Johor second half outlook positive

THE outlook for the Johor property market is likely to remain positive in the second half of the year based on the number of property transactions taking place in the state.

Johor Real Estate and Housing Developers Association (Rehda) branchchairman Simon Heng says its members who took part in the Malaysia Property Expo (Mapex) events recorded a 15% increase in sales.

Some 33 developers who participated in the four-day event held in last November raked in RM331mil in sales over a one-month period and the figure jumped to about RM384mil in Mapex held in May 2011.

“Our members reported better sales in the first half of the year and expect the momentum to continue in the second half of 2011,'' Heng says in an interview with StarBizWeek.

The 30-day period starting from the first day of Mapex is the benchmark used by Rehda to determine the value of sales by participating developers. There were several contributing factors that drove demand for properties in the Johor property market this year especially in the Johor Baru district.

As the pulse of the state, the Johor Baru district has the highest concentration of Johor-based and non-Johor-based developers compared with other districts such as Batu Pahat, Kluang, Muar and Segamat.

Sweetener: Johor Baru’s close proximity with Singapore has attracted buyers to properties in Iskandar Malaysia.

Price uptrend

“Many property buyers in Johor Baru are anticipating prices of properties will rise and have decided to make their purchase before the prices escalate again,'' says Heng.

He says the economic recovery meant that consumer confidence was returning after a two-year low period following the global recession sparked off by the US subprime crisis and European financial woes in 2008 and 2009.

Iskandar Malaysia, Heng says, is another main factor that contributed to the positive growth in the Johor Baru property market as it helps to boost demand for houses in the area.

Prior to the inception of Iskandar Malaysia in November 2006, demand for high-end residential properties was best described as lacklustre, but now demand for such properties is on the uptrend. It is common to see developers with projects in Iskandar Malaysia selling their double-storey link-house from RM350,000 up to RM450,000 each. The units are selling like hot cakes.

“Shophouses are also selling well and reports from our members show that a lot of buyers from Kuala Lumpur are buying the shophouses as investment,'' he says.

Heng: ‘Shophouses are also selling well.’

Heng says many of the buyers consider prices of shophouses in Johor Baru are much lower than those in Kuala Lumpur and that they would make good investments in view of the development taking place within Iskandar Malaysia.

Iskandar Malaysia covers 2,219 sq km located in the southernmost part of Johor and divided into five flagship development zones the Johor Baru City Centre, Nusajaya, Eastern Gate Development, Western Gate Development and Senai-Kulai.

Heng says even prices of properties in the Senai-Kulai area, on the northern part of the Johor Baru district which was one described as “hulu” or remote, are going up due to better accessibility and connectivity. A single-storey terrace house at Bandar Putra Kulai by IOI Properties Bhdlaunched in June 2010 was priced RM130,000 each and sold for RM200,000 in June this year. The two-storey link house in the same housing scheme which was sold at RM189,00 a unit in June last year, was going for RM269,000 each in June this year.

“Iskandar Malaysia is now gaining momentum with many ongoing projects by both the public and the private sectors at several stages of development,'' says Heng.

He says the completion of the New Coastal Highway, the Eastern Dispersal Link Expressway and the Southern Link next year would improve accessibility and connectivity within Iskandar Malaysia; hence help to push demand for properties.

The Kempas-Tebrau, Mount Austin, Nusajaya and Kulaijaya areas are expected to be the property hot spots with several projects to be launched within the next one to two years.

Investment boost

Meanwhile, KGV International Property Consultants (M) Sdn Bhd director Samuel Tan Wee Cheng says the property sector constitutes 30% of the total committed investments while the manufacturing sector makes up about 40%.

He says although the Iskandar Regional Development Authority (Irda) wants the services sector to be the forefront, the manufacturing and the property sectors are still the main contributors to the cumulative investments in Iskandar Malaysia.

Irda chief executive officer Ismail Ibrahim says that as of June 2011, Iskandar Malaysia has received about RM95bil in committed investments, up from RM73bil in the first quarter of the year.

He says that while Iskandar Malaysia is a main factor that pushed demand for high-end properties, the stakeholders must ensure that buyers who could not afford them are not left out.

“It is good for developers to be able to sell high-end properties especially to foreigners but we need to have a balanced approach to ensure locals are not sidelined in the name of progress,'' says Tan.

Rising demand

He says demand for properties in Johor Baru was up in the first half of the year as many prospective buyers missed the opportunity to buy the properties at lower prices due to the 1998 and 2009 economic recession.

Typically, buying a property would be the last option most people would consider committing to during economic uncertainties given concerns over job security.

“The moment the economy starts to show signs of recovery, those who missed the boat earlier will invest in properties as properties are always a good hedge,'' he says.

Tan says confidence in Johor is now at all time high especially with the progress made by Iskandar Malaysia since its inception five years ago, although many are sceptical in the early days on whether it would take off successfully.

Tan says the property sector constitutes 30% of total committed investments.

He says that as the Government-backed economic growth corridor in the country, Iskandar Malaysia has strong backing from the Government in terms of funding for infrastructure development projects.

“Road upgrading and new road projects within Iskandar Malaysia will improve accessibility and connectivity and buyers will look at other locations which were previously unpopular,'' says Tan.

For instance, Rawang and Shah Alam in Selangor used to be out of the radar among property buyers in the Klang Valley but now, buyers are flocking there as better infrastructure has turned them into preferred locations.

Tan says foreign investors, who were largely interested in Singapore and the Klang Valley, are also gradually turning their gaze to Iskandar Malaysia. A definite sweetener is Johor Baru's close proximity with Singapore which has attracted buyers especially Singaporeans to properties in Iskandar Malaysia. “Like it or not as close neighbours, Johor and Singapore complement each other in economic activities due to a long history of economic interdependence,'' says Tan.

With the republic's investment arm Temasek Holdings showing its serious commitment to invest in Iskandar Malaysia, more Singapore property players such as Mapletree and CapitaLand would likely invest in the property sector here.

Tan hopes that the Government will take a proactive step to correct the misconception that Iskandar Malaysia is Nusajaya as there are other areas that need equal attention in terms of infrastructure projects and investment flows.

VENTURE (Lim&Tan)

S$7.27 - VMS.SI

• Venture’s 2Q2011 net profit fell 8.4% yoy to $42mln, dragging down 1H2011 profit by 2.5% to $83mln, below expectations. Sales fell 3.7% yoy to $629mln, bringing 1H2011 sales down 5.9% to $1.22bln.

• The steep US$ decline had negatively impacted sales in S$ terms by more than 11%, hence if measured in US$ terms, 2Q2011 sales would have risen 8% instead of falling 3.7%.

• Other factors negatively impacting bottom-line were higher labor and other operating costs due to inflationary pressures in Asia. Due to the Japanese earthquake, management also said that their customers faced component shortages in 2Q2011.

• At yesterday’s briefing, management said that the component shortage problem has since been resolved and as compared to their cautious outlook provided in 1Q2011 briefing in May’11, management has now turned more upbeat, saying that general sentiment of their customers have turned encouraging with most expecting business volume growth going forward. As well, several new products and programs are expected to be launched in 2H2011.

• Despite expecting more business going forward, management said that they are maintaining a tight rein on their overall costs, expecting instead to squeeze more productivity out of existing employees, instead of planning to add more. These cost savings should help to offset somewhat the potential continued US$ weakness going forward.

• The company continues to generate robust cash flows with 2Q2011 operating cash flow of $39mln, bringing 1H2011 operating cash flow to $66mln up from $9mln a year ago, more than sufficient to cover capex of $12mln. After paying $151mln in dividends, cash holdings fell to $338mln against debts of $202mln, giving a net cash position of $136mln. Management expects their strong cash generation abilities to continue to improve their financial position in 2H2011.

• Given the lower than expected 2Q2011 performance, we are lowering our full year net profit forecast from $207mln to $188mln, similar to last year. PE is about 10x.

• Despite the lowered profit expectations, we believe that the company can sustain their 55 cents a share dividend payment this year, translating to a payout ratio of 80%, similar to last year, giving an attractive yield of 7.56%.

• While the overall market (including Venture) will be hit hard today on the back of sharp declines in global stock markets, we believe further share price weakness for Venture would be a good buying opportunity given its attractive yield and recent sharp share price weakness ahead of its 2Q2011 results release.

• We are thus upgrading from HOLD to BUY.

Venture Corp: Maintain BUY with revised S$9.56 fair value (OCBC)

Results tad better than expected. Venture Corp (VMS) reported 2Q11 revenue down 3.7% YoY to S$628.7m, mainly due to the impact of the weaker USD, which fell 11.0% YoY. However, revenue was +7.0% QoQ and 1.4% above our forecast. Net profit came in at S$42.0m, down 8.4% YoY and up 1.9% QoQ, and 2.1% ahead of our forecast due to lower-thanexpected effective tax rate of 1.9% (versus 3% forecast). 1H11 revenue slipped 5.9% to S$1216.3m, meeting 42.3% of our full-year forecast, while net profit fell 2.5% to S$83.1m, or 39.6% of FY11 forecast. Though net cash balance eased to S$136.0m (versus S$254.9m as of end-Mar), it was due to the S$150.9m dividend payment (or S$0.55/share for FY10).

Business segments still doing well in USD terms. If we strip out the impact of the weaker USD, its underlying business segments actually did pretty well; this also suggests that the manufacturing outlook is not overly gloomy. For example, its Networking & Communications revenue may have fallen 14.7% YoY and 3.6% QoQ to S$117.6m, but in USD terms, it was only down 4.2% YoY and 0.2% QoQ. Its star performer was Retail Stores Solutions & Industrial Products; +2.9% YoY and +14.0% QoQ to S$171.3m; also +15.6% YoY and +17.9% QoQ in USD terms. Test & Measurement/Medical/Others also put in a good quarter; +5.1% YoY and 5.0% QoQ to S$159.0m; +17.6% YoY and +7.0% QoQ in USD terms.

