beside Jurong East MRT station, and only 5.4% below the winning bid. This outcome was similar to a Bedok site auction in Sep 10. We think these strong tenders from SPH underline its desire to expand their retail landlord business. As of 2Q11, we estimate SPH to have a sizeable acquisition war-chest of S$1,265m, assuming a net gearing ceiling of 70%.
…but more GLS auctions to come. We think there are three sites in the 2H11 GLS supply that could be of interest to SPH. The commercial site beside Paya Lebar MRT, with a large GFA of 86,940 sqm, could have a significant retail component after setting aside the minimum office and hotel requirements. In addition, the commercial site beside Fernvale LRT could house a retail development with 26,400 sqm GFA - around the size of Clementi Mall. There is also a white site on the reserve list beside Novena MRT with potentially 19,400 sqm retail GFA after taking out the estimated minimum hotel requirement.
TripleOne and 313@Somerset potential targets? Market talk is that TripleOne Somerset is on the market for about S$1.2b ($2,132 psf NLA) and that 313@Somerset could be for sale as well. These may be interesting targets for SPH who could derive operational synergies between managing Paragon and any one of these assets, particularly 313@Somerset. Given the sizes of these assets, however, it is more l ikely for SPH to consider acqui r ing a stake or participating in a joint venture instead of acquiring these assets wholly.
Successful execution at Clementi Mall. Clementi Mall has opened for operations smoothly. The mall is fully leased with an average monthly rent of S$14 psf. Clementi Mall highlights SPH's retail management capabilities in a suburban location and the market would likely view similar acquisitions favorably. We forecast annual revenue at around S$30m from Clementi Mall after 4Q11.
Upgrade to BUY on valuation. The current price of S$3.81 indicates an upside of 13.4% against our S$4.32 fair value. In addition, the downside is limited by an attractive dividend yield of 7.1%, which is underpinned by a core newspaper segment yielding solid recurrent cash. Look for accretive acquisitions to be positive catalysts in FY11-12. We are upgrading SPH to BUY with a fair value estimate of S$4.32.
Came close for Jurong Gateway site tender... A consortium, made up of Singapore Press Holdings (SPH) and United Engineers Limited, recently bid S$917m (S$957 psf GFA) for a 99-year white site beside Jurong East MRT station. SPH's bid came in only 5.4% below the winning bid from a CapitaLand (CAPL) consortium and was significantly higher (16.7%) than the next highest bidder. This outcome was similar to a Bedok white site auction in Sep 10 when SPH's bid came in second after CAPL as well. In our view, these strong tenders from SPH underline management's continued desire to expand their retail landlord business. As of 2Q11, SPH's liquid capital (cash and ST investments) is estimated at S$1,034m with a net gearing of 13%. Assuming a net gearing ceiling of 70%, this translates to a sizeable acquisition war-chest of S$1,265m with limited need for additional debt-raising.
…and more GLS auctions to come. We think there are three sites in the 2H11 GLS supply that could be of interest to SPH. On the confirmed list, there is a 2.07-ha commercial site on Sims Ave beside Paya Lebar MRT station. With a large GFA of 86,940 sqm, a developer could possibly build a retail mall component after setting aside the minimum office and hotel quantum requirements. In addition, there is a 0.88-ha commercial site at Sengkang West Ave beside Fernvale LRT station that could yield a retail development with 26,400 sqm GFA - around the size of Clementi Mall. On the reserve list, there is also a white site at Thomson Rd beside Novena MRT station with potentially 19,400 sqm retail GFA after taking out the estimated minimum hotel requirement.
TripleOne and 313@Somerset potential targets? It has been reported recently that TripleOne Somerset is on the market for about S$1.2b (S$2,132 psf NLA) and that 313@Somerset could be for sale as well. These assets may be interesting targets for SPH who could derive operational synergies between managing Paragon and any one of these assets, particularly 313@Somerset. Given the sizes of these assets, however, it is more likely for SPH to consider acquiring a stake or participating in a joint venture instead of acquiring them wholly.
Successful execution at Clementi Mall. We visited Clementi Mall yesterday evening and found that it has opened for operations smoothly, with strong foot traffic from the captive flow of people between the mall, MRT station and bus interchange. (A recent report has pegged the daily number of visitors at Clementi Mall at 49k.) We also found that all retail stores have started sales, including the anchor tenants on every floor. Management had indicated that the mall is fully leased with an average monthly rent of S$14 psf. We expect rental revenues to roll in progressively as lease concessions wean off and forecast full annual revenue contributions at around S$30m after 4Q11. In our view, the successful execution at Clementi Mall highlights SPH's retail management capabilities outside of the high-end segment (Paragon) and the market would likely view SPH's suburban acquisitions favorably going forward.
Upgrade to BUY on valuation. SPH's current share price of S$3.81 indicates an upside of 13.4% to our fair value estimate of S$4.32. We value the core newspaper and magazine segment at S$4.2bn using a DCF methodology - this translates to an estimated 13.7 times FY11 segment earnings. We value Paragon and Clementi Mall at S$2.3bn and S$0.5bn respectively at cap rates of between 5-6% (FY12 net rental income).
Moreover, note that SPH's attractive dividend yield (27 cents) of 7.1% at this price is underpinned by the core newspaper and magazine segment, which throws out solid recurrent cash, and will likely limit share price downside. Look for accretive acquisitions to be positive catalysts in FY11-12 as SPH deploys its considerable capital into expanding its retail landlord business. We are upgrading SPH to BUY with a fair value estimate of S$4.32.
STX OSV (CIMB)
Signs of improvement in North Sea
OUTPERFORM Maintained
S$1.19 @14/06/11
Target: S$1.70
Offshore & Marine
• Gunning for stronger 2H. Faster-than-expected improvements in North Sea demand reaffirm our belief in a stronger order momentum for STX OSV in 2H11. The North Sea is an important yardstick for utilisation and day rates for the rest of the world. Also, while STX OSV’s longer-term growth is underpinned by booming Brazil demand, its near-term orders are backed by the North Sea. We believe the rebound is not merely seasonal, but signals a sustained recovery. Hence, STX OSV’s order momentum should strengthen in 2H to meet our FY11 order target of NOK10bn (excluding Transpetro orders), providing stock catalysts. No change to our earnings estimates or target price of S$1.70, based on 11x CY12 P/E (15% discount to rigbuilders’ 5-year mean).
• Stronger order flows than peers. YTD, STX OSV has secured NOK3.5bn of orders or 35% of our FY11 order target. It is second only to Eastern Shipbuilding’s Florida yard, with a 19% share of PSV global orders. We believe STX OSV could yet announce more orders before end-1H11. Furthermore, the NOK3bn Transpetro orders should be made effective in early 3Q11, following approval from Brazil’s Merchant Marine Fund.
• Yard to own. STX OSV remains our top pick among small-mid-cap industrials. Its positives are: 1) structural improvements in its operating performance; 2) its position to capture Brazil’s deepwater growth; and 3) a gross valuation-competence mismatch, in our view. Though clearly a league above local OSV builders, STX OSV is only trading in line with local OSV builders’ 5-year average.
Stronger order flows than peers
35% of order target met; Transpetro orders to be made effective in 3Q11. YTD, STX OSV has secured NOK3.5bn of orders or 35% of our FY11 order target of NOK10bn (excluding Transpetro orders). Orders are mostly from established North Sea OSV operators, the company’s main clients. Larger-capacity PSVs (4,000 dwt and above) continue to dominate orders as there is genuine demand for fuel and operational efficiency.
2Q11 orders of NOK2.3bn have already surpassed 1Q11’s NOK1.2bn. We believe STX OSV could yet announce more orders before the end of 1H11. Lastly, its NOK3bn Transpetro orders should be made effective in early 3Q11, following approval from Brazil’s Merchant Marine Fund.
Ahead of the pack in terms of orders. Up until May 11, ODS-Petrodata had reported 27 PSV and five AHTS orders globally. North Sea builders (and STX OSV’s peers) such as Kleven Maritime and the Bergen Group continue to benefit from demand for large PSVs. STX OSV is second only to Eastern Shipbuilding’s Florida yard, securing a 19% share of PSV global orders. Eastern Shipbuilding’s orders were boosted by a package of five 4,000 dwt PSV orders from Brazilian vessel owner, Boldini S.A as it leverages the US Maritime Administration (MARAD) for the financing of US builtvessels. These vessels would most likely be chartered to Petrobras. In the meantime, low-end AHTS orders have been trickling down to Chinese yards.
North Sea improvements
Sharp bounce back. After a typical lull in 4Q10 (due to the winter season), the North Sea OSV market has bounced back sharply as booming Brazil continues to attract vessels out of the overcrowded market; while increased fixtures have been keeping vessels busy. To illustrate, Solstad Offshore is one of the latest vessel owners to have secured four years of firm orders plus 4-year options from Petrobras. In addition, notable requirements such as Cairn Energy’s summer drilling programme in Greenland; the Allseas pipeline programme as well as BP’s construction programme have soaked up excess capacity. As a result, the number of vessels trading on the North Sea spot market has dropped to 65 from 95 at the turn of the year. Some vessel owners such as Netherlands-based Vroon Offshore have also profited from the booking of their entire North Sea fleets for work in the summer months.
Commensurate with this, strong demand for PSVs over the summer has jacked up utilisation rates to 97%. PSV day rates have also trended up as availability dries up. On the other hand, total AHTS utilisation hovers at 82-84% as this asset class remains plagued by oversupply. Other than ultra-large AHTSs (above 18,000 bhp), day rates for all the other classes of AHTSs have dropped.
Customers are cautiously optimistic. Established North Sea OSV owners and key STX OSV clients such as Farstad Offshore, Solstad Offshore and DOF are cautiously optimistic on OSVs’ recovery. All point towards continued vessel departures to Brazil and higher activities which would improve the market balance. However, they also warn of vessels yet to be delivered to the market. Despite this caution, we note that North Sea OSV owners have resumed their capex spending since they last placed newbuild orders in 2008. For example, until its orders with STX OSV in Nov 10, Farstad had not placed any newbuild orders since end-2006. Fleet rejuvenation, fulfilling industry demands for higher, quality tonnage, stronger balance sheets and buoyant second-hand prices are also forces behind a revisit of newbuild programmes by North Sea owners.
Can the rebound be sustained? Though vessel availability has tightened and should remain so until the winter season, the critical question is whether such activities are merely reflective of North Sea’s seasonality. Our sense is that the summer has been much busier than anticipated, especially seen against the sentiment at the turn of the year, which had pointed to a challenging 2011 for North Sea OSV owners. While consensus and industry players have looked to mid-2012 for a meaningful recovery for the OSV sector, early signs point to a faster-than-expected recovery. With deliveries of newbuilds moderating and heightened E&P, we are optimistic of a sustained recovery.
Positive implications for STX OSV. Judging from the faster-than-expected improvements in the North Sea, we believe STX OSV’s order momentum will strengthen in 2H11 to meet our FY11 order target. On the back of increased enquiries, STX OSV itself is anticipating improvements in 2H11. Interestingly, it has observed renewed interest in AHTS. Such orders, if any, could signal a concrete recovery for the OSV sector.
Valuation and recommendation
Market concerns of potential placement by parent, STX Europe, could be exaggerated. Fears of placements by the parent at steep discounts to the market price or a supply glut dampening prices could very well have been priced in, in our view. A stronger order momentum and the formalising of Transpetro orders in the near term could possibly mitigate such concerns. In addition, a larger free float should be beneficial to the stock’s liquidity in the longer scheme of things.
