Keppel Corporation - 3Q2011 Results Review & Update (AmFraser)

BUY (maintained)

FAIR VALUE: S$10.67

LAST CLOSE: S$8.78

(Previous S$10.13)

Keppel reported net profit of $406.1 million for 3Q2011, a 33.3% increase over the corresponding period last year. This was above market consensus of about $355.5 million. Higher profits came from its Offshore and Marine (O&M) and Property divisions. Revenue was up 18% to S$2.7 billion.

For the first nine months, Keppel’s net profit surpassed the billion dollar mark reaching S$1.12 billion, 15% higher than the corresponding period. Revenue was up 4% to S$7.28 billion.

We expect Keppel to see strong contribution from its offshore and marine division given its strong order books secured. To date, the division secured $8.7 billion worth of new orders . The demand for deep sea exploration will also create additional works and contracts for Keppel.

On the property front, Keppel should also see profit contribution from its Keppel Bay development and also from China and Vietnam projects. Its prime office portfolio in Ocean Financial Centre and Marina Bay Financial Centre still enjoy healthy demand.

For its infrastructure division, KIE involvement in the water reclamation project in the Tianjin Eco City development should also reap longer term benefits for the group. The expansion of the Keppel Merlimau cogen project will also be a booster to the group bottomline when completed in 2013.

We are revising upward our profit forecast to $1.44 billion from $1.3 billion for FY2011 and to S$1.52 billion for FY2012. On PE valuation, the stock is trading at reasonable 10.9x (2011) and 10.3x (2012) which is below the sector PE of about 15x.

We have raised our fair valuation for Keppel to S$10.67 from $10.13 (based on the sum of parts valuation). We maintain our Buy recommendation for Keppel.

Results Review

Keppel achieved a 33.3% rise in net profit of $406.1 million for the 3Q 2011 which was above the $355.5 million estimated by analysts. For the first nine months, profits was up 15.4% to $1.12 billion. Earnings per share was 22.8 cents.

Group revenue in 3Q2011 of $2,702.1 million was 18.1% above that of the corresponding period in 2010 of $2,287.3 million due to higher revenue from the Offshore & Marine (O&M), Property and Infrastructure divisions .

At the operating level, Group 3Q profit of $524.3 million was 42.4% above that of the corresponding quarter in 2010. Operating margins improved to 19.4% from 16.1% due mainly to higher margins from its offshore and marine division.

Going Forward

Offshore & Marine Division secured $8.7 billion of new orders to date. The net order book stands at $9 billion with deliveries into 2014. The strong momentum in order flows was supported by strong utilisation and day-rates for high-specification jackups as well as increases in exploration and production budgets. There are also good demand for deepwater exploration in the next few years.

In the Infrastructure Division, expansion of the Keppel Merlimau cogen power plant from 500MW to 1,300MW is progressing and on schedule for completion by 2013. The rising global focus on sustainable urbanisation will translate into demand for solutions in clean water and waste management. Keppel Integrated Engineering has also entered into a joint venture to build, own and operate a water reclamation plant in Tianjin Eco-City.

Keppel T&T also expects growth in Asia to drive demand for logistics and data centres, and will focus on providing integrated logistics services in selected regional markets and building a portfolio of high quality data centre assets.

Keppel Land has launched its residential site in Sengkang with good takeup. In China, Keppel Land China has acquired a prime residential site in Wuxi for the development of about 2,500 apartments. The Group’s portfolio of prime office buildings in Ocean Financial Centre and Marina Bay Financial Centre Phase 2 still enjoys healthy demand.

Frasers Centrepoint Trust - Fine end to a record year (CIMB)

Current S$1.46

Target S$1.65

Previous Target S$1.63

Up/downside 13.59%

FY11 ended on a high note for FCT, aided by a rebound in occupancy and rental reversions from a partially-refurbished Causeway Point. We continue to like its resilient suburban retail exposure and see the refurbishment of Causeway Point as a key game-changer. FY11 DPU was spot on for us though slightly above consensus. 4Q11 DPU forms 28% of our estimate on stronger Causeway Point contributions. We raise our DPU estimates and DDM-based target price (discount rate 8.4%) on lower interest costs. Maintain Outperform.