Cautiously upbeat outlook. Going forward, management notes that the general sentiment of its customers remains "encouraging" with most expecting business volume growth; not surprising given that 2H tends to be the stronger period for most manufacturing companies; but the strength of the pickup may be tempered by the weak economic situation in the US. In any case, VMS adds that it will continue to maintain a high degree of responsiveness to support all its customers' needs. However, it notes that the USD/SGD volatility will continue to have an impact on its business; but we have already factored in a continued weakening of the USD into our estimates.

Keeping our BUY call. As such, we intend to leave our FY11 estimates unchanged (we had only recently revised them downwards). But due to the still muted market conditions, we are reducing fair value from S$10.59 to S$9.56, pegged to 12x blended FY11F/FY12F EPS (versus 14x FY11F EPS previously). Still, given the potential return of 32% from here, we maintain our BUY rating.

StarHub Ltd: 2Q11 results within expectations (OCBC)

2Q11 results within expectations. StarHub Ltd reported almost flat 2Q11 revenue of S$568.6m, and in line with our S$568.0m forecast. Net profit jumped 34.5% YoY and 12.9% QoQ to S$78.0m, or 2.6% ahead of our forecast; due to the absence of higher content cost (from FIFA World Cup last year) and also slightly lower effective tax rate (13% versus usual 17%). As guided, StarHub proposed a quarterly dividend of S$0.05/share. For 1H11, revenue inched up 0.1% to S$1127.1m, meeting 47.6% of our fullyear estimate, while net profit jumped 46.0% to S$147.1m, or around 47.7% of our FY11 forecast.

Stable mobile business. Mobile revenue grew 2.9% YoY and 2.3% QoQ, driven mainly by a 20k increase (+1.9% QoQ) in post-paid subscribers; also a S$1 uplift in monthly ARPU to S$73, while monthly churn rate eased to 1.0% from 1.1% in 1Q11. However, StarHub has opted not to disclose its acquisition cost for post-paid customers, other than saying smartphones continue to be the phone of choice for its customers. Meanwhile, StarHub saw a 12k drop in pre-paid subscribers (-1.1% QoQ), as its strategy to lower IDD rates to attract more foreign workers did not pan out; but management believes in the attractiveness of its lower IDD rates and will be looking to recapture this group of customers with more distribution points.

Recovery in Pay TV segment. For Pay TV, although revenue tumbled 15.8% YoY (mainly due to lower sport group pricing, absence of World Cup), it inched up 0.8% QoQ as StarHub added another 2k subscribers. Monthly ARPU was also stable at S$49 in 2Q11; but StarHub expects this to rise as it had recently imposed an across-the-broad increase of S$2/month for all subscribers. Broadband revenue grew 3.0% YoY and 1.8% QoQ; but mainly due to the introduction of cheap cable packages to snare non-broadband subscribers. Fibre roll-out/subscription continues to remain slow, making it essentially a late 2012 or even early 2013 story.

Pares revenue guidance. And we suspect because of the slower-thanexpected fibre growth, StarHub revised its revenue growth to low singledigit (versus single-digit earlier); and also guides for lower capex (12% of revenue vs. 13% previously) for the same reason. However, it has kept its S$0.05 quarterly dividend payout for the rest of FY11. In light of the latest development, we also pare our FY11 estimates by 2.0-2.2%. Our fair value also dips slightly from S$3.02 to S$3.01; but due to attractive 7% yield, we maintain our BUY rating.

Rotary Engineering - 2H may not be as strong as thought (DBSVickers)

NEUTRAL Downgraded

S$0.81 Target: S$0.90

Mkt.Cap: S$460m/US$382m

Oil & Gas - Equipment & Svs

• Below; downgrade to Neutral from Outperform. Forming 14% of our FY11 forecast and 15% of consensus, 2Q11 net profit of S$10.2m (-26% yoy) is 50% below our expectation because of lower-than-expected turnover. 1H11 net profit of S$15.5m (-44% yoy) forms 22% of our FY11 number. An interim dividend of 1ct (37% payout) has been declared, as expected. We cut our earnings estimates for FY11-13 by 11-30% on lower revenue and margin assumptions. Our target price accordingly drops to S$0.90, still based on 9x CY12 P/E (5-year peer average), from S$1.26. As 2H11 is unlikely to be as strong as previously thought, we downgrade the stock to Neutral. On the other hand, a projected 5% dividend yield and the stock’s YTD decline of 21% should limit downside risks. We would re-visit the stock on stronger-than-expected orders.

• 2H11 unlikely to be as strong as thought. 2Q11 turnover dropped 27% yoy to S$153m as the landmark S$1bn SATORP project shifts from the engineering & procurement stage to construction. In the procurement phase, there could be spikes in quarterly revenue from the delivery of materials (as seen in 2Q10). However, turnover is now expected to stabilise in the construction phase. We previously anticipated stronger revenue from construction milestone completions. In addition, a slower-than-expected ramp-up of the Fujairah Oil Terminal project (engineering to start in 3Q11) points to a softer 2H11.

• Other highlights. Gross margins expanded 3% pts qoq to 21% on positive cost variances upon project closure. 1H11 cash operating cash outflow was S$30m due to higher working-capital requirements. Consequently, net cash declined to S$35m (6cts/share) from S$96m (17cts). Nonetheless, we expect receivables to reverse in 2H11 as the group receives payment from SATORP.

• Slower-than-expected orders, though a mega-Saudi job has emerged. Order book was S$757m, with the group announcing S$70m worth of jobs from Jurong Island. We understand that prospecting for a Turkey tank-farm project has stopped due to project-feasibility issues. However, Rotary has been prequalified for two tank-farm packages for the US$26bn Ras Tanura integrated project in Saudi Arabia. Bids open in Oct 11 and the results could be known by early 2012.

Venture Corporation - Slower growth and weak US$ (DBSVickers)

HOLD S$7.27

Price Target : S$ 8.10

At a Glance

• 2Q11 net profit of S$42m in line with our estimates

• US$ depreciation continues to be a dampener

• Muted business outlook in the near term

• Maintain HOLD with S$8.10 TP

Comment on Results

In line with recently revised estimates. As we had expected, 2Q11 earnings of S$42m came in almost flat compared to 1Q11. On a yo-y basis, earnings declined 8%, on the back of a 4% decline in revenue to S$629m, largely stemming from the US$ depreciation (down 11% y-o-y). Excluding the impact of the weak US$, revenues would have grown 8% y-o-y, in line with overall volume growth. Except for Networking & Communications segment, all segments registered volume growth y-o-y, with Retail Store Solutions and Test/ Measurement/ Others registering growth of more than 15%. While gross margins remained fairly stable, net margin slipped to 6.6% compared to 6.9% in 2Q10 and 7.0% in 1Q11 due to the impact of the weaker US$ (operating expenses in local currencies).

Recommendation and Outlook

Near term outlook remains muted for Venture. This is partly driven by macro uncertainties in the US and EU. There are also some component shortage concerns affecting volumes for a particular customer. No change to our earnings estimates. 2H11 should be slightly stronger than 1H11, but we still expect bottomline to decline in FY11, partly due to the US$ depreciation. However, we are confident that Venture will be able to sustain dividend payment of S$151m (DPS: 55Scts), which implies a yield of 7.4% at current prices, and provides downside support to share price. Venture currently has net cash reserves of S$136m, after paying out S$151m in dividends during the quarter. Cash conversion cycles normalized to 79 days from 92 days in 1Q11, despite Venture continuing to carry higher component inventories for customers in wake of recent supply chain disruptions.

Hutchison Port Holdings Trust (KimEng)

Background: Hutchison Port Holdings Trust (HPHT) is the largest port operator in the Pearl River Delta region, which in total handled 21.1m TEUs last year, representing 54% of the entire volume handled at deepwater ports. Its business activities mainly involve developing, operating and managing deepwater container ports.

Recent development: HPHT had a better-than-expected set of 2Q results with net profit attributable to unitholders 13% higher than forecast at HK$653.7m. This is due to the cost-cutting measures operationally as well as an increase in contribution from its JV, COSCO-HIT. This implies a distribution rate of HK14.3cents per unit, totalling HK$1,245.4m.

Our view

Largest IPO of the year. HPH was the talk of the town as the largest IPO showcased on SGX this year, with top port operator Hutchison Whampoa as sponsor, as well as an ambitious goal to raise S$5.4b for a three-stage expansion of Yantian Port in East Shenzhen by 2015 and to pay off maturing debt. The trust had forecast EBITDA margins of around 60% for FY11 and FY12. However, investors questioned whether margins were sustainable given the maturing ship-trading environment.

Key concerns. First, Pearl River Delta ports are losing ground to Yangtze ports due to rising labour costs forcing manufacturing businesses to relocate. In addition, China’s PMI dropping 4.2% YTD and weakening consumer demand in the US and Europe are likely to indicate lower throughput volumes in the second half of the year. With the looming possibility of the US losing its triple A rating, the US$ may face more downward pressure in the long run, thus raising forex risks for HPHT.

Projected yields now more attractive. As a business trust, HPHT is committed to paying out 100% of its distributable income in Hong Kong dollar. FY11’s income is estimated to be HK$6,179.65m, which translates to US$5.90 or HK45.88 cents annualised and provides a yield of 7.9%. For FY12, the forecast is US$6.59 or HK51.24 cents, implying an 8.8% yield. The stock currently trades at 27.6x PER and 0.8x P/B.