Yard to own; maintain Outperform. STX OSV remains our top pick among smallmid-cap industrials. Its main positives are: 1) structural improvements in its operating performance from the implementation of production efficiency measures (we are already seeing fruits); 2) its position to capture Brazil’s deepwater growth; and 3) a gross valuation-competency mismatch, in our view. Though clearly a league above local OSV builders, STX OSV is trading in line with local OSV builders’ 5-year average.
No changes to our earnings estimates or target price of S$1.70, still based on 11x CY12 P/E (15% discount to rigbuilders’ 5-year mean). We see catalysts from a stronger order momentum and quarterly results.
OUTPERFORM Maintained
S$1.19 @14/06/11
Target: S$1.70
Offshore & Marine
• Gunning for stronger 2H. Faster-than-expected improvements in North Sea demand reaffirm our belief in a stronger order momentum for STX OSV in 2H11. The North Sea is an important yardstick for utilisation and day rates for the rest of the world. Also, while STX OSV’s longer-term growth is underpinned by booming Brazil demand, its near-term orders are backed by the North Sea. We believe the rebound is not merely seasonal, but signals a sustained recovery. Hence, STX OSV’s order momentum should strengthen in 2H to meet our FY11 order target of NOK10bn (excluding Transpetro orders), providing stock catalysts. No change to our earnings estimates or target price of S$1.70, based on 11x CY12 P/E (15% discount to rigbuilders’ 5-year mean).
• Stronger order flows than peers. YTD, STX OSV has secured NOK3.5bn of orders or 35% of our FY11 order target. It is second only to Eastern Shipbuilding’s Florida yard, with a 19% share of PSV global orders. We believe STX OSV could yet announce more orders before end-1H11. Furthermore, the NOK3bn Transpetro orders should be made effective in early 3Q11, following approval from Brazil’s Merchant Marine Fund.
• Yard to own. STX OSV remains our top pick among small-mid-cap industrials. Its positives are: 1) structural improvements in its operating performance; 2) its position to capture Brazil’s deepwater growth; and 3) a gross valuation-competence mismatch, in our view. Though clearly a league above local OSV builders, STX OSV is only trading in line with local OSV builders’ 5-year average.
Stronger order flows than peers
35% of order target met; Transpetro orders to be made effective in 3Q11. YTD, STX OSV has secured NOK3.5bn of orders or 35% of our FY11 order target of NOK10bn (excluding Transpetro orders). Orders are mostly from established North Sea OSV operators, the company’s main clients. Larger-capacity PSVs (4,000 dwt and above) continue to dominate orders as there is genuine demand for fuel and operational efficiency.
2Q11 orders of NOK2.3bn have already surpassed 1Q11’s NOK1.2bn. We believe STX OSV could yet announce more orders before the end of 1H11. Lastly, its NOK3bn Transpetro orders should be made effective in early 3Q11, following approval from Brazil’s Merchant Marine Fund.
Ahead of the pack in terms of orders. Up until May 11, ODS-Petrodata had reported 27 PSV and five AHTS orders globally. North Sea builders (and STX OSV’s peers) such as Kleven Maritime and the Bergen Group continue to benefit from demand for large PSVs. STX OSV is second only to Eastern Shipbuilding’s Florida yard, securing a 19% share of PSV global orders. Eastern Shipbuilding’s orders were boosted by a package of five 4,000 dwt PSV orders from Brazilian vessel owner, Boldini S.A as it leverages the US Maritime Administration (MARAD) for the financing of US builtvessels. These vessels would most likely be chartered to Petrobras. In the meantime, low-end AHTS orders have been trickling down to Chinese yards.
North Sea improvements
Sharp bounce back. After a typical lull in 4Q10 (due to the winter season), the North Sea OSV market has bounced back sharply as booming Brazil continues to attract vessels out of the overcrowded market; while increased fixtures have been keeping vessels busy. To illustrate, Solstad Offshore is one of the latest vessel owners to have secured four years of firm orders plus 4-year options from Petrobras. In addition, notable requirements such as Cairn Energy’s summer drilling programme in Greenland; the Allseas pipeline programme as well as BP’s construction programme have soaked up excess capacity. As a result, the number of vessels trading on the North Sea spot market has dropped to 65 from 95 at the turn of the year. Some vessel owners such as Netherlands-based Vroon Offshore have also profited from the booking of their entire North Sea fleets for work in the summer months.
Commensurate with this, strong demand for PSVs over the summer has jacked up utilisation rates to 97%. PSV day rates have also trended up as availability dries up. On the other hand, total AHTS utilisation hovers at 82-84% as this asset class remains plagued by oversupply. Other than ultra-large AHTSs (above 18,000 bhp), day rates for all the other classes of AHTSs have dropped.
Customers are cautiously optimistic. Established North Sea OSV owners and key STX OSV clients such as Farstad Offshore, Solstad Offshore and DOF are cautiously optimistic on OSVs’ recovery. All point towards continued vessel departures to Brazil and higher activities which would improve the market balance. However, they also warn of vessels yet to be delivered to the market. Despite this caution, we note that North Sea OSV owners have resumed their capex spending since they last placed newbuild orders in 2008. For example, until its orders with STX OSV in Nov 10, Farstad had not placed any newbuild orders since end-2006. Fleet rejuvenation, fulfilling industry demands for higher, quality tonnage, stronger balance sheets and buoyant second-hand prices are also forces behind a revisit of newbuild programmes by North Sea owners.
Can the rebound be sustained? Though vessel availability has tightened and should remain so until the winter season, the critical question is whether such activities are merely reflective of North Sea’s seasonality. Our sense is that the summer has been much busier than anticipated, especially seen against the sentiment at the turn of the year, which had pointed to a challenging 2011 for North Sea OSV owners. While consensus and industry players have looked to mid-2012 for a meaningful recovery for the OSV sector, early signs point to a faster-than-expected recovery. With deliveries of newbuilds moderating and heightened E&P, we are optimistic of a sustained recovery.
Positive implications for STX OSV. Judging from the faster-than-expected improvements in the North Sea, we believe STX OSV’s order momentum will strengthen in 2H11 to meet our FY11 order target. On the back of increased enquiries, STX OSV itself is anticipating improvements in 2H11. Interestingly, it has observed renewed interest in AHTS. Such orders, if any, could signal a concrete recovery for the OSV sector.
Valuation and recommendation
Market concerns of potential placement by parent, STX Europe, could be exaggerated. Fears of placements by the parent at steep discounts to the market price or a supply glut dampening prices could very well have been priced in, in our view. A stronger order momentum and the formalising of Transpetro orders in the near term could possibly mitigate such concerns. In addition, a larger free float should be beneficial to the stock’s liquidity in the longer scheme of things.
Yard to own; maintain Outperform. STX OSV remains our top pick among smallmid-cap industrials. Its main positives are: 1) structural improvements in its operating performance from the implementation of production efficiency measures (we are already seeing fruits); 2) its position to capture Brazil’s deepwater growth; and 3) a gross valuation-competency mismatch, in our view. Though clearly a league above local OSV builders, STX OSV is trading in line with local OSV builders’ 5-year average.
No changes to our earnings estimates or target price of S$1.70, still based on 11x CY12 P/E (15% discount to rigbuilders’ 5-year mean). We see catalysts from a stronger order momentum and quarterly results.
Golden Agri-Resources Ltd (OCBC)
Maintain BUY
Previous Rating: BUY
Current Price: S$0.665
Fair Value: S$0.96
Higher CPO output expected this year
Eyes >10% output growth. Golden Agri-Resources (GAR) was recently quoted by newswires as saying that its output of crude palm oil (CPO) could grow by >10% this year if weather conditions remain favourable. The group had earlier guided that it should be able to achieve a 5-10% increase in CPO production. As a recap, GAR's 1Q11 CPO production saw a smaller-than-usual dip of just 15.4% QoQ to 602.6k tons; palm product yield was 1.4 tons per ha, versus 1.5 tons in 4Q10 and 1.15 tons in 1Q10. Meanwhile, management was also quoted as saying that "there is continued tightness in supply, so whatever is produced by the sector in Indonesia and Malaysia is taken by the market", where China and India continue to be the group's core markets.
CPO prices continue to hold up for now. We note that this is supported by the current market demand-supply situation, given that CPO prices have been fairly stable, despite the recent volatility in crude oil prices. However, we believe that with the recent increase in CPO production in both Indonesia and Malaysia in May and with production expected to increase further in 2H11, CPO prices are likely to head south as well. Hence we continue to maintain our average CPO price forecast at US$950/ton for the whole of 2011; this suggests a potential downside of 6.1% from the current US$1012/ton. But we are not perturbed as the price decline would be more than offset by the expected production increase.
Planning for medium-term growth. Meanwhile, we note that GAR remains committed to medium-term growth, as it aims to expand its plantations by 20-30k ha per year in the next three years, mainly by cultivating its existing 100k ha land bank in Indonesia; it is also looking at the possibility of acquiring a few sites in Kalimantan with a minimum size of 10k ha each. We understand that GAR wi l l not rule out acquisitions (of complementary crops like rubber and sugar) if opportunities arise. It also plans to expand its downstream production capabilities in cooking oil, margarine and other specialty fats to shift product mix into higher value-added products.
Maintain BUY with S$0.96 fair value. GAR is turning towards Liberia for longer-term growth opportunities, where it cur rent ly has a concession to develop around 220k ha. According to management, it intends to start planting up to 15k ha next year, which should start to bear fruit in the next five years. Maintain BUY with S$0.96 fair value (based on 16x FY11F EPS).
Previous Rating: BUY
Current Price: S$0.665
Fair Value: S$0.96
Higher CPO output expected this year
Eyes >10% output growth. Golden Agri-Resources (GAR) was recently quoted by newswires as saying that its output of crude palm oil (CPO) could grow by >10% this year if weather conditions remain favourable. The group had earlier guided that it should be able to achieve a 5-10% increase in CPO production. As a recap, GAR's 1Q11 CPO production saw a smaller-than-usual dip of just 15.4% QoQ to 602.6k tons; palm product yield was 1.4 tons per ha, versus 1.5 tons in 4Q10 and 1.15 tons in 1Q10. Meanwhile, management was also quoted as saying that "there is continued tightness in supply, so whatever is produced by the sector in Indonesia and Malaysia is taken by the market", where China and India continue to be the group's core markets.
CPO prices continue to hold up for now. We note that this is supported by the current market demand-supply situation, given that CPO prices have been fairly stable, despite the recent volatility in crude oil prices. However, we believe that with the recent increase in CPO production in both Indonesia and Malaysia in May and with production expected to increase further in 2H11, CPO prices are likely to head south as well. Hence we continue to maintain our average CPO price forecast at US$950/ton for the whole of 2011; this suggests a potential downside of 6.1% from the current US$1012/ton. But we are not perturbed as the price decline would be more than offset by the expected production increase.
Planning for medium-term growth. Meanwhile, we note that GAR remains committed to medium-term growth, as it aims to expand its plantations by 20-30k ha per year in the next three years, mainly by cultivating its existing 100k ha land bank in Indonesia; it is also looking at the possibility of acquiring a few sites in Kalimantan with a minimum size of 10k ha each. We understand that GAR wi l l not rule out acquisitions (of complementary crops like rubber and sugar) if opportunities arise. It also plans to expand its downstream production capabilities in cooking oil, margarine and other specialty fats to shift product mix into higher value-added products.