Positive rental reversions; strong occupancy

We expect a further pick-up in occupancy at Causeway Point and positive rental reversions. 4Q was marked by a sharp recovery in occupancy there and rental reversions (8.6% for FY11, 7.9% for 4Q11, 7.2% for FY10) for its portfolio. Occupancy at its other assets also held up above 95%.

Causeway Point a potential game-changer

Having gone through the most intensive period of AEI with good rental reversions for refurbished space, Causeway Point could change the game for FCT in FY12. Occupancy surged to 92% from a trough of 69% in 2Q and is expected to sustain above 90% in FY12. With 65.5% of the refurbishment completed, work should henceforth be less disruptive, given its progression to higher levels.

Pleasant surprise from lower costs of borrowing

Interest cost savings should continue. Management refinanced its S$260m 4.12% p.a. CMBS in July and hedged this at a low interest cost of 3.09%. This brought effective borrowing rate down to 3.0% from 3Q’s 3.8%. Refinancing of its S$75m MTN due in 2012 should generate further savings, given a high cost of 4.8%. After the drawdown for the Bedok Point acquisition and revaluation of its portfolio, asset leverage was a healthy 31%.

Keppel Corporation - O&M continues to deliver (DBSVickers)

BUY S$8.78 STI : 2,694.01

Price Target : 12-month S$ 10.14 (Prev S$ 10.38)

Reason for Report : Revision of earnings forecasts, TP, introduce FY13 forecasts

Potential Catalyst: Order wins, better than expected margins

DBSV vs Consensus: Above on higher margins

• 3Q11 PATMI of S$406m in line with our expectations, above consensus; 9M11 makes up 75% of our FY11F

• O&M shines while the offshore market continues to firm up

• Maintain BUY, TP lowered to S$10.14

3Q11 in line; O&M shines again. KEP posted 3Q11 recurring PATMI of S$406m (+33% y-o-y) and 9M2011 PATMI of S$1.1bn (+15% y-o-y), forming c. 75% of our FY11 earnings forecast. O&M continues to deliver, with EBIT margins surprising on the upside, at 26% (+7.0ppt y-o-y), offsetting weaker-thanexpected contributions from both the Property and Infrastructure divisions.

Offshore fundamentals firming up. Notwithstanding the fact that several options had lapsed with 3 options remaining, industry fundamentals continue to firm up, with utilisation rates up across all rig classes. While the current uncertain macro environment could lead to a temporary deferment of orders, this is accounted for by our FY12 order wins assumption of S$5.0bn. This is premised on slower but positive global GDP growth. Petrobras orders remain the wild card not captured by our numbers, for which KEP could win orders for up to 6 semisubs, worth a total of US$3.6-4.2bn.

Earnings forecasts intact. We keep our FY11/12F largely intact and introduce FY13F, for which we project a 2% rise in earnings. We have assumed FY13 O&M order wins of S$5.0bn, in line with KEP’s historical average. We expect efficiency gains accumulated over the past few years of deliveries and from many repeat designs will place KEP on firm ground to generate higher EBIT margins of 16%, from 10-12% pre-2009.

Maintain BUY, TP lowered to S$10.14. Our SOTP-based TP for KEP is lowered to S$10.14(base case TP) on reduced valuation for its listed affiliates, partially offset by rolling forward our PE valuation to 13x of FY12F for the O&M and Infrastructure division. In the event macro uncertainties unfold into a recession scenario, our recession TP of $7.42 takes into account reduced contract wins of S$3b and valuation for O/M pegged at 8.7x PE. KEP remains our preferred pick among the large-cap O&M names in Singapore for its healthy order backlog, diversified earnings stream, solid execution track record and market leadership position as the yard of choice for newbuild jackups and semisubs.