Key ratios…

Price-to-earnings: 27.6x

Price-to-NTA: 1.1x

Net cash/(debt) per share: HK$2.2

Net cash as % of market cap: 20.9%

Share price US$0.745

Issued shares (m) 8,708.88

Market cap (US$m) 7,402.55

Free float (%) 80.1%

Recent fundraising activities Mar’11 - IPO at US$1.01/unit

Financial YE Dec-31

Major shareholders Hutchinson Whampoa (27.6%), PSA (10.4%), Capital Group (10.05%)

YTD change n.a

52-wk price range US$0.780-1.020

Venture Corporation (KimEng)

Event

Venture’s 2Q11 results were slightly below our lowered forecasts but still significantly below consensus. While consensus is likely to be cut following this set of results, we believe the share price plunge of recent weeks has already factored in the heightened uncertainties. The stock currently trades at 11x current year forecast earnings (below its long-term average valuation of 15x) and 7.6% dividend yield. Maintain BUY.

Our View Revenue fell 4% YoY but net profit fell 9% YoY. Sequentially however, both the topline and bottomline improved. The main culprit behind the YoY weakness was the steep 12% drop in the US$. In US$ terms, revenue actually improved by 8%. Also a factor was component shortages that affected certain customers’ ability to deliver on order commitments.

As expected, Venture’s focus on enterprise products rather than consumer products served

it well amidst the continuing weakness in US consumption. All segments except Networking & Communication showed relatively robust growth, but especially strong were the enterprise-driven Test & Measurement and Retail Store Solutions & Industrial Products segments.

Earlier customer caution has resolved in favour of greater optimism. Despite the weak economic outlook, Venture expects its sequential results to benefit from the higher volume expectations of customers in the more resilient Test & Measurement, RSS & Industrial Products and Data Storage segments. However, with US$ volatility continuing, we have conservatively cut our FY11 forecast further by 7%.

Action & Recommendation

Maintain BUY with the target price lowered to $9.68 (previously $10.40), still based on 15x target valuation.

OCBC – 2Q11 results (POEMS)

HOLD (Maintained)

Closing Price SGD 9.69

Target Price SGD 10.00 (+3.2%)

▪ 1H11 core net profit of S$1.17 billion and revenue of S$2.8 billion met 50% and 47% of our full year forecasts respectively.

▪ OCBC reported 2Q11 NPAT of S$577 million (-13% q-q; +15% y-y). Revenue of $1.41 billion was flat q-q but gained 14% y-y; Results were below expectations.

▪ 27% y-y loans growth resulted in 15% y-y increase in NII. NIMs however fell by 3 bps q-q and by 9 bps y-y to 1.87%.

▪ Expense ratio increased in 2Q11 to 44% and LDR jumped to 89%. ROE and ROA saw quarterly decline to 11.4% and 1.14% respectively.

▪ OCBC announced interim dividend of $0.15, 1 cent below our estimate.

▪ At 1.65x PB, 15x PE and with DY of 3%, OCBC is fairly valued in our opinion. NPAT missed estimates by 3% still we maintain our Hold recommendation and fair value of S$10.00.

The positives:

a. Loans growth was spectacular and resulted in increase in net interest income. NII grew

15% y-y; 5.5% q-q to $827 million, ahead of our expectations by 2%. In FY10, rapidly falling NIMs eroded the positive impact from stellar loan growth. For 2011, flattening of NIMs coupled with continued strong loans growth enable NII to grow. The significant increase in NII for FY11 is somewhat a prelude to the potential explosive growth we can expect when yield curve steepens and NIMs finally begin to edge up.

b. Gross loans grew 27% y-y; 9% q-q to $121 billion. Growth was broad based with large increases to commerce, housing, non bank FI and investment holding companies.

c. Improvement in group’s credit quality saw NPL fall from 0.9% to 0.8% in 2Q11 but we see pockets of weaknesses.

d. Wealth management contributed 25% of group’s revenue versus 22% in previous year. AUM grew 12% in the first 6 months to US$29.6 billion. Despite WM segment being a significant growth driver, we have no further statistics to show the potential of this segment as management refused to share, citing competition issues.

e. OCBC’s Islamic banking segment continues to build strength with another 5 branches expected in Malaysia by end of the year. Group had refocused their branding strategy to target the young bumis.

f. Corporate banking business continued to exhibit strength growing 35% y-y; 10% q-q to $579 million (37% of total revenue). Operating profit after allowances grew 24% y-y; 11% q-q to $379 million. Both net interest income and fee, commission income contributed to bottomline.

The Negatives:

g. NIMs fell by 3 bps to 1.87% in 2Q11 due to shift in loan mix to less risky loans such as

trade-related financing. Competitive loan pricing as well as weaknesses in mortgage loans also contributed to lower NIMs.

h. Though NPL improved, we note pockets of weaknesses. Classified debt securities jumped from $13 million in previous quarter to $110 million. Substandard loans from greater China also increased from $7 million to $26 million and from $46 million to $126 million in Other Asia Pacific region.

i. Expense ratio increased from 41.5% in previous quarter to 43.7% in 2Q11 due to higher staff cost and compensation.

j. LDR currently at 89% which means loan growth either has to slow (management expects 21% y-y growth for FY11) or the deposit base must be ramped up. This may mean increase in cost of funding for the bank which in turn may erode NIMs further.

Other developments:

Insurance revenue fell by 23% q-q to $137 million. Trading income was also lower by 46% q-q to $41 million. The two items resulted in lower earnings but we see these as temporary weaknesses.

Another blip in earnings for this quarter was also due to an increase in portfolio allowances of $56 million. Under MAS regulations, bank has to set aside 1% loan allowances even though the bank does not think default or credit deterioration will occur. Over time however, the larger loan book should see higher contribution from net interest income.

OCBC sees OCBC NISP as a key player to the group’s expansion in Indonesia. Recently there had been a lot of talk about the Indonesian government setting limits to shareholdings in local banks. In general, the international banking community had feedback to the government that such a move may undermine future investments in local entities. But if government insists and the new policy is implemented, It will be a setback to OCBC. We deem it speculative to price such policy changes in our valuation.

Valuations:

Base on previous trading close, OCBC trades at 1.65x PB. Its earnings meet 47% of our FY11

forecast (including divestment gains from property in 1Q11; earnings meet 48.4%), and since

it has not exceed our expectations, there is no reason for an upgrade. Annualised EPS is

$0.664 giving us a PE of 14.6x which is also not particularly. OCBC also announced interim

dividend of 15 cents, 1 cent below our forecast amount. If the bank maintains full year

dividend payment of 30 cents contrary to our expected 32 cents, then dividend yield will only be about 3% vs 3.3%. OCBC is not as attractive compared to DBS (1.3x PB, 12x PE, 3.7%

DY). We hence maintain our HOLD recommendation and fair value estimate of S$10.00.

CapitaLand - More of the same (DBSVikcers)

BUY S$2.80 STI : 3,107.01

Price Target : 12-month S$ 4.34

Reason for Report : 2Q11 Results

Potential Catalyst: Deployment of capital into accretive investments

DBSV vs Consensus: Below

• Results above our estimates but in line with street, lifted

by Singapore and China residential and divestment gains

• Residential activities continue to underpin income stream

• Maintain Buy with TP of $4.34

Within market expectations, above ours. Q2 PATMI came in at $399m, up 17% yoy on a 25% rise in revenue to $740.4m. Excluding revaluations, PATMI would have been $171.3m, +27% yoy. Reported EBIT of $719.6m was 0.5% lower than a year ago but 42.4% higher on a pre-revaluation basis to $608.8m. The bulk of the earnings jump came from divestment gain of a residential site in Shanghai of $102.5m and better profits from Spore and China residential with Spore EBIT seeing a 68% jump to $74.2m on progressive recognition from The Interlace, Wharf Residence and Urban Resort. In China, it delivered 940 residential units at The Loft in Chengdu and The Riviera and Riverside Ville in Foshan in Q2, bringing total delivered in 1H to 1316 units and sold 271 units valued at $565m in Q2 (total 930 units in 1H). No interim dividend was declared.

Spore and China to generate bulk of profit. Looking ahead, underpinning profits in the near term would be residential contributions from Singapore where it will continue to sell/launch ongoing /new projects such as Urban Resort (34% of total 68 sold), The Interlace (65%

sold) and d’Leedon (23% sold) as well as target to launch a new project in Bedok. In China, the company launched 1700 units this year and plans to offer another 2500 units in 2H from new developments such as Dolce Vita in Guangzhou, Imperial Bay in Hangzhou and new units from ongoing projects like Metropolis, Riverside and Beau Residences and The Loft. The Group had committed to $5b of new investments, largely in Singapore, and recycled $595m of capital in 1H11 and expects to exceed this investment target for the full year. Its low current gearing of 0.23x will enable it to tap opportunities that may arise given the uncertain global macro outlook. It will continue to focus in core markets such as Spore, China, Australia and secondary markets in Vietnam, Msia and Europe, while Japan and India remains opportunistic.

Raise earnings but maintain TP at $4.34. We raise our net earnings (pre-exceptional) by 8% to $509m on better clarity on China residential completion schedule. Including revaluation gains, FY11 net profit would be $650m. The stock is currently trading at 0.85x P/bk NAV and 35% discount to our price target of $4.34. We believe rerating catalyst would come from ongoing deployment of its significant balance sheet capacity. Maintain Buy.