Maintain BUY with S$0.96 fair value. GAR is turning towards Liberia for longer-term growth opportunities, where it cur rent ly has a concession to develop around 220k ha. According to management, it intends to start planting up to 15k ha next year, which should start to bear fruit in the next five years. Maintain BUY with S$0.96 fair value (based on 16x FY11F EPS).
SINGAPORE EXCHANGE (Lim&Tan)
S$7.33-SGXL.SI
- At $7.33, SGX is at its lowest since Jun ’10 and 27.5% off it 2010 peak of $10.12 reached just before the announcement of the proposal to acquire/merge with ASX in Oct ’10.
- This could be attributed to a confluence of factors, both internal (s-chip scandals) and external (economic slowdown, Euro crisis).
- The resultant weak market sentiment caused recent IPOs (Hutchison Port) to perform dismally, as too trading volume.
- April and May (40 trading sessions) saw volume aggregating $60.29 bln, down 14.7% from the same period last year. The daily average of $1507.34 mln was also 10% lower than the Mar ’11 quarter’s $1679 mln ($104.1 bln total over 62 days), when SGX pos t ed $77.34 mln under lying prof i t, excluding the expenses related to the ASX exercise (reported profit was $67.0 mln).
- The first 9 trading days this month however showed a 7.7% increase y-o-y.
- Trading interest on GlobalQuote has significantly waned, totaling only $66.43 mln in May or $3.3 mln a day! Nov ’10, first full month of the board, saw $802 mln worth of business or $38 mln a day.
- None of the above is however expected to jeopardize SGX’s final dividend payout when result for ye Jun ’11 re released in early August. We expect unchanged 12 cents variable dividend, which has been the case for the last 2 consecutive fiscal years, on top of the 4 cents quarterly rate..
- Total for ye Jun ’11 would therefore be 28 cents a share costing just under $300 mln (vs 27 cents for ye Jun ’10), for a 3.8% yield. This should provide strong support for SGX’s share price.
- Short of new initiatives that could boost trading and hence help the company break out of the $70-80 mln quarterly profit as for the last 6 quarters, we do not expect SGX to be in a position to hike the base dividend rate as it did for 5 straight fiscal years till now.
- As such, HOLD remains appropriate.
- At $7.33, SGX is at its lowest since Jun ’10 and 27.5% off it 2010 peak of $10.12 reached just before the announcement of the proposal to acquire/merge with ASX in Oct ’10.
- This could be attributed to a confluence of factors, both internal (s-chip scandals) and external (economic slowdown, Euro crisis).
- The resultant weak market sentiment caused recent IPOs (Hutchison Port) to perform dismally, as too trading volume.
- April and May (40 trading sessions) saw volume aggregating $60.29 bln, down 14.7% from the same period last year. The daily average of $1507.34 mln was also 10% lower than the Mar ’11 quarter’s $1679 mln ($104.1 bln total over 62 days), when SGX pos t ed $77.34 mln under lying prof i t, excluding the expenses related to the ASX exercise (reported profit was $67.0 mln).
- The first 9 trading days this month however showed a 7.7% increase y-o-y.
- Trading interest on GlobalQuote has significantly waned, totaling only $66.43 mln in May or $3.3 mln a day! Nov ’10, first full month of the board, saw $802 mln worth of business or $38 mln a day.
- None of the above is however expected to jeopardize SGX’s final dividend payout when result for ye Jun ’11 re released in early August. We expect unchanged 12 cents variable dividend, which has been the case for the last 2 consecutive fiscal years, on top of the 4 cents quarterly rate..
- Total for ye Jun ’11 would therefore be 28 cents a share costing just under $300 mln (vs 27 cents for ye Jun ’10), for a 3.8% yield. This should provide strong support for SGX’s share price.
- Short of new initiatives that could boost trading and hence help the company break out of the $70-80 mln quarterly profit as for the last 6 quarters, we do not expect SGX to be in a position to hike the base dividend rate as it did for 5 straight fiscal years till now.
- As such, HOLD remains appropriate.
The Hour Glass (KimEng)
Background: The Hour Glass (THG), established since 1979, is a leading luxury watch retailer in Asia. It represents over 60 brands across 25 boutiques in nine cities in the Asia Pacific.
Recent development: Revenue grew by 7% YoY in FY Mar11 against an already good year in FY Mar10. The corresponding 29% YoY rise in FY Mar11 net profit reflected an improvement in margins. Although THG usually does not receive much attention, this stellar performance did not go unnoticed as its share price rose steadily from pre-results of $1.01 to a recent intra-day high of $1.33.
Positive consumer sentiment tempered with cost inflation. The strong consumer demand for luxury watches in Asia has benefited THG. However, inflationary pressures on staff and rental cost are potential threats. THG has done well in controlling its cost, posting an increase in margins in the face of such pressures.
Strong and stable financials. THG generated strong and stable operating cash flows of $20.6m per year in FY Mar10 and FY Mar11. It holds a quality balance sheet with $191m in inventory and $36.4m in net cash, out of its total equity of $257m. Inventory is stated at the lower of cost or net realisable value. We reckon the market value of the inventory should be more than its book value.
Comparable to peers after rise in share price. After the recent increase in its share price, THG’s valuation measures appear comparable to its peers, trading at 1.1x P/B and trailing PER of 6.6x. However, watch retailers do seem to trade at lower valuation levels compared to fashion and lifestyle retailers like FJ Benjamin and Osim, although all are driven by similar macro factors.
Price-to-earnings: 6.6x
Price-to-NTA: 1.1x
Dividend per share / yield: $0.05 / 4.2%
Net cash/(debt) per share: S$0.16
Net cash as % of market cap: 13.0%
Share price S$1.20
Issued shares (m) 234.332
Market cap (S$m) 281.20
Free float (%) 36.8
Financial YE 31 Mar
YTD change +17.7%
52-wk price range S$0.77-1.33
Recent development: Revenue grew by 7% YoY in FY Mar11 against an already good year in FY Mar10. The corresponding 29% YoY rise in FY Mar11 net profit reflected an improvement in margins. Although THG usually does not receive much attention, this stellar performance did not go unnoticed as its share price rose steadily from pre-results of $1.01 to a recent intra-day high of $1.33.
Positive consumer sentiment tempered with cost inflation. The strong consumer demand for luxury watches in Asia has benefited THG. However, inflationary pressures on staff and rental cost are potential threats. THG has done well in controlling its cost, posting an increase in margins in the face of such pressures.
Strong and stable financials. THG generated strong and stable operating cash flows of $20.6m per year in FY Mar10 and FY Mar11. It holds a quality balance sheet with $191m in inventory and $36.4m in net cash, out of its total equity of $257m. Inventory is stated at the lower of cost or net realisable value. We reckon the market value of the inventory should be more than its book value.
Comparable to peers after rise in share price. After the recent increase in its share price, THG’s valuation measures appear comparable to its peers, trading at 1.1x P/B and trailing PER of 6.6x. However, watch retailers do seem to trade at lower valuation levels compared to fashion and lifestyle retailers like FJ Benjamin and Osim, although all are driven by similar macro factors.
Price-to-earnings: 6.6x
Price-to-NTA: 1.1x
Dividend per share / yield: $0.05 / 4.2%
Net cash/(debt) per share: S$0.16
Net cash as % of market cap: 13.0%
Share price S$1.20
Issued shares (m) 234.332
Market cap (S$m) 281.20
Free float (%) 36.8
Financial YE 31 Mar
YTD change +17.7%
52-wk price range S$0.77-1.33
City Developments Limited (KimEng)
Event:
After being shelved for three years, construction work at South Beach has started and is scheduled for completion in 2015. Malaysialisted IOI Corporation is now onboard and will hold a 49.9% stake in this mega project, with City Developments (CDL) holding the remaining 50.1%. We believe it is timely to revisit this iconic development and review our assumptions, given an increase in our RNAV estimate by 11 cents a share. Maintain BUY.
Our View:
Based on the URA’s Written Permission issued in March, South Beach will comprise 644,871 sq ft of office space, 60,924 sq ft of retail space, 701 hotel rooms and 180 residential apartments. Compared to the Provisional Permission granted in 2009, the retail GFA has been reduced by 60% while the number of residential units has been increased from 171. We believe this is a wise move considering that South Beach is located between Raffles City and Suntec City, which together already have 1.2m sq ft of retail space.
We have increased our valuations based on higher capital value assumptions, mainly for the office and residential components, which we now value at $2,500 psf each, after taking into consideration the valuations of MBFC and Marina Bay Suites. We estimate South Beach to have a Gross Development Value (GDV) of $3.15b, which compares favourably to the total development cost which we estimate at $2.7b.
Following the restructuring, CDL’s exposure to South Beach has increased from the original 33% to 50.1%, indirectly raising the group’s overall exposure to non-residential property. Nonetheless, CDL may still continue to divest other non-core commercial assets, at the appropriate price, to unlock shareholders’ value.
Action & Recommendation:
Maintain BUY with a target price of $13.45, now pegged at parity to RNAV as headwinds remain in the residential property segment. However, this will be mitigated by CDL’s improving recurring income from its investment and hospitality properties.
After being shelved for three years, construction work at South Beach has started and is scheduled for completion in 2015. Malaysialisted IOI Corporation is now onboard and will hold a 49.9% stake in this mega project, with City Developments (CDL) holding the remaining 50.1%. We believe it is timely to revisit this iconic development and review our assumptions, given an increase in our RNAV estimate by 11 cents a share. Maintain BUY.
Our View:
Based on the URA’s Written Permission issued in March, South Beach will comprise 644,871 sq ft of office space, 60,924 sq ft of retail space, 701 hotel rooms and 180 residential apartments. Compared to the Provisional Permission granted in 2009, the retail GFA has been reduced by 60% while the number of residential units has been increased from 171. We believe this is a wise move considering that South Beach is located between Raffles City and Suntec City, which together already have 1.2m sq ft of retail space.
We have increased our valuations based on higher capital value assumptions, mainly for the office and residential components, which we now value at $2,500 psf each, after taking into consideration the valuations of MBFC and Marina Bay Suites. We estimate South Beach to have a Gross Development Value (GDV) of $3.15b, which compares favourably to the total development cost which we estimate at $2.7b.
Following the restructuring, CDL’s exposure to South Beach has increased from the original 33% to 50.1%, indirectly raising the group’s overall exposure to non-residential property. Nonetheless, CDL may still continue to divest other non-core commercial assets, at the appropriate price, to unlock shareholders’ value.
Action & Recommendation:
Maintain BUY with a target price of $13.45, now pegged at parity to RNAV as headwinds remain in the residential property segment. However, this will be mitigated by CDL’s improving recurring income from its investment and hospitality properties.
STX OSV HOLDINGS (DMG)
BUY
Price S$1.19
Previous S$1.89
Target S$1.89
Offshore & Marine
STX OSV is a global shipbuilder of offshore support vessels (OSV) used in the offshore oil and gas industry.
Riding the upcycle for OSVs; re-iterate BUY
Order ou tlook improving; top pick in the mid-cap space. Our roadshow with STX OSV in Europe last week left us feeling positive on the company‟s ability to capture more new orders for offshore support vessels (OSV) and execute the projects well. Proper risk management is in place to avoid the problems faced in 2007-08 (which lead to losses) and we believe margins will stay relatively strong vs. historical trend of 8-9%. We made minor adjustments to our model: (1) we keep FY11F EPS estimate intact; (2) lower FY12 EPS estimate by 2% as initial billings from the new yard in Brazil could be slower than we expected; (3) raise FY11-12F dividends forecasts from S¢3.5 to S¢5.5 based on its minimum payout of 30% net profit. We also introduce FY13F numbers. We forecast +12% EPS CAGR over FY10-13F. Re-iterate BUY with an unchanged TP of S$1.89 based on 11x FY11F core EPS. Stock is now trading at 6.9x FY11F core P/E and offers 4.6% yield (new estimate).
Strong order book for the next two years. Based on our estimates, STX OSV has an unbilled order book of NOK17.5b and sufficient to keep the yards busy for the next two years. We think investors have not fully appreciated the improving business outlook for STX OSV given slow order wins in 1Q11. Order wins have picked up in 2Q11 with contracts for seven newbuilds vs. three in 1Q11 and we are positive that order flow will be stronger in 2H11 as vessel owners have turned more bullish on charter rates in 2013 and spot charter rates in the North Sea is rising. STX OSV is also well placed to win Petrobras-related newbuild orders due to its strong local presence in Brazil. Second yard in Brazil (50.5% owned) will start operation in 2H12 and will add 25% new capacity when fully developed in 2013.
Earnings outlook: We expect +12% EPS CAGR over FY10-13F mainly driven by higher topline while expecting EBITDA margin of 11.0-11.5% (1Q11:13.8%). Based on our sensitivity analysis, every 1% improvement in EBITDA margins vs. our base assumptions (FY11F:11.5%, FY12F:11.0%) will lift our EPS estimates by 9-10%.
Highlights from Europe Roadshow
Relationship between STX OSV and STX Group/STX Europe
What is the relationship between STX Group and STX OSV?
STX Europe, a wholly owned subsidiary of the STX Group, holds 69% stake in the company after the IPO in Nov 2010. Representatives from the STX Group have three seats on the Board of Directors out of the total six seats.
Why did the company choose to list in Singapore?
Management explained that the rationale behind the listing in Singapore was due to: (1) high number and attractive valuations of offshore & marine companies listed on the SGX; and (2) strong understanding of the offshore support vessel market.
Is the STX Group involved in day-to-day operations?
In its day-to-day operations, we understand that STX OSV operates independently from the STX Group. The executive management team is led by its CEO, Roy Reite, and has remained stable from before STX Group became an owner of the STX OSV group.
Cost structure, order book and margins
What is the cost structure of the vessel projects?
The main cost is the equipment cost which account for 55-60% of the total cost. Steel cost is marginal and only represents around 3-5% of the total cost.
What are the payment terms and currency of a typical newbuild contract?
Contracts for newbuilds are usually on fixed price basis and denominated in Norwegian Krone (NOK) except in Brazil whereby contracts are mostly denominated in US Dollars.
Payment terms are typically 20% during construction and 80% upon delivery. The 20% payment during construction is split into four payments of 5% each. Usually there is a risk contingency of 1-3% built into the newbuild contracts that will be released in the profits upon completion.
What is the order size and completion period for each type of vessels?
Pricing can be different for different risk assumed for the project and client profile. A typical platform supply vessel (PSV) contract can range between US$45-80m and a newbuild contract for an offshore subsea construction vessel (OSCV) can be worth more than US$200m.
For PSV, the construction period is the shortest at 13-14 months, followed by anchor handling tug and supply (AHTS) with construction period of 15-18 months and for OSCV, construction period could be more than 20 months.
What is the order outlook for high-end newbuilds?
Enquiries for newbuilds have improved significantly in the past three months. YTD, STX OSV has secured newbuild contracts for ten vessels – seven PSVs and three MRVs (Multi-Role vessels). MRVs are essentially similar to PSVs but may be equipped with other equipments to perform additional work such as limited seismic work, lifting capability (with crane) and remote operating vehicle (ROV) support.
In our view, the market appears to show renewed interest for AHTS and OSCV lately – in the mid-segment of the vessel market, ST Engineering has just won a S$171m (US$139m) contract for four deepwater AHTS from Swire Pacific while Ezra Holdings is looking to build a US$300m DP3 ice-class subsea construction vessel called Lewek Constellation. We believe STX OSV is well positioned to capture more new orders in 2H11. We estimate that STX OSV has an unbilled order book of NOK17.5b, sufficient to keep a high work level at its yards for the next two years.
Are the margins better for any particular segment i.e. AHTS, PSV or OSCV?
In general, no single product commands better margins. However, better margins can be attained when there is more customisation work involved.
Are the margins better for yards in Brazil, Europe or Vietnam?
STX OSV does not provide segmental breakdown for the yards in the respective countries. From our own understanding, we believe that the margins in Brazil and Europe are on fairly similar level given the yards in Europe have showed better execution due to optimisation of work split and seamless integration between the yards in Norway and Romania. We think margins for vessels delivered from Vietnam are lower than Brazil/Europe as the yard is still in the ramp-up stage but we believe the Vietnam yard has the highest upside potential for improvement due to lower labour cost.
What is the current yard capacity and future new capacity?
The company can deliver 24-25 vessels per annum but this is dependent on the type of vessels being built. From a revenue standpoint, STX OSV can generate around NOK12b revenue per annum and we believe that the company can squeeze out some incremental revenue from its existing yards. The Vietnam yard has the capacity to build 3-4 vessels per annum and is now running at 2-3 vessels run-rate. The second yard in Brazil (50.5% owned by STX OSV and 49.5% owned by Brazilian partners) will add 25% capacity when fully developed over the next two years.
Update on Brazil
Capital expenditure for the second yard in Brazil
The second yard in Brazil (50.5% owned by STX OSV and 49.5% owned by Brazilian partners) will cost US$105m and the yard investment will be funded by 25-30% equity and 70-75% debt. Based on 30% equity funding, we estimate that STX OSV‟s cash outlay for the new yard is estimated at US$15.9m. The financing for the new yard is backed by FMM (Merchant Marine Fund) and is expected to have debt tenure of 15-18 years with a USD-denominated fixed interest rate of 4-5%.
When will the second yard be ready for commercial operations?
The yard in Brazil is expected to start commercial operation in mid 2012. Environmental license was granted on 30 March 2011. As part of the new yard start-up, STX OSV has entered into an agreement with Transpetro to build eight LPG carriers for a total value of US$536m (NOK3b) which will be made effective after financing approval from Brazil‟s FMM.
Why did STX take on the contract for LPG carriers and will it have lower margins?
Management admit that the LPG carriers are outside the company‟s core expertise but are necessary to kick-start the investment in a new yard. They believe they have the necessary skills to complete the project given the complexity level is lower than OSVs. The contract will provide work for the yard in the initial years as the eight vessels are expected to be delivered between 2014 and 2016.
Will the LPG carriers come with lower margins?
Management believe that the LPG orders will not necessarily dilute the existing margins. Additionally, the client will take the risk of steel prices and the contract comes with elements of adjustment for labour cost.
Competition from other yards
Who are the main competitors?
Main competitors are yards in Norway such as Kleven Maritime, Havyard and Ulstein. STX OSV is the only high-end yard with global presence in four different countries.
How does STX OSV stay ahead of the upcoming yards in Asia?
Innovation is key to their ability to stay ahead of competitors. STX OSV is primarily focused on the high-end segment and has a knowledge driven culture to improve the design of a vessel from time to time and bring new products to the market. New vessels built today are not the same ones built five years ago. In our view, most Asian yards are generally pure shipbuilders without in-house design capabilities. We believe most of the high-end vessels constructed at Asian yards are few years behind in terms of new technology.
Will there be any sell down by the parent company?
Obviously the most common question posted to the management given rumours in the market that the parent company is looking to sell down more of its own stake.
On potential selldown by STX Europe?
STX OSV is not aware of any firm plans by the STX Europe to selldown their stake in the company. We believe that the STX Group will want to keep majority control of the STX OSV, and we would not rule out a further selldown of 18-20% stake by the parent company given STX OSV‟s share price has risen 51% from its IPO price. We think the concern over a potential selldown is overblown and improving fundamental in the high-end newbuild sector will continue to drive share price re-rating.
When is the lock-up period over?
The “First Period” lockup (six months from listing date) expired on 12 May 2011 and STX Europe can pare down its stake provided they get written consent from the sole global coordinator. The final lockup period will expire 12 months from the listing date (on 12 November 2011) and STX Europe can selldown without any restriction.
Price S$1.19
Previous S$1.89
Target S$1.89
Offshore & Marine
STX OSV is a global shipbuilder of offshore support vessels (OSV) used in the offshore oil and gas industry.
Riding the upcycle for OSVs; re-iterate BUY
Order ou tlook improving; top pick in the mid-cap space. Our roadshow with STX OSV in Europe last week left us feeling positive on the company‟s ability to capture more new orders for offshore support vessels (OSV) and execute the projects well. Proper risk management is in place to avoid the problems faced in 2007-08 (which lead to losses) and we believe margins will stay relatively strong vs. historical trend of 8-9%. We made minor adjustments to our model: (1) we keep FY11F EPS estimate intact; (2) lower FY12 EPS estimate by 2% as initial billings from the new yard in Brazil could be slower than we expected; (3) raise FY11-12F dividends forecasts from S¢3.5 to S¢5.5 based on its minimum payout of 30% net profit. We also introduce FY13F numbers. We forecast +12% EPS CAGR over FY10-13F. Re-iterate BUY with an unchanged TP of S$1.89 based on 11x FY11F core EPS. Stock is now trading at 6.9x FY11F core P/E and offers 4.6% yield (new estimate).
Strong order book for the next two years. Based on our estimates, STX OSV has an unbilled order book of NOK17.5b and sufficient to keep the yards busy for the next two years. We think investors have not fully appreciated the improving business outlook for STX OSV given slow order wins in 1Q11. Order wins have picked up in 2Q11 with contracts for seven newbuilds vs. three in 1Q11 and we are positive that order flow will be stronger in 2H11 as vessel owners have turned more bullish on charter rates in 2013 and spot charter rates in the North Sea is rising. STX OSV is also well placed to win Petrobras-related newbuild orders due to its strong local presence in Brazil. Second yard in Brazil (50.5% owned) will start operation in 2H12 and will add 25% new capacity when fully developed in 2013.
Earnings outlook: We expect +12% EPS CAGR over FY10-13F mainly driven by higher topline while expecting EBITDA margin of 11.0-11.5% (1Q11:13.8%). Based on our sensitivity analysis, every 1% improvement in EBITDA margins vs. our base assumptions (FY11F:11.5%, FY12F:11.0%) will lift our EPS estimates by 9-10%.
Highlights from Europe Roadshow
Relationship between STX OSV and STX Group/STX Europe
What is the relationship between STX Group and STX OSV?
STX Europe, a wholly owned subsidiary of the STX Group, holds 69% stake in the company after the IPO in Nov 2010. Representatives from the STX Group have three seats on the Board of Directors out of the total six seats.
Why did the company choose to list in Singapore?
Management explained that the rationale behind the listing in Singapore was due to: (1) high number and attractive valuations of offshore & marine companies listed on the SGX; and (2) strong understanding of the offshore support vessel market.
Is the STX Group involved in day-to-day operations?
In its day-to-day operations, we understand that STX OSV operates independently from the STX Group. The executive management team is led by its CEO, Roy Reite, and has remained stable from before STX Group became an owner of the STX OSV group.
Cost structure, order book and margins
What is the cost structure of the vessel projects?
The main cost is the equipment cost which account for 55-60% of the total cost. Steel cost is marginal and only represents around 3-5% of the total cost.
What are the payment terms and currency of a typical newbuild contract?