Hyflux - Backend loaded growth (DBSVickers)

HOLD S$1.95 STI : 3,107.01 (Downgrade from BUY)

Price Target : 12-Month S$ 2.07 (Prev S$ 2.47)

Reason for Report : Earnings/ TP revision

Potential Catalyst: Contract wins and divestment

DBSV vs Consensus: Sales and revenue significantly below consensus

• 2Q misses but expect China, Tuaspring & Tlemcen O&M to drive a stronger 2H

• FY11/12F revised by –24%/+17% to factor in higher costs & Magtaa pushback to FY12

• Downgrade to HOLD, SOTP TP lowered to S$2.07

2Q11 earnings missed due to weaker sales, higher costs. In tandem with weaker than expected sales of S$111m, PATMI of S$14.5m (-47% y-o-y, 97% q-o-q) came in significantly below our S$27m forecast. 1H made up only 38% of our original FY11F compared to 42% in FY10. Excluding S$1.9m of forex losses, core profit would be S$16.5m. Sales fell 21% y-o-y because Magtaa is winding down and MENA’s contribution has shrunk to 48% of sales from 75% a year back. Although cost controls lifted gross margin to 49.8% from 44% in 2Q10, net margin slipped to 13% from 19% due to higher financing, depreciation and higher effective tax rate. Hyflux maintained interim DPS of 0.67 Scts.

S$1.16bn EPC backlog covers 1.3x FY12 sales. Hyflux has secured S$982m contracts YTD. We are not factoring in any more wins this year. However, there could be small wins along the way as Hyflux continues to pursue projects in China, India and SEA. Meanwhile, nine of Hyflux’s China projects are at various stages of development including near completion or operational soon. Hence, there is scope for asset divestment over the next six months, which could further boost earnings.

Earnings pushed back to FY12, SOTP lowered to S$2.07. In addition to higher costs and taxes, the Magtaa fire will delay some EPC recognition. Hence, we have cut FY11F earnings by 24% and push up FY12F by 17%. For 2H, drivers include continued execution of China projects, start of Tuaspring (~ 15% recognition) in 4Q11 and some O&M flow through from Tlemcen. Notwithstanding higher earnings in FY12, our SOTPbased TP is reduced to S$2.07, in line with lowered market valuations and delayed O&M receipts for Magtaa too. Downgrade to HOLD on limited price upside.

CSC Holdings: A disappointing start (DMG)

(NEUTRAL, S$0.13, TP S$0.12)

CSC’s 1QFY12 earnings was below expectations despite a 8.8% YoY growth in revenue, coming in at S$0.8m, due to margin erosion from higher costs and projects delays/interruption. While order book is strong, standing at S$200m currently and projects aplenty, margins may only pick up in 2HFY12. Thus, we have lowered our FY12 and FY13 earnings forecast by 68.3% and 62.6% to S$5.3m and S$8.6m respectively, to reflect the slower than expected pick-up in gross margins. Downgrade to NEUTRAL with a lower TP of S$0.12 (previously S$0.19), based on

0.85x P/B - the level CSC was trading at post the 2005-2007 construction up-cycle (previously 12x FY12/FY13 blended P/E).

1QFY12 results below expectations. Despite 1QFY12 revenue rising 8.8% YoY to S$84.5m (attributable to an increase in demand for foundation engineering services), CSC turned in a

profit of S$0.8m (down 74.6% YoY), due to margin erosion arising from higher labour costs and interruption/delays in certain projects that was not within the company’s control. As a result, gross profit margin (gpm) dropped from 12% in 1QFY11 to 6.6% this quarter.

Pipeline of projects strong, but at what margins? In 1QFY12, CSC secured >S$100m worth of foundation contracts in Singapore and Malaysia. Order book remains strong, standing at S$200m currently and would be fulfilled over the next six months. In addition, the company is in talks to carry out foundation works at Jurong Island and Tuas and negotiating with main contractors for MRT Downtown Line 3 (DTL3) projects. This validates our view that there is a strong pipeline of projects out there. However, we understand that for those projects secured to date, they are still reflective of the competitive pricing environment. Thus, it may only be in 2HFY12 before we see a pick-up in margins.

Lowering margin assumptions, downgrade to NEUTRAL. With CSC’s strong track record in MRT projects (it clinched four out of 12 MRT stations along the DTL2), it is likely to secure some projects from the upcoming DTL3. However, we cut our FY12 and FY13 earnings to S$5.3m and S$8.6m, largely on the back of a 6ppt reduction in gpm to 8% and 9% respectively (last seven years’ average was 15.5%).

United Envirotech: Entry of KKR a positive catalyst (DMG)

(BUY, S$0.38, TP S$0.51)

United Envirotech’s (UE) 1QFY12 earnings disappointed, falling 16.3% YoY to S$3.5m due to

lower than expected engineering revenue. We reduce FY12 earnings by 24.3% on slower than

expected EPC project wins (-37.6%) but raise FY13 earnings by 10.8% on the back of higher

treatment revenue offset by lower engineering revenue. UE is issuing a convertible bond (CB) to

KKR China Water Investment Holdings Limited’s (KKR). The increase in treatment revenue

estimates is to factor in utilisation of the CB proceeds in the form of new Build- Operate-

Transfer/ Transfer-Operate-Transfer/ Build-Own-Operate (BOT/TOT/BOO) investments. We

believe KKR’s investment into UE is a positive catalyst as it 1) provides UE with relatively cheap funding for its BOT/TOT/BOO investments, 2) enables UE to tap on KKR’s vast network for

resources going forward and 3) reaffirms investors of UE’s track record and long term growth

potential. With the Chinese government’s emphasis on environmental protection, the macro

outlook remains positive in our view. Our new TP of S$0.51 (previously S$0.54) is based on

10.4x FY12/FY13 blended earnings, at least a 7% discount to its larger peers.

Results below expectations. UE’s 1QFY12 earnings fell 16.3% YoY to S$3.5m, due to

revenue coming in 7% lower YoY at S$20.8m, as well as higher expenses. This was attributable

to a drop in engineering income, which was partially offset by higher treatment revenue.

Entrance of a new long term investor. UE is issuing a US$113.8m 5-year 2.5% CB to KKR,

an affiliate of Kohlberg Kravis Roberts & Co. L.P., which is a leading global investment firm with US$61b in assets under management. The conversion price of the bond is S$0.45/share and

the transaction is estimated to be completed by Sept 11. Assuming 100% conversion, there will

be 305m new shares issued, representing ~38.4% of the enlarged share capital. We understand

that KRR’s typical investment holding period is five to eight years and that they would have three new directors to sit on UE’s board (existing seven members).

Impact of convertible bond. Assuming the CB is in the money and the full conversion of the

CB at mid year, UE’s FY12 and FY13 EPS would fall by 24% and 23.7% to 3S¢ and 4.5S¢

respectively.

Parkway Life REIT - Defensive yields (CIMB)

OUTPERFORM Maintained

S$1.90 Target: S$2.11

Mkt.Cap: S$1,149m/US$954m

REIT

• In line; maintain Outperform. 2Q11 DPU of 2.37cts meets Street expectation and our expectation (23% of FY11 estimates). 2Q11 DPU was up 13.3% yoy on revenue contributions from Japanese properties acquired in 2010-11 and higher rentals for Singapore assets. Management announced a minimum guaranteed rent increase of 5.3% (1.73% in previous year) from Aug 11, and a lower all-in cost of debt of 1.65% (from 1.96%). We retain our assumption of S$200m acquisitions, but defer the bulk to FY12. Factoring in higher rental growth and lower interest costs, we adjust our FY11-13 DPU estimates by -2/+5%. Accordingly, our DDM target price rises to S$2.11 (discount rate: 7.2%) from S$1.98. We continue to like PLife for its defensive qualities and good inflation hedge. We anticipate stock catalysts from asset enhancement and earlier-than-expected acquisitions.

• Increase in minimum guaranteed rent. Under its CPI + 1% rental revision formula for Singapore assets, their minimum guaranteed rent has been increased by 5.3% for the year commencing 23 Aug 11. This is higher than the prior year’s increase of 1.73%, on the back of rising inflation in the preceding 12 months.

• Lower all-in cost of debt. Management has extended interest-rate swap hedges for an average of 3.5 years on 45% of its loan portfolio to lock in low interest rates. Annual interest savings are estimated at S$1.5m (S$0.6m for FY11), or 2% of distributable profit. This lowers the REIT’s all-in cost of debt to 1.65%, the lowest among SREITs.

• Still awaiting acquisition catalysts. Management has identified Malaysia as a place for acquisitions, but remains cautious because of global uncertainties. We expect more headway in its negotiations with sponsor Khazanah on the potential acquisition of Pantai’s healthcare assets towards late 2011. We understand that management is still looking out for assets from the sponsor and third parties and thus defer part of our assumed acquisitions to 2012. Low asset leverage of 34% still offers debt headroom of S$261m to management’s mid-term gearing target of 45%.

PEC Ltd - Cash rich; initiate with BUY (OCBC)

Initiating Coverage BUY

Current Price: S$1.025

Fair Value: S$1.22

Specialist engineering service provider. PEC Ltd (PEC) provides engineering, project management and maintenance services to the oil & gas, petrochemical and pharmaceutical industries through its two main operating segments: (i) project works (FY10: 73% of total revenue) and (ii) maintenance services (FY10: 27%). It is led by Executive Chairman Ms Edna Ko, Group CEO Mr Robert Dompeling and Managing Director Mr Wong Peng, each having more than 20 years of experience in the oil & gas, and/or oil and chemical industries.

Established track record. PEC's established track record helps the group to secure orders, and it has successfully executed a number of projects in Singapore, UAE and China. Its core competences are in the fabrication and installation of piping structures and engineering, procurement and construction (EPC) services for plants/terminals. Its major customers include multinational engineering firms and major oil companies, such as Chiyoda Corporation, ExxonMobil and Shell Eastern.

Credit and liquidity risks. The group may be exposed to some credit and liquidity risks as it generally offers customers credit terms of 30-45 days. In the event that its customer defaults, the group may need to write off part of its debts. If the customer delays on its payments, the company may be faced with a liquidity squeeze.