Contracts for newbuilds are usually on fixed price basis and denominated in Norwegian Krone (NOK) except in Brazil whereby contracts are mostly denominated in US Dollars.
Payment terms are typically 20% during construction and 80% upon delivery. The 20% payment during construction is split into four payments of 5% each. Usually there is a risk contingency of 1-3% built into the newbuild contracts that will be released in the profits upon completion.
What is the order size and completion period for each type of vessels?
Pricing can be different for different risk assumed for the project and client profile. A typical platform supply vessel (PSV) contract can range between US$45-80m and a newbuild contract for an offshore subsea construction vessel (OSCV) can be worth more than US$200m.
For PSV, the construction period is the shortest at 13-14 months, followed by anchor handling tug and supply (AHTS) with construction period of 15-18 months and for OSCV, construction period could be more than 20 months.
What is the order outlook for high-end newbuilds?
Enquiries for newbuilds have improved significantly in the past three months. YTD, STX OSV has secured newbuild contracts for ten vessels – seven PSVs and three MRVs (Multi-Role vessels). MRVs are essentially similar to PSVs but may be equipped with other equipments to perform additional work such as limited seismic work, lifting capability (with crane) and remote operating vehicle (ROV) support.
In our view, the market appears to show renewed interest for AHTS and OSCV lately – in the mid-segment of the vessel market, ST Engineering has just won a S$171m (US$139m) contract for four deepwater AHTS from Swire Pacific while Ezra Holdings is looking to build a US$300m DP3 ice-class subsea construction vessel called Lewek Constellation. We believe STX OSV is well positioned to capture more new orders in 2H11. We estimate that STX OSV has an unbilled order book of NOK17.5b, sufficient to keep a high work level at its yards for the next two years.
Are the margins better for any particular segment i.e. AHTS, PSV or OSCV?
In general, no single product commands better margins. However, better margins can be attained when there is more customisation work involved.
Are the margins better for yards in Brazil, Europe or Vietnam?
STX OSV does not provide segmental breakdown for the yards in the respective countries. From our own understanding, we believe that the margins in Brazil and Europe are on fairly similar level given the yards in Europe have showed better execution due to optimisation of work split and seamless integration between the yards in Norway and Romania. We think margins for vessels delivered from Vietnam are lower than Brazil/Europe as the yard is still in the ramp-up stage but we believe the Vietnam yard has the highest upside potential for improvement due to lower labour cost.
What is the current yard capacity and future new capacity?
The company can deliver 24-25 vessels per annum but this is dependent on the type of vessels being built. From a revenue standpoint, STX OSV can generate around NOK12b revenue per annum and we believe that the company can squeeze out some incremental revenue from its existing yards. The Vietnam yard has the capacity to build 3-4 vessels per annum and is now running at 2-3 vessels run-rate. The second yard in Brazil (50.5% owned by STX OSV and 49.5% owned by Brazilian partners) will add 25% capacity when fully developed over the next two years.
Update on Brazil
Capital expenditure for the second yard in Brazil
The second yard in Brazil (50.5% owned by STX OSV and 49.5% owned by Brazilian partners) will cost US$105m and the yard investment will be funded by 25-30% equity and 70-75% debt. Based on 30% equity funding, we estimate that STX OSV‟s cash outlay for the new yard is estimated at US$15.9m. The financing for the new yard is backed by FMM (Merchant Marine Fund) and is expected to have debt tenure of 15-18 years with a USD-denominated fixed interest rate of 4-5%.
When will the second yard be ready for commercial operations?
The yard in Brazil is expected to start commercial operation in mid 2012. Environmental license was granted on 30 March 2011. As part of the new yard start-up, STX OSV has entered into an agreement with Transpetro to build eight LPG carriers for a total value of US$536m (NOK3b) which will be made effective after financing approval from Brazil‟s FMM.
Why did STX take on the contract for LPG carriers and will it have lower margins?
Management admit that the LPG carriers are outside the company‟s core expertise but are necessary to kick-start the investment in a new yard. They believe they have the necessary skills to complete the project given the complexity level is lower than OSVs. The contract will provide work for the yard in the initial years as the eight vessels are expected to be delivered between 2014 and 2016.
Will the LPG carriers come with lower margins?
Management believe that the LPG orders will not necessarily dilute the existing margins. Additionally, the client will take the risk of steel prices and the contract comes with elements of adjustment for labour cost.
Competition from other yards
Who are the main competitors?
Main competitors are yards in Norway such as Kleven Maritime, Havyard and Ulstein. STX OSV is the only high-end yard with global presence in four different countries.
How does STX OSV stay ahead of the upcoming yards in Asia?
Innovation is key to their ability to stay ahead of competitors. STX OSV is primarily focused on the high-end segment and has a knowledge driven culture to improve the design of a vessel from time to time and bring new products to the market. New vessels built today are not the same ones built five years ago. In our view, most Asian yards are generally pure shipbuilders without in-house design capabilities. We believe most of the high-end vessels constructed at Asian yards are few years behind in terms of new technology.
Will there be any sell down by the parent company?
Obviously the most common question posted to the management given rumours in the market that the parent company is looking to sell down more of its own stake.
On potential selldown by STX Europe?
STX OSV is not aware of any firm plans by the STX Europe to selldown their stake in the company. We believe that the STX Group will want to keep majority control of the STX OSV, and we would not rule out a further selldown of 18-20% stake by the parent company given STX OSV‟s share price has risen 51% from its IPO price. We think the concern over a potential selldown is overblown and improving fundamental in the high-end newbuild sector will continue to drive share price re-rating.
When is the lock-up period over?
The “First Period” lockup (six months from listing date) expired on 12 May 2011 and STX Europe can pare down its stake provided they get written consent from the sole global coordinator. The final lockup period will expire 12 months from the listing date (on 12 November 2011) and STX Europe can selldown without any restriction.
Tuesday, 14 June 2011
ST Engineering Ltd (OCBC)
Maintain BUY
Previous Rating: BUY
Current Price: S$2.92
Fair Value: S$3.57
10% cap on Ropax contract claims
Receives claim from LDA. ST Engineering (STE) has just updated that its marine arm - ST Marine (STM) - has received a letter of claim (dated 10 Jun 2011) from the lawyers of Louis Dreyfus Armateurs (LDA) in respect of the shipbuilding contract for the Roll-on/Roll-of Passenger (Ropax) ferry that was contracted in Jul 2007 for around S$179m. LDA is claiming for both liquidated and unliquidated damages resulting from STM's purported breach of the Ropax contract amounting to around S$4.8m and EUR33.03m, respectively. However, STM has referred the matter to its legal advisers and it intends to dispute the claim as it is of the view that LDA's purported termination of the Ropax contract is a breach and STM itself has terminated the Ropax contract because of this breach.
No material impact on financials. But in the event that STM is liable, we understand that STM is required to refund the milestone payments made by LDA (amounting to S$129m plus interest); STM also maintains that under the contract, its total liability is capped at 10% of the contract price. As such, STE also does not expect the contract termination to have any material impact on its NTA or EPS for FY11. Meanwhile, we note that the milestone payments (excluding interest and damages) are just 2.2% of STE's FY10 revenue, and we also understand that the group has been making provisions for this particular vessel since missing the stated delivery date.
Sell or lease vessel when completed. We also understand that the group is going ahead with the completion of this vessel; and this will give STE the option of either reselling it in the secondary market or chartering it out to third party operators. However, as the Ropax is likely to be quite highly customized, we note that there may be a need for STE to refit the vessel to new specifications or face a longer time before it can find a suitable buyer or charterer. But from recent transaction reports from shipbrokers, we understand that the demand for RoRo (Roll-on/Roll-off) vessels remains relatively buoyant.
Maintain BUY. As before, we think it is still early days to assess if STE/STM has to pay damages, hence we hold off adjusting our FY11 estimates. Our worst case scenario could see a <5% impact on FY11F pre-tax profit. We are still positive on the group's overall prospects, defensive nature and do not believe that this incident will affect its strong payout (around 90% of core earnings) ability; hence we maintain our BUY rating and S$3.57 fair value (21x FY11F EPS).
Previous Rating: BUY
Current Price: S$2.92
Fair Value: S$3.57
10% cap on Ropax contract claims
Receives claim from LDA. ST Engineering (STE) has just updated that its marine arm - ST Marine (STM) - has received a letter of claim (dated 10 Jun 2011) from the lawyers of Louis Dreyfus Armateurs (LDA) in respect of the shipbuilding contract for the Roll-on/Roll-of Passenger (Ropax) ferry that was contracted in Jul 2007 for around S$179m. LDA is claiming for both liquidated and unliquidated damages resulting from STM's purported breach of the Ropax contract amounting to around S$4.8m and EUR33.03m, respectively. However, STM has referred the matter to its legal advisers and it intends to dispute the claim as it is of the view that LDA's purported termination of the Ropax contract is a breach and STM itself has terminated the Ropax contract because of this breach.
No material impact on financials. But in the event that STM is liable, we understand that STM is required to refund the milestone payments made by LDA (amounting to S$129m plus interest); STM also maintains that under the contract, its total liability is capped at 10% of the contract price. As such, STE also does not expect the contract termination to have any material impact on its NTA or EPS for FY11. Meanwhile, we note that the milestone payments (excluding interest and damages) are just 2.2% of STE's FY10 revenue, and we also understand that the group has been making provisions for this particular vessel since missing the stated delivery date.
Sell or lease vessel when completed. We also understand that the group is going ahead with the completion of this vessel; and this will give STE the option of either reselling it in the secondary market or chartering it out to third party operators. However, as the Ropax is likely to be quite highly customized, we note that there may be a need for STE to refit the vessel to new specifications or face a longer time before it can find a suitable buyer or charterer. But from recent transaction reports from shipbrokers, we understand that the demand for RoRo (Roll-on/Roll-off) vessels remains relatively buoyant.
Maintain BUY. As before, we think it is still early days to assess if STE/STM has to pay damages, hence we hold off adjusting our FY11 estimates. Our worst case scenario could see a <5% impact on FY11F pre-tax profit. We are still positive on the group's overall prospects, defensive nature and do not believe that this incident will affect its strong payout (around 90% of core earnings) ability; hence we maintain our BUY rating and S$3.57 fair value (21x FY11F EPS).
Noble Group (DBS)
BUY; S$1.97; Price Target: 12-Month S$ 2.6
Territory Resources board recommends takeover offer from Noble
This morning, Territory Resources’ (TTY) board unanimously recommended the acceptance of Noble’s offer to acquire up to 100% of the fully paid ordinary shares in TTY at A$0.50 per share by way of an unconditional on-market takeover. Noble had previously announced its takeover offer via Jonesville Limited, a wholly owned subsidiary on 9 June 2011. Jonesville currently owns a 32.01% stake in TTY. TTY’s board believes that the Noble offer is superior to the bid by Exxaro announced on 23 May 2011, which offered to acquire TTY at A$0.46 per share. TTY had previously signed a Bid Implementation Agreement with Exxaro.
From 9 June 2011 till close of the offer on Thursday 21 July, Noble via Jonesville will buy on-market every TTY share offered to it (up to a maximum of 198.25m shares) at AS$0.50 per share. We believe Noble can easily fund the A$99.1m purchase cost.
TTY also noted in this morning’s announcement that due to the recommendation to accept Noble’s offer, a break fee of c.A$1.56m will be payable to Exxaro. Furthermore, an undrawn US$36m debt facility provided by Exxaro to TTY may potentially be cancelled immediately. Should Noble complete the transaction, we believe TTY will not have any issue in accessing new debt facilities.
TTY’s share price is currently trading at A$0.515, above Noble’s takeover offer price. Furthermore, without a formal response from Exxaro, there is no guarantee that Noble will be able to complete the takeover of TTY. Our Buy rating on Noble remains unchanged. Until the takeover is finalised, there is no change in our forecasts - to which we do not expect any significant change.
Territory Resources board recommends takeover offer from Noble
This morning, Territory Resources’ (TTY) board unanimously recommended the acceptance of Noble’s offer to acquire up to 100% of the fully paid ordinary shares in TTY at A$0.50 per share by way of an unconditional on-market takeover. Noble had previously announced its takeover offer via Jonesville Limited, a wholly owned subsidiary on 9 June 2011. Jonesville currently owns a 32.01% stake in TTY. TTY’s board believes that the Noble offer is superior to the bid by Exxaro announced on 23 May 2011, which offered to acquire TTY at A$0.46 per share. TTY had previously signed a Bid Implementation Agreement with Exxaro.
From 9 June 2011 till close of the offer on Thursday 21 July, Noble via Jonesville will buy on-market every TTY share offered to it (up to a maximum of 198.25m shares) at AS$0.50 per share. We believe Noble can easily fund the A$99.1m purchase cost.
TTY also noted in this morning’s announcement that due to the recommendation to accept Noble’s offer, a break fee of c.A$1.56m will be payable to Exxaro. Furthermore, an undrawn US$36m debt facility provided by Exxaro to TTY may potentially be cancelled immediately. Should Noble complete the transaction, we believe TTY will not have any issue in accessing new debt facilities.
TTY’s share price is currently trading at A$0.515, above Noble’s takeover offer price. Furthermore, without a formal response from Exxaro, there is no guarantee that Noble will be able to complete the takeover of TTY. Our Buy rating on Noble remains unchanged. Until the takeover is finalised, there is no change in our forecasts - to which we do not expect any significant change.
Yongnam Holdings Ltd (CIMB)
OUTPERFORM Maintained
S$0.26 @13/06/11
Target: S$0.40
Construction
All systems in place
• Stronger recognition this year. YNH’s contract wins had picked up strongly in 2Q11, with the group securing more than S$190m worth of contracts or 40% of our target for this year. Coupled with profit margins which had been sustained over the four quarters of 2010 (with a positive surprise in 1Q11), we believe YNH is on track to meet our FY11 earnings target. No change to our EPS estimates or target price of S$0.40, still based on 8x CY12 P/E, a 20% discount to its mid-cycle multiples. We also like YNH’s undemanding valuations against peers, at 5.2x CY12 P/E vs. the peer average of 7.6x. We expect stock catalysts from contract wins for projects such as the MRT Downtown Line and structural steelwork projects in the Middle East.
• On track to meet FY11 earnings target. Although 1Q11 turnover only accounted for 17.5% of our FY11 forecast, we see two reasons for remaining optimistic on our net profit target of S$60m. First, contract wins had picked up strongly in 2Q11, with the group securing more than S$190m worth of contracts in that quarter, or 40% of our target for this year. Second, profit margins have been both strong and sustainable for 4-5 quarters, with a positive surprise in fact in 1Q11.
• Order-book renewal. We estimate that YNH is bidding for S$1.2bn worth of projects this year. The outlook in Singapore remains underpinned by numerous opportunities in the civil engineering space. The Middle East is another market with considerable infrastructure spending plans. We believe if the political situation stabilises there, construction firms like YNH could stand to reap major benefits.
On track to meet FY11 earnings target
During its 4Q10 results announcement, management had guided for earnings recognition of S$270m (60% of its S$450m order book as at 31 Dec 10) for 2011. 1Q11 turnover represents 28% of that S$270m amount. This is consistent with 1Q revenue which typically makes up 23-28% of full-year numbers (cf. FY09-10). An apparent lack of contract flows in the first quarter of this year (only a S$24m contract announced late in 1Q11) implies that the turnover of S$75m was derived mainly from an existing order book. This further implies that work on existing projects is proceeding well, and that the other 72% of management’s guidance would pan out by end-2011.
Although 1Q11 turnover only accounted for 17.5% of our FY11 forecast, we see two reasons to remain optimistic. First, contract wins had picked up strongly in 2Q11, with the group securing more than S$190m worth of contracts in that quarter. This figure makes up for 40% of our full-year target. We expect stronger revenue recognition for the remaining nine months of FY11. Second, profit margins have been both strong and sustainable for 4-5 quarters, with a positive surprise in fact in 1Q11.
Expect stronger revenue recognition. YTD, YNH has won S$217m contracts, of which 89% was secured in the second quarter of 2011. With these contracts, quarterly revenue in the next three quarters of FY11 is likely to surpass 1Q11 levels. Assuming that existing projects continue to make steady progress, we see upside to quarterly revenue from new contracts won in the year.
Strong and sustainable margins. Even if full-year revenue falls short of our target, we believe persistent margin strength could make up for the shortfall. Throughout FY10, YNH’s net profit margins had been consistently well above those of the corresponding quarters in FY09. This was attributed to: 1) a shift in its revenue mix to the highermargin specialist civil engineering segment; and 2) better margins in the structural steelwork segment. A spike in 1Q11 gross margins came as a pleasant surprise to us, from an average 28.6% in FY10 to 33.2%; lifting net profit margins to 20% in the quarter. For the sake of prudence though, we have kept our gross and net margin assumptions of 26.3% and 14.1% respectively for FY11. Judging from the strength of its margins in the past year, any revenue shortfall could be made up by potential margin upside during the year.
Order-book renewal
Promising projects. We estimate that YNH is bidding for S$1.2bn worth of structural steel (67%) and specialist civil engineering projects (33%) this year. With its shift in focus to specialist civil engineering projects, these projects now represent a third of the total value of its bids, up from only 21% in 2010. In contrast, structural steel projects now account for less than 70%, from almost 79% in 2010. The shift is consistent with the emergence of abundant specialist civil engineering opportunities in the domestic market after the Singapore government unveiled its transport system master plan to “make public transport a choice mode”.
Good domestic outlook for specialist civil engineering. To date, the group has won S$73m worth of specialist civil engineering projects. With contracts for the proposed 21km-long, 16-station MRT Downtown Line 3 under bidding, we may see some contract wins in 2H11. If successful, there would be little slack time for YNH’s specialist civil engineering team, as the government has given the go-ahead for the construction of the North-South Expressway at a cost of S$7bn-8bn, for completion by 2020. This is in addition to plans for two new MRT lines: Thomson Line and Eastern Region Line.
Don’t discount Middle East yet. The Middle East is a big market with good prospects, interrupted by recent political turmoil. Prior to the disturbances, countries in the region had already announced huge infrastructure spending plans which would likely benefit construction firms like YNH. On the back of rising demand for power and utilities in addition to transport infrastructure which is in need of overhauling, Saudi Arabia will be pouring US$400bn into infrastructure projects. New projects are designed to improve the efficiency and quality of the cities in the kingdom and facilite access to these cities from the surrounding areas. Qatar is another market which offers potential over the medium term, catalysed by the country's hosting of the 2022 FIFA World Cup. According to a report by Business Monitor International, some US$80bn could be spent preparing the country for the World Cup. Even prior to winning hosting rights for the tournament, Qatar had already wanted to invest US$20bn in tourism, including US$3bn-4bn in new stadiums regardless of the outcome of its football bid.
We estimate that Middle East projects could make up 35% of the group’s projects. One structural steel project is the Muscat Airport Terminal Building in Oman. In the event of a contract win, risks should again be borne largely by the main contractor, while payments to YNH would be made on a monthly progress basis.
Valuation and recommendation
Maintain Outperform. No change to our order-book assumptions, EPS estimates or target price of S$0.40, still based on 8x CY12 P/E, a 20% discount to its mid-cycle multiples. We also like YNH for its undemanding valuations against peers, at 5.2x CY12 P/E vs. the peer average of 7.6x. We expect stock catalysts from contract wins for projects such as the MRT Downtown Line and structural steelwork projects in the Middle East.
S$0.26 @13/06/11
Target: S$0.40
Construction
All systems in place
• Stronger recognition this year. YNH’s contract wins had picked up strongly in 2Q11, with the group securing more than S$190m worth of contracts or 40% of our target for this year. Coupled with profit margins which had been sustained over the four quarters of 2010 (with a positive surprise in 1Q11), we believe YNH is on track to meet our FY11 earnings target. No change to our EPS estimates or target price of S$0.40, still based on 8x CY12 P/E, a 20% discount to its mid-cycle multiples. We also like YNH’s undemanding valuations against peers, at 5.2x CY12 P/E vs. the peer average of 7.6x. We expect stock catalysts from contract wins for projects such as the MRT Downtown Line and structural steelwork projects in the Middle East.
• On track to meet FY11 earnings target. Although 1Q11 turnover only accounted for 17.5% of our FY11 forecast, we see two reasons for remaining optimistic on our net profit target of S$60m. First, contract wins had picked up strongly in 2Q11, with the group securing more than S$190m worth of contracts in that quarter, or 40% of our target for this year. Second, profit margins have been both strong and sustainable for 4-5 quarters, with a positive surprise in fact in 1Q11.
• Order-book renewal. We estimate that YNH is bidding for S$1.2bn worth of projects this year. The outlook in Singapore remains underpinned by numerous opportunities in the civil engineering space. The Middle East is another market with considerable infrastructure spending plans. We believe if the political situation stabilises there, construction firms like YNH could stand to reap major benefits.
On track to meet FY11 earnings target
During its 4Q10 results announcement, management had guided for earnings recognition of S$270m (60% of its S$450m order book as at 31 Dec 10) for 2011. 1Q11 turnover represents 28% of that S$270m amount. This is consistent with 1Q revenue which typically makes up 23-28% of full-year numbers (cf. FY09-10). An apparent lack of contract flows in the first quarter of this year (only a S$24m contract announced late in 1Q11) implies that the turnover of S$75m was derived mainly from an existing order book. This further implies that work on existing projects is proceeding well, and that the other 72% of management’s guidance would pan out by end-2011.
Although 1Q11 turnover only accounted for 17.5% of our FY11 forecast, we see two reasons to remain optimistic. First, contract wins had picked up strongly in 2Q11, with the group securing more than S$190m worth of contracts in that quarter. This figure makes up for 40% of our full-year target. We expect stronger revenue recognition for the remaining nine months of FY11. Second, profit margins have been both strong and sustainable for 4-5 quarters, with a positive surprise in fact in 1Q11.
Expect stronger revenue recognition. YTD, YNH has won S$217m contracts, of which 89% was secured in the second quarter of 2011. With these contracts, quarterly revenue in the next three quarters of FY11 is likely to surpass 1Q11 levels. Assuming that existing projects continue to make steady progress, we see upside to quarterly revenue from new contracts won in the year.
Strong and sustainable margins. Even if full-year revenue falls short of our target, we believe persistent margin strength could make up for the shortfall. Throughout FY10, YNH’s net profit margins had been consistently well above those of the corresponding quarters in FY09. This was attributed to: 1) a shift in its revenue mix to the highermargin specialist civil engineering segment; and 2) better margins in the structural steelwork segment. A spike in 1Q11 gross margins came as a pleasant surprise to us, from an average 28.6% in FY10 to 33.2%; lifting net profit margins to 20% in the quarter. For the sake of prudence though, we have kept our gross and net margin assumptions of 26.3% and 14.1% respectively for FY11. Judging from the strength of its margins in the past year, any revenue shortfall could be made up by potential margin upside during the year.