Geographical concentration in Singapore. PEC's operations are predominantly in Singapore, which accounted for 83% of its total revenue as of FY10. This makes it highly susceptible to event risk in Singapore. If competition within Singapore's Jurong Island persists or intensifies, the group's profitability may be heavily affected. Changes in Singapore's foreign labour policy may also lead in higher labour costs or manpower constraints.

Large war-chest of cash. The group currently holds S$168m of cash and cash equivalent, amounting to 56% of total assets as of Mar 11. The large war-chest, largely due to unutilized IPO proceeds and internally generated capital, provides PEC with the flexibility to make large capital expenditures or look for strategic acquisitions or joint ventures if opportunities arise.

Initiate with BUY. Our fair value estimate for PEC is S$1.23, based on a 6.4x industry-average PER on its forward 12-months EPS. We feel that current valuation is undemanding and the group has substantial cash (S$0.67 cash per share). Potential price catalyst could come from contract wins and/or successful acquisitions.

Singapore Airlines - Cloudy skies are behind (DBSVickers)

BUY S$12.24 STI : 3,130.34

Price Target : 12-Month S$ 15.00 (Prev S$ 16.20 Ex-Div)

Reason for Report : Change in earnings estimates and TP.

Potential Catalyst: Stronger demand, load factors or yields.

DBSV vs Consensus: We are 8% above consensus for FY12 on stronger sequential earnings recovery

• Expect stronger quarters ahead

• Still in net cash of S$4bn ex-div, with potential for more value enhancing moves

• Pro-active moves to regain market share

• Maintain BUY, our TP is adjusted to S$15 (1.3x FY12/13 P/BV) from S$16.20 previously

1Q earnings weak but expect better ahead. 1QFY12 PATMI of S$45m came in below our forecast of S$150m, as yield improvement was slower than expected amid the strong S$. Still, 1Q is seasonally the weakest for SIA and we are expecting stronger quarters ahead on sequentially higher load factors and yields. Adjusting for weak 1Q numbers and lower capacity growth for FY12, we cut our FY12 and 13 forecasts by 23% and 16% to S$934m and S$1,070m respectively.

Firm balance sheet and growth initiatives are also positives. We like SIA’s moves to gain more market share in both its traditional network carrier segment as well as a fresh venture in the LCC market. This includes a tie-up with Virgin Australia (VA) to allow SIA access to VA’s 30+ destinations in Oceania as well as the setting up of an independently branded and managed mid-to-long haul low cost carrier within a year.

With c.S$3.30 net cash per share after paying out the final dividend of S$1.20, SIA remains in a strong financial position to further enhance shareholder value, by a) returning excess cash, b) paying out a consistently high level of dividends or c) making value accretive acquisitions.

Maintain BUY. Our 12-month target price for SIA is adjusted to S$15 as we lower our P/BV multiple from 1.4x to 1.3x to account for the lower ROE (on lower earnings projections), based on blended FY12/13 estimates. Key risks would include a double-dip in the US economy or further softness in Europe or a sudden spike in fuel price.

Overseas Union Enterprise - More to come (CIMB)

OUTPERFORM Maintained

S$2.87 Target: S$3.93

Mkt.Cap: S$2,817m/US$2,336m

Property Devt & Invt

• Below; but more to come later. 2Q11 core net profit of S$20m forms 15% of our FY11 forecast and 11% of consensus, with 1H11 earnings at 31% of our forecast. The miss was due to lower income from OUEB and delays in the sale completion of Crowne Plaza (CP) – a timing issue. OUEB is now 77% leased while the sale of CP was only recently completed. We expect much stronger numbers in 4Q11-1Q12. We adjust our core EPS estimates by -9%/+4% to reflect this. Elsewhere, strong hotel revenue mirrored industry trends. We reiterate our expectation of a 28-30% yoy income surge in 2012-14 as its acquisitions start to deliver. Maintain target price of S$3.93 (15% discount to RNAV). Higher RevPar, additional office precommitments and more accretive acquisitions (debt headroom of S$1bn-1.5bn on 45-50% adjusted net gearing) could provide stock catalysts, in our view.

• More income to come from OUEB and Crowne Plaza. 2Q11 revenue surged 40% yoy to S$72m, though this still fell short of our estimate as OUEB contributed less while there were no contributions from CP, a timing issue. We understand that BOA-ML, the anchor tenant of OUEB, will only move in by 1Q12. New tenants were recently signed up for the office block which include Hogan Lovells (law firm) and UBP (Swiss bank), lifting pre-commitments from 68% to over 77%. The retail component of OUEB (OUE Tower and OUE Link) is also fully tenanted. No income from CP was booked in 2Q11 as the acquisition was only officially completed on 25 Jul, three months longer than expected. We expect OUE to starting reporting much stronger earnings in 4Q11-1Q12.

• Mandarin Orchard continued to do well; DBST starting to make full-year contributions. The strong revenue growth was bolstered by a 7% yoy increase in Mandarin Orchard’s revenue and contributions from DBST. RevPAR for the former inched up 3% yoy to S$233. Occupancy is believed to be 82-85%. We understand that OUE wants to expand its average day rates beyond S$300 by end-2011. Rents at DBST are still at S$5psf levels but could be substantially uplifted in 2013-14 once old leases expire and a proposed retail podium becomes operational.

• Interim dividend. OUE has proposed an interim dividend of 2cts. Management was previously committed to a payout of at least 50% every year.

Hutchison Port Holdings Trust - DPU in line; deep value at these levels (DBSVickers)

BUY US$0.735

Price Target : US$ 1.05 (Prev US$ 1.15)

At a Glance

• DPU of 14.3HKcts (1.84UScts) for first period in FY11 in line with our estimates and above IPO guidance

• Lower-than-expected revenues offset by lower operating and interest expenses

• FY11 DPU estimate unchanged; Lower FY12 DPU by 3% to reflect economic concerns

• Maintain BUY; TP adjusted lower to US$1.05

Comment on Results

No surprises in DPU. Revenues of HK$3400m for the 3-and-half month period (16 Mar to 30 Jun 2011) was lower than expected on account of disappointing throughput growth at both ports, but net profit and distributable cash was boosted by cost and interest savings. Staff costs and Trust expenses were well contained, and depreciation and amortisation were also lower than expected, though these were offset by higher tax recognition (deferred tax credits). Interest costs came in significantly below estimates as floating interest rates remained much lower than our conservative assumptions. Income from associates and JVs was boosted by better performance at COSCO-HIT, where throughput growth outperformed assumptions.

Recommendation

Slightly lower growth trajectory but combination of yield and growth still attractive. For the period under consideration, throughput growth disappointed, with HIT and Yantian Port registering 4.6% and 2.1% y-o-y growth, respectively, lower than our 6-8% initial estimates. And there is no evidence of a strong peak season as yet, owing to economic uncertainties in the US and EU. As our economist cuts US GDP growth to 1.6% in 2011 and 2.5% in 2012, we revised down our volume growth assumptions in FY11/12 to 4-5%. However, ASP trends remain intact and since cost savings will largely offset volume weakness in FY11. We keep our 2H11 DPU estimate of 2.9UScts unchanged but cut our FY12 DPU estimate by 3% to 6.4UScts. Maintain BUY with revised DCF-based TP of US$1.05 (lower DPU CAGR of 7% over FY11-15). Management re-iterated their commitment to pay out 100% of distributable income. Current valuations – ~8% dividend yield is even higher than what some infrastructure and shipping trusts are trading at – look unjustifiably low given HPH Trust’s superior asset profile, earnings quality, balance sheet strength and organic growth potential.

Elec & Eltek - No disappointment in dividends (CIMB)

NEUTRAL Downgraded

US$3.56 Target: US$3.60

Mkt.Cap: US$668m/US$668m

• Below; cutting forecasts and downgrade to NEUTRAL from Outperform. Excluding one-off US$5m expenses for its dual-listing in 2Q11, 2Q11 core net profit of US$17.1m (-29% yoy) is 24% below our estimate due to lower-than-expected GP margins. 1H11 core net profit of US$32.6m (-23% yoy) forms 40% of our forecast. We have cut our FY11-13 profit forecasts by 9-22% to factor in lower GP margin assumptions. Accordingly, our target price drops from US$4.03 to US$3.60, still based on 8x CY12 P/E. We downgrade the stock to NEUTRAL as its share price has done well, outperforming the market by about 20% (including a 25 USct final dividend) YTD. We see support from its sustainable attractive dividend yields.

• Revenue inched up 8% yoy to US$168m in 2Q11, on the back of higher HDI board sales and a better sales mix that lifted weighted ASPs. HDI sales formed 13.9% of sales in 2Q11 vs. 8.1% a year ago. Sales of 2-6 layers and eight layers & above made up 61.5% (67.1% in 2Q10) and 24.6% (24.7%) of the total, respectively.

• EBITDA margins contracted 6.8% pts yoy to 17.8% in 2Q11, dragged down by a 5.8%-pt decline in GP margins. The drop was precipitated by higher raw-material and wage costs. Together with one-off expenses relating to its dual listing in Hong Kong, net profit plunged 50% yoy to US$12.0m.

• Net gearing still low at 0.16x (0.04x at end-March); interim dividend intact. E&E still generated about US$5m of positive free cash flow in 2Q11. Net gearing increased due largely to the final dividend paid during the quarter. It declared an unchanged interim dividend of 15 UScts.

• More subdued seasonal uptick in 2H11. We understand that order intake remained healthy at the beginning of 3Q, especially for HDI boards where E&E is still operating at full capacity. Thus, E&E will continue invest in more HDI capacity. Its new plant in Yangzhou is on track for completion by year-end. In the near term, we expect more subdued hoh growth in 2H11 on the back of a slow economic recovery in the US and European markets.

CSC HOLDINGS - A disappointing start (DMG)

NEUTRAL

Price S$0.13

Previous S$0.19

Target S$0.12

CSC’s 1QFY12 earnings was below expectations despite a 8.8% YoY growth in revenue, coming in at S$0.8m, due to margin erosion from higher costs and projects delays/interruption. While order book is strong, standing at S$200m currently and projects aplenty, margins may only pick up in 2HFY12. Thus, we have lowered our FY12 and FY13 earnings forecast by 68.3% and 62.6% to S$5.3m and S$8.6m respectively, to reflect the slower than expected pick-up in gross margins. Downgrade to NEUTRAL with a lower TP of S$0.12 (previously S$0.19), based on 0.85x P/B - the level CSC was trading at post the 2005-2007 construction up-cycle (previously 12x FY12/FY13 blended P/E).

1QFY12 results below expectations. Despite 1QFY12 revenue rising 8.8% YoY to S$84.5m (attributable to an increase in demand for foundation engineering services), CSC turned in a profit of S$0.8m (down 74.6% YoY), due to margin erosion arising from higher labour costs and interruption/delays in certain projects that was not within the company’s control. As a result, gross profit margin (gpm) dropped from 12% in 1QFY11 to 6.6% this quarter.

Pipeline of projects strong, but at what margins? In 1QFY12, CSC secured >S$100m worth of foundation contracts in Singapore and Malaysia. Order book remains strong, standing at S$200m currently and would be fulfilled over the next six months. In addition, the company is in talks to carry out foundation works at Jurong Island and Tuas and negotiating with main contractors for MRT Downtown Line 3 (DTL3) projects. This validates our view that there is a strong pipeline of projects out there. However, we understand that for those projects secured to date, they are still reflective of the competitive pricing environment. Thus, it may only be in 2HFY12 before we see a pick-up in margins.

Lowering margin assumptions, downgrade to NEUTRAL. With CSC’s strong track record in MRT projects (it clinched four out of 12 MRT stations along the DTL2), it is likely to secure some projects from the upcoming DTL3. However, we cut our FY12 and FY13 earnings to S$5.3m and S$8.6m, largely on the back of a 6ppt reduction in gpm to 8% and 9% respectively (last seven years’ average was 15.5%).

Ascendas India Trust - Post NDR take-aways (DBSVickers)

BUY S$0.945 STI : 3,130.34

Price Target : 12-Month S$ 1.05

Reason for Report : Post NDR update

Potential Catalyst: Acqusitions/strong operational results

DBSV vs Consensus: In line with consensus expectations for rental growth, new completions

• Strong S$ erodes underlying earnings growth

• Acquisition/development completions to underpin strong DPU growth profile over FY12-13F

• Maintain BUY, DDM-based TP of S$1.05

Strong S$ had an impact on an otherwise strong operational performance. While Ascendas India Trust (“a-itrust") performance in INR terms showed growth 11% in topline in 1QFY12, the strong S$, which appreciated against the INR by 10%, eroded its reported numbers, leading to topline and net property income coming in +1% y-o-y and –7% y-o-y to S$31.2m and S$17.6m respectively. Distribution income was also 10% lower at S$11.5m (DPU of 1.5 Scts) due to additional finance expenses incurred for the development of the new buildings (Zenith, Park Square and Voyager), while rental income has yet to be fully recognized as occupancy levels are still being ramped up with a majority of tenants currently doing fit-outs. We moderate our DPU assumptions slightly to account for lower S$-INR exchange rate (1S$ : INR 35.5 from 35 previously) and delayed revenue recognition from its newly completed properties.

Acquisitions and development projects to contribute more significantly. The forward growth picture remains robust given the expected execution of its acquisition and development projects over next few years. This is projected to boost DPU by up to c11% p.a. over FY12-13F. Earnings growth is likely to be driven by: (i) 3 recently completed buildings totaling 1.7m sqft SBA (25% of its enlarged portfolio) which should be fully leased in the coming quarters; (ii) earnings from the expected completion of the acquisition of 2 operating buildings in Hi-City (renamed to aVance Business Hub); and (iii) the planned development of a 500,000 sqft multi-tenanted office development in ITPB.

Maintain BUY, S$1.05 TP. While a strong S$ will likely be a drag on earnings in the near term, we see a-itrust ‘s FY12-13F DPU CAGR of 11% as attractive, with upside risk on execution of acquisition & development pipelines - from 3rd parties and its sponsor - in order to continuing growing its portfolio size in the longer term.

Sri Trang Agro-Industry (KimEng)

Background: Sri Trang Agro-Industry (STA) is one of the world’s largest natural rubber processors based and listed in Thailand. It made its debut on Singapore Exchange (SGX) by way of a dual listing in January this year at a price of $1.20 per share. The group sells a variety of rubber products including Ribbed Smoke Sheet (RSS), Technically Specified Rubber (TSR) and latex.

Recent development: Trading volume on the SGX has been disappointing since its debut and the stock has hovered in the same price range despite announcing a strong set of 1Q11 results.

Our view

A significant global player. STA is one of the world’s largest natural rubber processors. In 2010, its sales volume accounted for 8% of global demand and 16% of Thailand, a major rubber-producing country’s production volume. It is also a major exporter to China, making up 12% of the country’s import that year.

Big and becoming bigger. To capitalise on the growth of rubber estates in Northern Thailand, STA is expanding capacity from 860,000 tonnes to 1.5m tonnes per annum. This will increase its global market share from 8% to 15%. Management sees continued demand for TSR rubber which is used to make car tyres. Other than China, it expects India to be a new major market to drive demand growth going forward.

Upstream ambitions. STA currently has about 1,700ha of rubber plantation land with only 2% or 34ha mature for tapping. Another 600ha are under gestation and will be ready for tapping in seven years’ time. The group is aiming to acquire land in Northern Thailand as well as Indonesia, Cambodia and Laos.

Key ratios…

12-month trailing PER: 7.7x

Price-to-book: 1.9x

Dividend per share: na

Net debt/equity: 129%

Share price S$1.23

Issued shares (m) 1,280

Market cap (S$m) 1,574.8

Free float (%) 46.9

Recent fundraising activities Share offering in Singapore @ $1.20/share, 280m shares, raised $336m

Financial YE 31 Dec

Major shareholders Sincharoenkul family including Managing Director – 53.4%

YTD change +2.5%

52-wk price range S$1.03-1.32

Yangzijiang Shipbuilding (KimEng)

Event

Yangzijiang Shipbuilding (YZJ) saw its share price retreating by more than 6% this week after its peer, Cosco Corp, dropped a bombshell on investors when it announced much weaker-than-expected 2Q11 results. With Chinese shipbuilders facing lingering headwinds amid uncertain outlook in the bulk/containership market, YZJ is our preferred pick in the sector for its execution track record, cost leadership and undemanding valuation. Reiterate BUY.

Our View

YZJ is confident of achieving at least 30% YoY growth for 1H11 (results to be released on 11 August) in view of the timely delivery of its vessels. This puts it on track to meet our full-year earnings forecast. Nevertheless, it would imply earnings growth of just 6% YoY in 2Q11 (or net profit of RMB850m) given that the group has already reported a 62.8% increase in 1Q11.

Cosco was hit hard by rising steel and labour costs, particularly with regard to its shipbuilding division. This was exacerbated by other macro uncertainties such as the appreciating renminbi against the US dollar and rising interest rates in China. We do not think YZJ will be immune to this predicament even though it is acknowledged as one of the more efficient shipyards in China.

Having said that, we reckon YZJ should be able to keep its gross margins steady at around 23% in FY11 (compared to 22.5% a year ago) as it continues to recognise high-margin orders secured prior to the global financial crisis. In line with management’s guidance, we have also assumed lower margins going forward. We estimate that a 100bps decline in margin would cause net profit to contract by about 4.4%.

Action & Recommendation

Despite being a leading shipyard in China, YZJ’s stock currently trades at a steep discount of over 30% to its domestic peers. We believe its controversial RMB10b investment in financial assets is weighing on the share price. We are switching to the SOTP valuation methodology to better reflect the group’s dual earnings stream. We maintain our BUY recommendation but with the target price lowered to $1.80.

CREATIVE (Lim&Tan)

S$2.85 - CREAF.SI

• Creative continues to destroy shareholder value with 4Q to June’11 loss of US$19.7mln, widening from year ago’s loss of US$11.7mln and quarter ago’s loss of US$13mln. Full year loss of US$47mln widened from last year’s US$39mln.

• As a result of the loss and higher working capital requirements, operating cash flow was negative US$63mln, widening from last year’s negative US$28mln and after capex and dividends, cash holdings fell from US$214mln to US$163mln.

• Looking ahead, despite the lowered operating expenses from last year’s restructuring efforts, management said that they will continue to lose money due to weak demand for their products.

• Full year dividend was halved to 5 cents a share.

• The stock continues to make new 52 week lows currently at $2.85, having broken below the Mar’09 low of $3. Its all time low of $2.54 was hit in late 2008, shortly after the collapse of Lehman Brothers.

• With no signs of a turnaround, we expect the stock to remain in its well entrenched downtrend channel established since mid-2009.

• Maintain SELL.

ELEC AND ELTEK (Lim&Tan)

S$3.56 - ELEC.SI

• Even excluding the one-off US$5mln dual listing charge, 2Q2011 bottom-line would have still declined 29% yoy to US$17mln (-50% yoy if included), deteriorating from 1Q2011’s 12% yoy decline. This is despite top line having grown 7.6% yoy to US$168mln.

• The weaker bottom-line performance reflects higher raw material, labor and SG&A costs reflecting the inflationary environment in China. Other factor include the continued strength of the RMB and higher finance costs.

• Looking ahead, notwithstanding the uncertain macro environment caused by the debt problems in the US and Europe, management said that their overall order in-take is showing modest growth as they enter the seasonally stronger 3Q2011. However, management warned that there continues to be many challenges ahead.