Order-book renewal
Promising projects. We estimate that YNH is bidding for S$1.2bn worth of structural steel (67%) and specialist civil engineering projects (33%) this year. With its shift in focus to specialist civil engineering projects, these projects now represent a third of the total value of its bids, up from only 21% in 2010. In contrast, structural steel projects now account for less than 70%, from almost 79% in 2010. The shift is consistent with the emergence of abundant specialist civil engineering opportunities in the domestic market after the Singapore government unveiled its transport system master plan to “make public transport a choice mode”.
Good domestic outlook for specialist civil engineering. To date, the group has won S$73m worth of specialist civil engineering projects. With contracts for the proposed 21km-long, 16-station MRT Downtown Line 3 under bidding, we may see some contract wins in 2H11. If successful, there would be little slack time for YNH’s specialist civil engineering team, as the government has given the go-ahead for the construction of the North-South Expressway at a cost of S$7bn-8bn, for completion by 2020. This is in addition to plans for two new MRT lines: Thomson Line and Eastern Region Line.
Don’t discount Middle East yet. The Middle East is a big market with good prospects, interrupted by recent political turmoil. Prior to the disturbances, countries in the region had already announced huge infrastructure spending plans which would likely benefit construction firms like YNH. On the back of rising demand for power and utilities in addition to transport infrastructure which is in need of overhauling, Saudi Arabia will be pouring US$400bn into infrastructure projects. New projects are designed to improve the efficiency and quality of the cities in the kingdom and facilite access to these cities from the surrounding areas. Qatar is another market which offers potential over the medium term, catalysed by the country's hosting of the 2022 FIFA World Cup. According to a report by Business Monitor International, some US$80bn could be spent preparing the country for the World Cup. Even prior to winning hosting rights for the tournament, Qatar had already wanted to invest US$20bn in tourism, including US$3bn-4bn in new stadiums regardless of the outcome of its football bid.
We estimate that Middle East projects could make up 35% of the group’s projects. One structural steel project is the Muscat Airport Terminal Building in Oman. In the event of a contract win, risks should again be borne largely by the main contractor, while payments to YNH would be made on a monthly progress basis.
Valuation and recommendation
Maintain Outperform. No change to our order-book assumptions, EPS estimates or target price of S$0.40, still based on 8x CY12 P/E, a 20% discount to its mid-cycle multiples. We also like YNH for its undemanding valuations against peers, at 5.2x CY12 P/E vs. the peer average of 7.6x. We expect stock catalysts from contract wins for projects such as the MRT Downtown Line and structural steelwork projects in the Middle East.
Biosensors Int’l Group (OCBC)
Maintain BUY
Previous Rating: BUY
Current Price: S$1.29
Fair Value: S$1.60
Acquiring remaining 50% stake in JWMS
Proposal to acquire remaining 50% stake in JWMS. Biosensors International Group (BIG) has proposed to acquire the remaining 50% stake in JW Medical Systems (JWMS) from Shandong Weigao Group Medical Polymer (Shandong Weigao). JWMS is currently a joint venture between BIG and Shandong Weigao. The purchase consideration amounts to ~S$625.4m, comprising of (i) a cash payment of S$160m; (ii) issuance of 260m new ordinary shares to Shandong Weigao at S$1.2215 per share (0.12% premium to 10 Jun closing price) and (iii) issuance to Shandong Weigao of US$120m principal amount of 4% convertible notes due 2014. Upon the successful completion of this transaction, JWMS would be a wholly-owned subsidiary of BIG. Shandong Weigao would also own 21.6% of BIG assuming full conversion of the notes. We view this move positively from a strategic standpoint as BIG's own BioMatrix drug-eluting stent (DES) has yet to obtain approval from the relevant authorities in China and currently penetrates the China market via JWMS. Hence the move to gain full control of JWMS would allow BIG to strengthen its position in China.
Rationale for proposed acquisition. Management believes that China is one of the fastest growing DES markets in the world, with industry sources estimating the current market size to be worth approximately US$500m. The new healthcare reform initiative by the Chinese government has also allowed stent treatment to be reimbursable under China's basic medical insurance coverage. This would likely result in lower costs and increase the demand for stent treatments. Moreover, the changing demographics in China towards an aging population and increasing prevalence of coronary diseases also augurs well for the DES market. Hence this acquisition is in line with BIG's strategy to expand and consolidate its DES business in China. Nevertheless, we note that the industry is undergoing ASP erosion due to increasing competition although this should be mitigated by strong volume growth.
Maintain BUY. We believe that this move would help to support BIG's earnings momentum moving forward. Management estimates that this acquisition would be completed by the later part of the year (assuming shareholder approval is obtained), implying that JWMS is likely to be consolidated from 2H12 onwards. We take into account the dilutive impact caused by the enlarged share base and also update our required return on equity assumption to 9.1%. However, our FCFE model also captures the accretive earnings growth potential of the combined entity. As such, our fair value estimate increases from S$1.55 to S$1.60. Maintain BUY.
Previous Rating: BUY
Current Price: S$1.29
Fair Value: S$1.60
Acquiring remaining 50% stake in JWMS
Proposal to acquire remaining 50% stake in JWMS. Biosensors International Group (BIG) has proposed to acquire the remaining 50% stake in JW Medical Systems (JWMS) from Shandong Weigao Group Medical Polymer (Shandong Weigao). JWMS is currently a joint venture between BIG and Shandong Weigao. The purchase consideration amounts to ~S$625.4m, comprising of (i) a cash payment of S$160m; (ii) issuance of 260m new ordinary shares to Shandong Weigao at S$1.2215 per share (0.12% premium to 10 Jun closing price) and (iii) issuance to Shandong Weigao of US$120m principal amount of 4% convertible notes due 2014. Upon the successful completion of this transaction, JWMS would be a wholly-owned subsidiary of BIG. Shandong Weigao would also own 21.6% of BIG assuming full conversion of the notes. We view this move positively from a strategic standpoint as BIG's own BioMatrix drug-eluting stent (DES) has yet to obtain approval from the relevant authorities in China and currently penetrates the China market via JWMS. Hence the move to gain full control of JWMS would allow BIG to strengthen its position in China.
Rationale for proposed acquisition. Management believes that China is one of the fastest growing DES markets in the world, with industry sources estimating the current market size to be worth approximately US$500m. The new healthcare reform initiative by the Chinese government has also allowed stent treatment to be reimbursable under China's basic medical insurance coverage. This would likely result in lower costs and increase the demand for stent treatments. Moreover, the changing demographics in China towards an aging population and increasing prevalence of coronary diseases also augurs well for the DES market. Hence this acquisition is in line with BIG's strategy to expand and consolidate its DES business in China. Nevertheless, we note that the industry is undergoing ASP erosion due to increasing competition although this should be mitigated by strong volume growth.
Maintain BUY. We believe that this move would help to support BIG's earnings momentum moving forward. Management estimates that this acquisition would be completed by the later part of the year (assuming shareholder approval is obtained), implying that JWMS is likely to be consolidated from 2H12 onwards. We take into account the dilutive impact caused by the enlarged share base and also update our required return on equity assumption to 9.1%. However, our FCFE model also captures the accretive earnings growth potential of the combined entity. As such, our fair value estimate increases from S$1.55 to S$1.60. Maintain BUY.
AMTEK (Lim&Tan)
S$0.955-AMTK.SI
• At 95.5 cents, Amtek is down 27% from its Dec’10 IPO price of $1.30, half cent below its post listing closing low of 96 cents and only 1 cent above its post listing all time low of 94.5 cents (hit on 8 Dec’10).
• It is also down 32% from its all time high of $1.41 reached on 21 Jan’11 (when several local and foreign brokers initiated coverage on the stock with bullish forecasts and outperform calls).
• During its IPO in Dec’10, we were not enthusiastic about Amtek and had then recommended investors to give the IPO a miss due to its steep valuations compared to its peer group average.
• But with the stock having dropped 27% from its IPO price, 32% from its all time post listing high and currently retesting its post listing all time lows, we believe the stock is worth accumulating, especially on further price weakness.
• The reasons are as follows:
(a) consensus expectations for full year ending June 2011 profit forecasts have since come down to more realistic levels recently due to the company’s disappointing results in 3Q ended March’2011 on the back of weaker than expected hard disk drive performance;
(b) we understand that management is currently quite comfortable with the market’s 4Q ending June’2011 expectations with profit expected to rise 42% qoq and 371% yoy to a record US$14mln on the back of stabilization of the hard disk drive business, strong growth of their automotive, electronic & electrical business segments due to outsourcing and relocation of manufacturing to Asia;
(c) the company has committed to pay about 50% of their earnings as dividends for their upcoming full year ending June 2011 results, potentially yielding about 6%; and
(d) consensus remains bullish on the stock due to its undemanding PE of 6-7x against growth potential of 20-25% going forward.
• One risk factor is that its major shareholders who are private equity owners (Metcom Group owns 28.3% and Standard Chartered Bank 28.3%) could potentially off-load shares given that their 6-month moratorium just expired on 1 June’2011. During the IPO they had sold 230mln vendor shares at $1.30 each, raising $299mln. They had spent $516mln in May’2007 to privatize the company.
• However, we note that despite CMIA’s consistent selling of China Minzhong, its share price has performed well since listing, underpinned by its robust fundamentals.
• At 95.5 cents, Amtek is down 27% from its Dec’10 IPO price of $1.30, half cent below its post listing closing low of 96 cents and only 1 cent above its post listing all time low of 94.5 cents (hit on 8 Dec’10).
• It is also down 32% from its all time high of $1.41 reached on 21 Jan’11 (when several local and foreign brokers initiated coverage on the stock with bullish forecasts and outperform calls).
• During its IPO in Dec’10, we were not enthusiastic about Amtek and had then recommended investors to give the IPO a miss due to its steep valuations compared to its peer group average.
• But with the stock having dropped 27% from its IPO price, 32% from its all time post listing high and currently retesting its post listing all time lows, we believe the stock is worth accumulating, especially on further price weakness.
• The reasons are as follows:
(a) consensus expectations for full year ending June 2011 profit forecasts have since come down to more realistic levels recently due to the company’s disappointing results in 3Q ended March’2011 on the back of weaker than expected hard disk drive performance;
(b) we understand that management is currently quite comfortable with the market’s 4Q ending June’2011 expectations with profit expected to rise 42% qoq and 371% yoy to a record US$14mln on the back of stabilization of the hard disk drive business, strong growth of their automotive, electronic & electrical business segments due to outsourcing and relocation of manufacturing to Asia;
(c) the company has committed to pay about 50% of their earnings as dividends for their upcoming full year ending June 2011 results, potentially yielding about 6%; and
(d) consensus remains bullish on the stock due to its undemanding PE of 6-7x against growth potential of 20-25% going forward.
• One risk factor is that its major shareholders who are private equity owners (Metcom Group owns 28.3% and Standard Chartered Bank 28.3%) could potentially off-load shares given that their 6-month moratorium just expired on 1 June’2011. During the IPO they had sold 230mln vendor shares at $1.30 each, raising $299mln. They had spent $516mln in May’2007 to privatize the company.
• However, we note that despite CMIA’s consistent selling of China Minzhong, its share price has performed well since listing, underpinned by its robust fundamentals.
Koon Holdings Ltd (KimEng)
Background: Koon Holdings is a civil engineering, construction, reclamation and shore protection specialist. The company listed on the Singapore Exchange’s junior board SESDAQ in 2003 and upgraded to the main board last year. It started as a family-owned construction conglomerate but is now run by professional managers.