• With 1H2011 net profit of US$28mln only accounting for 33% of full year consensus estimate (versus 51% last year), we believe there is likely to be downside risks.

• Notwithstanding this, there is likely to be near term support for the share price as despite the lower profit (-34% yoy if we include the dual listing expense and -22% if we exclude it), the company maintained its interim dividend of US$0.15 a share, representing a payout ratio of 100% versus 66% last year.

• Since the stock started its dual listing in Hong Kong on 8 July 2011, its share price in Hong Kong has been on a consistent decline from high of HK$32.3 to yesterday’s close of HK$28.3, which is equivalent to US$3.63.

• In Singapore, the stock has similarly been on a consistent downtrend since its dual listing started in Hong Kong, having declined from US$4 to yesterday’s close of US$3.56.

• Our last call in early July’11 ahead of its dual listing in Hong Kong was to “Take Profit” anywhere close to the US$4 level as all previous dual listing candidates in Hong Kong have seen their share prices declined shortly after their dual listings there.

• With the stock having declined 11% since then, we believe it will likely be held up in the near term by its interim dividend. We are thus changing to Neutral now.

PARKWAY LIFE (Lim&Tan)

S$1.90 - PLIFE.SI

• What likely justifies yesterday’s new high for the hospital reit is disclosure that the minimum guaranteed rent from the 3 hospitals (Mt E, Gleneagles and East Shore) will rise 5.3% in the Aug 23’11 - Aug 22’12 period over the previous lease period.

• This is as provided under the arrangement with Parkway Holdings when PLife was first set up (and which we would not rule out Khazanah Nasional which now owns Parkway Holdings, “hoping / wanting” to undo at some point). And this in turn makes PLife an “inflation play”.

• Otherwise, there is little new in the June quarter numbers released this morning: Distributable Income rising 13.4% y-o-y (reflecting contributions from acquisitions in 2010) but 0.1% q-o-q. DPU is 2.37 cents or 9.48 cents annualized. Gearing is 34%, allowing for more acquisitions, last being in Japan, where PLife now has 29 nursing homes and 1 healthcare production facility.

• Based on DPU of 9.37 cents for the 12 months to Jun’11, and annualized DPU of 9.48 cents, yield is 4.9% and 5% respectively.

• Given PLife’s unique structure, a BUY can still be justified.

OCBC - Strong loan expansion but NIM under pressure (KimEng)

BUY

Price S$9.88

Previous S$10.60

Target Under Review

OCBC recorded 2Q11 net profit of S$577m, up 15% YoY, QoQ and down 8% QoQ. This is close to ours and consensus expectations of S$607m and S$603m respectively. We will review our earnings forecast and recommendation after the analyst briefing later.

Continued NIM squeeze but loans expanded strongly. Net interest income rose a marginal 6% sequentially, driven by loan expansion of 9.4% QoQ. General commerce loans rose 33% QoQ and accounted for 14% loan share. Group NIM of 1.87% was 3 bps narrower QoQ, due to the persistent low interest rate environment, strong growth in well-collateralised, lower yielding loans linked to trade, and housing loan price competition. NIM was also squeezed for its regional operations, with OCBC(M)’s NIM of 2.29% down 10 bps QoQ and OCBC NISP’s down 37 bps QoQ to 4.68%.

Fees and commissions performed well. Non-interest income grew 13% YoY, and declined 11% QoQ. Fees and commissions rose 9% QoQ, driven by service charges, trade-related fees and remittances. Wealth management fees recorded a 10% QoQ decline. However, we continue to see strength in OCBC’s private banking business, with assets under management rising 12% in the first six months to US$29.6b.

Operating expenses rose 11% YoY and 6% QoQ to S$618m due to higher staff costs from headcount growth, salary increments, and sales commissions and incentive compensation linked to stronger business volumes.

Asset quality and CAR remain robust. NPL ratio improved to 0.8% from 1Q11’s 0.9%. OCBC remains well capitalised, with a Tier 1 CAR of 15.4%, and total CAR of 17%, well above regulatory minimums of 6% and 10% respectively.

OCBC declared an interim dividend of S$0.15 for 1H11, similar to the 1H10 interim dividend. This represents 43% of core net profit. The Script Dividend Scheme will be applicable to the interim dividend.

Singapore Exchange - Derivatives-led improvements (DBSVickers)

BUY S$7.35

Price Target : S$ 9.50

At a Glance

• 4Q11 earnings of S$79.5m, brought FY11 net profit to S$295m. Excl one-off ASX-SGX-related expenses, FY11 net profit was S$312m - in line.

• Weaker securities market dragged revenues y-o-y but was offset by improved derivatives revenues (despite weaker US$)

• Final DPS of 15 Scts declared (4 Scts was base DPS) led to FY11 DPS of 27 Scts or 90% payout of core earnings.

• Maintain Buy with S$9.50 TP.

Comment on Results

4Q11 earnings grew 3% q-o-q excluding the non-recurring ASXSGX related expenses. Overall revenues were weaker q-o-q from lower securities and derivatives volume and values. But, derivatives revenues were at a record high on a full year basis from higher volumes, thanks to new products coupled with higher market share for existing products, despite the weaker US$. The Nikkei225, CNX Nifty and FTSE China A50 posted record transaction volumes for the year. Other revenues from higher market data subscriptions rose hand-in-hand with increased connectivity and co-location services. Higher institutional settlements also added to other revenues. New memberships increased but we understand that benefits flowing into revenues normally lag by approximately a year. Expenses have started to taper off q-o-q as SGX reached the peak of its technology-related capex activity which will accrue benefits over time from its new derivatives platform, OTC clearing platform (allowing the clearing of interest rate swaps) and a data centre. SGX will launch its new securities trading platform on 15 Aug. Capex for FY11 was at S$57m, a steady increase since FY09, while depreciation costs also inched up over the three years. SGX is guiding for S$40-45m capex for FY12, largely relating to necessary replacements and replenishments while depreciation costs would range between S$42-43m. The all-day trading which began on 1 Aug contributed 6.5%/8% of total volumes on 1 Aug/2 Aug. IPO pipeline remains strong although the ultimate listing of these companies would depend on market conditions.

Recommendation

SGX is trading at 21x FY12 EPS, below its 5-year historical mean, vs. regional peers at 28x FY12 EPS. Our TP is based on the Dividend Discount Model assuming 90% dividend payout, 8% growth and cost of equity of 11.6%, which implies 27x target PE to FY12 EPS of S$0.35.

ST Engineering Ltd - Margins recover in 2Q11 (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$3.05

Fair Value: S$3.58

Margins recover in 2Q11. ST Engineering's (STE) 2Q11 revenue fell 2.2% YoY and 5.3% QoQ to S$1484.3m, with lower revenues from the Electronics and Marine sectors partially offset by higher revenue in Aerospace sector. Despite the revenue decline, gross profit climbed 5.6% YoY and 10.9% QoQ to S$327.5m, which in turn improved its gross margin to 22.1% from 18.8% in 1Q11 (20.4% in 2Q10). Also aided by a 54.4% YoY jump (+81% QoQ) in share of associates profit, net profit grew 5.3% YoY and 17.5% QoQ to S$130.5m. For 1H11, revenue rose 6.0% to S$3051.5m, meeting 48.4% of our FY11 forecast, while net profit grew 11.5% to S$241.6m, meeting 47.0% of our full-year estimate. STE also declared an interim dividend of S$0.03/share (unchanged from last half year), payable on 2 Sep 2011.

Aerospace is star performer in 2Q11. For the quarter, Aerospace (+1.0% YoY, +12.0% QoQ) was the star performer, with revenue coming in at S$504m, although it did feel some impact from the weaker USD. Electronics (+1.0% YoY, -28% QoQ) was mixed with revenue of S$318m; the softer QoQ showing was due to lower value project milestone completions. Land system reported fairly softer revenue of S$350m (-14% YoY, -2% QoQ) due to lower scheduled project deliveries YoY. Marine sector posted a revenue of S$258m (+5.0% YoY, -5% QoQ), where it saw higher YoY Shiprepair revenue but weaker QoQ Shipbuilding revenue.

Expects higher 2H11 PBT. Going forward, management expects to achieve comparable revenue and higher PBT in 2H11 versus 1H11. As of end June, the group is sitting on an order of S$10.8b, with S$2.3b to be delivered in 2H11. For Aerospace, STE expects 2H11 revenue to be comparable, PBT to be higher. For electronics, 2H11 revenue is likely to be lower, while PBT comparable. For Land Systems, both revenue and PBT are expected to be higher. For Marine, it expects lower revenue but higher PBT. For FY11, management expects to achieve comparable revenue and higher PBT.

Maintain BUY with S$3.57 fair value. In line with the latest guidance, we see the need to pare our FY11 revenue estimate by 4.7% and earnings by 0.9% (we are also reducing our FY12 revenue forecast by 4.9% and earnings by 1.0%). However, as we are pushing out our valuations from 21x FY11F EPS to blended FY11/12F EPS, our fair value actually increases slightly from S$3.57 to S$3.58. Maintain BUY.

Singapore Technologies Eng Ltd - Good performance slightly marred by weak US$ (CIMB)

OUTPERFORM Maintained

S$3.05 Target: S$3.88

Mkt.Cap: S$9,316m/US$7,753m

• Broadly in line; maintain Outperform. 2Q11 net profit of S$130.5m (+5% yoy) meets our expectation and consensus, with 1H11 net profit of S$241.6m (+11% yoy) forming 45% of our FY11 forecast. Qoq profits improved for all segments, with Aerospace leading the growth. An interim DPS of 3.0cts has been declared, representing a 70% payout (1H10: 73%). Our earnings estimates and target price of S$3.88 are unchanged (blended DCF, P/E, and dividend-yield valuations). Amid challenging macro conditions, management is optimistic that 2H11 would be stronger. STE is trading at 15x CY12 P/E, a 16% discount to its 5-year historical average despite a steady 3-year earnings CAGR of 7% and strong ROEs of above 30%. We see catalysts from a stronger MRO pick-up for Aerospace.