Recent development: Koon’s investments into the precast business in Singapore puts it in good stead to benefit from this method of construction in the face of rising labour costs in the construction industry.
Our view:
Earnings to grow. Koon’s recent order flow demonstrates its excellent positioning in the Singapore construction industry. In March, the company secured a $15.25m contract to construct roads, drains, sewers and earthworks at Tampines Logistics Park. This award brings its pure construction orderbook to $74.0m. In April, it won new precast projects with an approximate contract value of $16.3m in total for public housing projects. Its precast orderbook currently stands at $53.2m.
Keeping construction costs down. With the government’s push for increased productivity in the construction sector, precast products are in demand. Developers and contractors are exploring greater use of such products, which simplify construction as well as provide better quality control and higher cost efficiencies.
Cash pile, opportunistic investments Following the sale of its marine logistics business, Koon has $17.9m in net cash earmarked for more acquisitions. It has already purchased a 49% stake in Tesla Holdings for $3.7m. Its 9.9MW diesel power plant in Western Australia will be completed in 2H11.
Cheap by any measure. Koon is undervalued relative to its peers, and trades at only 3.3x. A simple re-rating to sector average PER would boost its stock price by over 60%. Its low trading liquidity has also improved somewhat after the recent 1-for-1 stock split.
Price-to-earnings: 3.3x
Price-to-NTA: 1.3x
Dividend per share / yield: $0.02 / 7.5%
Net cash/(debt) per share: $0.11
Net cash as % of market cap: 41.5%
Share price S$0.265
Issued shares (m) 164..1
Market cap (S$m) 43.5
Free float (%) 46
Recent fundraising Nil
Financial YE December 31
Recent development: Koon’s investments into the precast business in Singapore puts it in good stead to benefit from this method of construction in the face of rising labour costs in the construction industry.
Our view:
Earnings to grow. Koon’s recent order flow demonstrates its excellent positioning in the Singapore construction industry. In March, the company secured a $15.25m contract to construct roads, drains, sewers and earthworks at Tampines Logistics Park. This award brings its pure construction orderbook to $74.0m. In April, it won new precast projects with an approximate contract value of $16.3m in total for public housing projects. Its precast orderbook currently stands at $53.2m.
Keeping construction costs down. With the government’s push for increased productivity in the construction sector, precast products are in demand. Developers and contractors are exploring greater use of such products, which simplify construction as well as provide better quality control and higher cost efficiencies.
Cash pile, opportunistic investments Following the sale of its marine logistics business, Koon has $17.9m in net cash earmarked for more acquisitions. It has already purchased a 49% stake in Tesla Holdings for $3.7m. Its 9.9MW diesel power plant in Western Australia will be completed in 2H11.
Cheap by any measure. Koon is undervalued relative to its peers, and trades at only 3.3x. A simple re-rating to sector average PER would boost its stock price by over 60%. Its low trading liquidity has also improved somewhat after the recent 1-for-1 stock split.
Price-to-earnings: 3.3x
Price-to-NTA: 1.3x
Dividend per share / yield: $0.02 / 7.5%
Net cash/(debt) per share: $0.11
Net cash as % of market cap: 41.5%
Share price S$0.265
Issued shares (m) 164..1
Market cap (S$m) 43.5
Free float (%) 46
Recent fundraising Nil
Financial YE December 31
Singapore Press Holdings (KimEng)
Event:
Two failed bids at recent land tender exercises could prompt the Singapore Press Holdings (SPH) to become more aggressive in seeking future projects. Or, it could just put property acquisition plans on the back burner as there are fewer sites that satisfy its investment criteria. On our part, we prefer SPH to focus on boosting its digital media revenue stream and returning surplus cash to shareholders. At FY Aug12F PER of 15x and a sustainable dividend yield of 6.4%, the stock still warrants a BUY rating. However, our target price is lowered to $4.60, from $4.68 previously.
Our View:
In May this year and September last year, SPH failed to secure the White Site at Boon Lay Way and the mixed-used site at Bedok Town Centre, respectively. Fewer commercial plots are now available with nearly all sites on the Confirmed List of the 2H11 Government Land Sales (GLS) Programme slated for residential use and a White Site on the Reserve List catering to Grade A office use. With neither segment the focus of SPH’s property development division, we rule out land acquisition as a near-term catalyst
The group’s commercial properties appear to be doing well. We expect Clementi Mall, which became fully operational last month, to achieve gross rental revenue of $32.5m pa by FY Aug12. Paragon, on the other hand, is benefitting from positive rental reversions. If market buzz is true that Australian property group Lend Lease is seeking to divest its stake in the neighbouring retail mall, 313@Somerset, at $4,400-4,800 psf net lettable area, Paragon’s valuation may get a boost. It currently is valued at around $3,200 psf compared to Ion Orchard whose valuation stands at $4,169 psf
Action & Recommendation:
SPH’s core media and retail mall rental businesses will continue to hinge on domestic consumption growth. The plan to use Apple’s and Google’s subscription platforms to boost its subscription base is positive for the longer term. The return of surplus cash as dividends is another potential catalyst. However, a key risk is that management might bid aggressively for property projects. Maintain BUY.
Two failed bids at recent land tender exercises could prompt the Singapore Press Holdings (SPH) to become more aggressive in seeking future projects. Or, it could just put property acquisition plans on the back burner as there are fewer sites that satisfy its investment criteria. On our part, we prefer SPH to focus on boosting its digital media revenue stream and returning surplus cash to shareholders. At FY Aug12F PER of 15x and a sustainable dividend yield of 6.4%, the stock still warrants a BUY rating. However, our target price is lowered to $4.60, from $4.68 previously.
Our View:
In May this year and September last year, SPH failed to secure the White Site at Boon Lay Way and the mixed-used site at Bedok Town Centre, respectively. Fewer commercial plots are now available with nearly all sites on the Confirmed List of the 2H11 Government Land Sales (GLS) Programme slated for residential use and a White Site on the Reserve List catering to Grade A office use. With neither segment the focus of SPH’s property development division, we rule out land acquisition as a near-term catalyst
The group’s commercial properties appear to be doing well. We expect Clementi Mall, which became fully operational last month, to achieve gross rental revenue of $32.5m pa by FY Aug12. Paragon, on the other hand, is benefitting from positive rental reversions. If market buzz is true that Australian property group Lend Lease is seeking to divest its stake in the neighbouring retail mall, 313@Somerset, at $4,400-4,800 psf net lettable area, Paragon’s valuation may get a boost. It currently is valued at around $3,200 psf compared to Ion Orchard whose valuation stands at $4,169 psf
Action & Recommendation:
SPH’s core media and retail mall rental businesses will continue to hinge on domestic consumption growth. The plan to use Apple’s and Google’s subscription platforms to boost its subscription base is positive for the longer term. The return of surplus cash as dividends is another potential catalyst. However, a key risk is that management might bid aggressively for property projects. Maintain BUY.
OSIM International (DMG)
OSIM International: Key takeaway from investor meeting with CFO (BUY, S$1.49, TP S$1.84)
Following the placement of the CBs which ignited investor anxiety over OSIM’s intentions for another huge M&A, we hosted a tea time investor meeting to gather more information from management. Key takeaways from our meeting with CFO Peter Lee: 1) OSIM does not intend to make mega acquisitions following the Brookstone saga; any acquisition will range between S$30-60m; 2) Year end cash war chest expected is expected to be ~S$250-300m; 3) RichLife, its proprietary nutritional brand in China, is expected to turn profitable next year. Maintain BUY with TP of S$1.84.
Not in hurry to acquire, any M&A to be in region of S$30-60m. CFO Peter Lee was quick to reassure investors that the Group was not intent on engaging in another big acquisition after learning a painful lesson from its Brookstone acquisition which was funded by a syndicate of ten banks. Any acquisition down the road will be in the region of S$30-60m. This amount is small relative to its cash hoard which we expect to be S$250m by year end. It was reiterated that any potential target will have to be a speciality retailer with a strong brand and current founders still running the business.
Flushed with cash, year end cash expected to be ~S$250-300m. In 1Q11, OSIM was sitting on net cash of S$30m. With CEO Ron Sim’s recent exercise of warrants, that will generate another S$26m in cash. To add to the cash pile, S$118m was raised from the CBs and S$76m is to be raised from the upcoming TDR listing, bringing total cash to S$250m. Coupled with strong net operating cashflows of ~S$25m, we expect OSIM to be flushed with cash. While the official dividend policy is 10-20%, we can expect it to trend towards 30%. In Q1, it had announced a payout of S$0.01 per share.
RichLife likely to be profitable next year. The Group’s nutritional supplements business in China which is under its own proprietary brand, RichLife is currently in losses but expected to be profitable by next year. Management plans to use a celebrity well-known in China to help market its range of products after experiencing tremendous success with superstar Andy Lau for its uDivine range of chairs.
Maintain BUY and TP of S$1.84. We think the recent sell down provides a window of opportunity for investors to accumulate the stock. Investor worries over another big leveraged buyout has been allayed now that management has clarified it will not be doing so. We like the stock as it: 1) Owns strong brands and dominant market positions in each of its businesses; 2) Expected to register strong earnings growth from its expansion into China; 3) Strong cash position ith ~S$250m cash at year end.
Following the placement of the CBs which ignited investor anxiety over OSIM’s intentions for another huge M&A, we hosted a tea time investor meeting to gather more information from management. Key takeaways from our meeting with CFO Peter Lee: 1) OSIM does not intend to make mega acquisitions following the Brookstone saga; any acquisition will range between S$30-60m; 2) Year end cash war chest expected is expected to be ~S$250-300m; 3) RichLife, its proprietary nutritional brand in China, is expected to turn profitable next year. Maintain BUY with TP of S$1.84.
Not in hurry to acquire, any M&A to be in region of S$30-60m. CFO Peter Lee was quick to reassure investors that the Group was not intent on engaging in another big acquisition after learning a painful lesson from its Brookstone acquisition which was funded by a syndicate of ten banks. Any acquisition down the road will be in the region of S$30-60m. This amount is small relative to its cash hoard which we expect to be S$250m by year end. It was reiterated that any potential target will have to be a speciality retailer with a strong brand and current founders still running the business.
Flushed with cash, year end cash expected to be ~S$250-300m. In 1Q11, OSIM was sitting on net cash of S$30m. With CEO Ron Sim’s recent exercise of warrants, that will generate another S$26m in cash. To add to the cash pile, S$118m was raised from the CBs and S$76m is to be raised from the upcoming TDR listing, bringing total cash to S$250m. Coupled with strong net operating cashflows of ~S$25m, we expect OSIM to be flushed with cash. While the official dividend policy is 10-20%, we can expect it to trend towards 30%. In Q1, it had announced a payout of S$0.01 per share.
RichLife likely to be profitable next year. The Group’s nutritional supplements business in China which is under its own proprietary brand, RichLife is currently in losses but expected to be profitable by next year. Management plans to use a celebrity well-known in China to help market its range of products after experiencing tremendous success with superstar Andy Lau for its uDivine range of chairs.
Maintain BUY and TP of S$1.84. We think the recent sell down provides a window of opportunity for investors to accumulate the stock. Investor worries over another big leveraged buyout has been allayed now that management has clarified it will not be doing so. We like the stock as it: 1) Owns strong brands and dominant market positions in each of its businesses; 2) Expected to register strong earnings growth from its expansion into China; 3) Strong cash position ith ~S$250m cash at year end.
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