• Strong Aerospace performance. Powered by Components & Engine Repair (CERO) and Engineering & Materials (EMS), Aerospace turnover climbed 12% qoq to S$503m while PBT improved 20% qoq to S$68m. Yoy, turnover was flat but PBT rose 17%. With airlines rolling out previously-delayed maintenance schedules, management anticipates CERO to be the biggest beneficiary in the short term.

• Electronics boosted by satellite sales. Though revenue dropped 11% qoq to S$318m (weaker large-scale ground communications sales), PBT rose 11% qoq to S$36m on higher-margin satellite sales.

• Land Systems and Marine benefited from better sales mixes which resulted in strong qoq growth. PBT margins for Land were stable qoq at 9% while Marine’s margins grew 60bp qoq to 11% largely from an improvement in shipbuilding margins of 7% (1Q11: 3%).

• Slightly marred by weak US$. If not for a declining US$, management said 1H11 net profit would have grown 16% yoy vs. the reported 11%. For every 1% weakness in US$, STE’s PBT could be affected by S$3m. On the other hand, US$ weakness helps US aerospace operations to be more cost-competitive, especially in tendering for jobs in Europe.

• Management is upbeat on 2H11, powered by stronger Aerospace, Land Systems and Marine. Order book dipped to S$10.8bn (from S$11.3bn in 1Q11), of which S$2.3bn is expected to be delivered in 2H11.

Wilmar International - Raising cooking oil prices in China (DBSVickers)

BUY S$5.85 STI : 3,177.09

Price Target : 12 months S$ 6.25

Bloomberg yesterday reported that Wilmar was raising its cooking oil prices in China by an average of 5%. This was confirmed by the company which had informed their dealers yesterday of the c.5% price (average) increase across their range of cooking oil products and that the price increase is effective from yesterday.

In July 2011, we estimated that the removal of the price cap were to restore Wilmar's Consumer segment margin back to c.US$40/MT (i.e. to levels before price controls were imposed in Nov 2010, vis-a-vis US$33 in 1Q11), Wilmar's FY11F and FY12F net profit would increase by 1.1% and 2.3%, respectively.

However, raw material prices have since increased, and in our view a 5% increase this time may no longer restore its margin back to US$40/MT. Therefore, assuming that net ASP is the same as the raw material cost, a 5% increase would raise Wilmar's FY11F and FY12F net profit by 0.7% and 1.1%, respectively. In our estimates, Wilmar's Consumer segment contributes approximately 31% and 6% of Wilmar's FY11F Revenue and EBIT, respectively. Hence, while we see this development as positive for Wilmar, the impact is insignificant, in our estimation.

Wilmar will announce its 2Q11 results on Friday, 12 Aug11 and we will be reviewing our numbers then. For now, our Buy rating and S$6.25 TP are unchanged.

OCBC - GEH 2Q11 results in line (DBSVickers)

BUY S$10.01 STI : 3,177.09

Price Target : 12-month S$ 12.10

• GEH’s 2Q11 earnings was dragged by lower nonpar fund life assurance profit but is within expectations when imputed in our OCBC forecasts.

• OCBC’s 2Q11 results to be released tomorrow.

• OCBC is a Buy with S$12.10 TP

2Q11 GEH net profit dragged by lower non-par fund life assurance profit. Great Eastern Holdings’ (GEH) 2Q11 net profit stood at S$118m (-26% q-o-q, +58% y-o-y). Weaker q-o-q earnings were attributed to lower non-par fund profits. This was expected due to relative movements of lower long-term bond yields coupled with a larger decline in long-term swap rates, narrowing the spread between the long-term swap rates to SGS yields. Fees and other income improved q-o-q from its asset management business, Lion Global Investors. Expenses were however higher from increased headcount and staff costs for expansion purposes. Compared to a year ago, earnings were 58% higher as performance in 2Q10 was dented by debt concerns in Europe. Imputing GEH’s 2Q11 net profit in our OCBC estimates, numbers were largely in line.

OCBC’s 2Q11 results to be released tomorrow (4 Aug, am). We estimate OCBC’s 2Q11 net profit at S$601m (-4% q-o-q, +19% y-o-y) driven by net interest income. While we expect loan growth to be fairly robust for OCBC, we believe NIM would be stable. Wealth management via Bank of Singapore (BoS) is scaling up, providing support for overall non-interest income. Overall trading income is expected to be volatile. We had highlighted that GEH’s contribution would be lower in 2Q11 (reasons mentioned above). Operating costs would likely inch up in 2Q11 on higher headcount and salary revisions. Meanwhile, provisions are expected to remain benign. Similar to its peers, additional provisions would largely relate to general provisions rather than specific. We expect NPL ratios to remain stable given that it is already at an all time low at 0.9%. OCBC guided Basel III core equity Tier-1 CAR at 10.8%, comfortably above the new MAS requirement of 9% (including the conservation buffer). We expect OCBC to declare an interim DPS of at least 15 Scts.

OCBC remains our preferred pick for Singapore banks. We still prefer OCBC (Buy, TP S$12.10) to UOB (Buy, TP S$23.50) for stronger non-interest income traction. OCBC’s performance has lagged its peers YTD.

China XLX Fertiliser - Better results, but no cheers yet (CIMB)

NEUTRAL Maintained

S$0.34 Target: S$0.39

Mkt.Cap: S$340m/US$283m

• Good enough but not bullish yet. 2Q11 results prove our point that changing trends have indeed been turning the quarters around. 2Q11 core net profit of Rmb38.1m (+86% yoy, +80% qoq), though below consensus, meets our expectation, reflecting a better sales mix and ASP increases. 2Q11 and 1H11 core EPS forms 24% and 37% of our FY11 forecast respectively, in line as they reflect seasonality. The ASP improvements and stabilising margins are commendable but not reasons to turn bullish just yet, as we remain wary of costlier coal input and fund-raising needs from aggressive expansion. ASPs as a whole could still be volatile because of overcapacity in China while methanol producers are still confronting cost pressures. Our earnings estimates are unchanged, so is our target price of S$0.39, still at 7x CY12 P/E, a 50% discount to peers.

• Better sales mix with improving margins for all. 2Q11 revenue jumped 50% yoy to Rmb943m as a result of higher urea and compound fertiliser volume and higher urea, methanol and compound fertiliser ASPs. Gross profit increased to Rmb123m (+95% yoy) as compound sales volume increased 144% yoy. This was made possible by the shutdown of only Plant 3 for maintenance in 2Q11 vs. all plants shut down in 2Q10. Overall, we note a deliberate shift in the sales mix in favour of compound fertilisers where margins are higher than urea, in 2Q11. This paid off as blended GP margins outpaced cost escalation, backed by ASP hikes.

• Balancing fortunes. As 3Q is the seasonal peak for urea and especially compound fertilisers, profitability in 3Q11 should be better than in 2Q11. We note a moderate recovery in urea gross margins for two consecutive quarters from 4Q10 to 2Q11 due to higher urea prices and lower coal prices. Urea ASPs should stay firm in 3Q11 from the re-opening of the export window. While management will be focusing on the construction of a fourth plant (to be completed in FY13) which is meant to improve cost efficiencies, we remain cautious. We are concerned about the accompanying surge in finance expenses as borrowings and interest rates increase, given a debt-filled balance sheet.

Cerebos Pacific Ltd - Short-term blip (CIMB)

OUTPERFORM Maintained

S$5.33 Target: S$6.65

Mkt.Cap: S$1,688m/US$1,400m

• Below; maintain Outperform with lower target price of S$6.65 (from S$7.30). 2Q11 net profit of S$16.2m (-19% yoy) forms 14% of our FY11 estimate, with 1H11 net profit at 38% of our forecast. The main culprits were: 1) a product recall in Taiwan, Hong Kong, and Singapore; and 2) increasing raw-material costs. We believe the after-effects could persist in 2H11, though Cerebos’s longer-term growth outlook should be unaffected. We cut our earnings estimates by 2-20% for FY11-12 to reflect lower sales and higher costs, which brings down our SOP target price to S$6.65 (from S$7.30). Nevertheless, maintain Outperform as we still anticipate catalysts from stronger-than-expected sales growth further out.

• Sales rose 10%; operating margins declined 8%. Despite its product recall, sales growth was 14% yoy for health supplements. There was growth in its main markets of Thailand (+29% yoy), Malaysia (+35% yoy) and Singapore (+11% yoy). Food & Coffee turnover was roughly flat (+4% yoy, including translation gains). Operating margins were, however, down due to higher raw-material costs and provisions made for product recalls.

• Product recall in Taiwan, Hong Kong, and Singapore. Brand’s tablets were taken off the shelves due to the presence of plasticizers. Management has given the assurance that stringent quality control is in place and this incident was related to supplies from an indirect manufacturer. We can expect increased A&P spending to repair its brand image and higher provisions. However, the blip should be shortterm, given a long-established brand name in its markets.

• Increasing coffee, sugar & bird’s nest prices weighed on operating profit (-8% yoy). We expect the pressure to persist in 2H11, mitigated by management’s ability to pass on the higher prices to corporate customers Also, the unprofitable Riva product range has been dropped, and Toby’s Estate (coffee outlet) is set to open in Singapore in 2H11.

• Dividend policy sustainable. Its historical dividends of 25cts should be sustainable. Cerebos had been paying up to 90+% of its earnings in the past, and had net cash of S$92m at end-Jun 11.