First Ship Lease Trust - Progress towards refinancing borrowings (DBSVickers)

HOLD S$0.31

Price Target : S$ 0.34 (Prev S$ 0.43)

At a Glance

• 3Q11 DPU maintained at 0.95UScts, though distributable cash flow improves on sequential basis

• Progress made towards refinancing existing borrowings

• Yields look attractive but maintain HOLD pending the outcome of refinancing exercise and efforts to deploy 2 product tankers from spot market to long-term leases

Comment on Results

Spot market product tanker performance disappoints but cash flow shores up by new TORM leases. As a result of full-quarter lease revenue from the two newly acquired vessels leased to TORM, revenue was up 22% to US$28.6m. On a q-o-q basis though, revenue was flat as the product tankers on spot market performed weaker. Cash earnings were boosted 16% y-o-y and 11% q-o-q to US$15.6m due to the accretive TORM deal and lower interest expenses following the expiry of covenant waiver period in 2Q11. After loan repayments of US$7.2m, net income available for distribution was up 38% y-o-y to US$8.4m, but management decided to maintain DPU of 0.95UScts for the quarter.

Recommendation

Loan refinancing is the first priority. With one tranche of close to US$240m maturing in April 2012, and another tranche of US$243m maturing in March 2014, management has decided to refinance the entire outstanding amount with a partially amortising 6-year loan. Firm commitments have been secured from a group of 6 lenders (both existing and new) for 90% of the amount and management is hopeful of securing the rest by the end of FY11. We estimate spreads for the new loans will be significantly higher than existing 125-145bps, pushing up interest costs. And with loan amortisation payments to be made every quarter, DPU growth may be limited. Pending finalization of and details of the refinancing exercise and a long-term lease solution to end the earnings volatility from the 2 product tankers trading on the spot market, we retain our HOLD call on the stock. Our TP is revised down to S$0.34 (14% target yield) as we account for the higher risk environment. Upside may be capped by recent round of equity placement at S$0.35.

Frasers Centrepoint Trust - Expect another high note (DBSVickers)

BUY S$1.46

Price Target : S$ 1.76 (Prev S$ 1.73)

At a Glance

• FY11 DPU of 8.32 Sct was slightly above our expectation of 8.2 Sct

• Revenue to trend up supported by multipronged growth engines; gearing healthy at 31%

• Good defensive stock; maintain BUY, TP raised slightly to S$1.76

Comment on Results

FY11 DPU of 8.32cts at a record high. On a y-o-y basis, 4Q11 revenue and NPI rose 5.1% and 13.7% to S$34.1m and S$25.3m respectively on the back of strong portfolio performance and partial completion of the AEI works at Causeway Point. Portfolio occupancy strengthened from 87.6% a quarter ago to 95.1% and the group renewed 34,161sf of retail space at 7.9% higher than the preceding rents. Consequently, distribution income rose 10.8% to S$18.3m, translating to a DPU of 2.35 Scts. There was net revaluation gain of S$97.2m, largely from Causeway Point and North Point at slightly compressed cap rates (lowered by 10 to 25bps), as well as Bedok Point bringing portfolio value to S$1.7bn or book NAV of S$1.40/unit (+8.5% y-o-y).

Revenue drivers all set for next year. Going forward, we expect to see steady income growth from (1) full year contribution from Bedok Point from 1QFY12 - expected to add about S$7m p.a. at NPI level; (2) progressive completion of AEI works at Causeway Point and reopening of the refurbished sections at the basement, level 1 and 2; (3) ability to continue to drive rental reversions with 35% of its portfolio NLA up for renewal in FY12. 98% of the leases have step-up rental clauses and we expect 3-5% rental reversion in FY12; and (4) interest savings from refinancing of the S$80m revolving loan.

Recommendation

Yield for FY12 at 6.1%, Maintain BUY. We continue to like FCT for its pure exposure to the resilient and stable suburban market. Balance sheet remains robust with 31.3% gearing. We nudge up FY12F DPU by 1.6% after including the additional income from Bedok Mall. Maintain BUY with a slightly higher DCF-based TP of S$1.76 as we roll our numbers forward into FY12.

Ascott Residence Trust - Still going strong (DBSVickers)

BUY S$1.01

Price Target : S$ 1.34

At a Glance

• 3Q DPU of 2.23 Scts in line (YTD 3Q 77% of estimates)

• 4Q11 performance could moderate sequentially from a seasonally weaker quarter in Europe

• BUY Call maintained, TP S$1.34 based on DCF

Comment on Results

3Q11 DPU of 2.23 Scts in line. Revenues and gross profits grew by 57% and 89% to S$73.0m and S$40.0m respectively, largely fueled by revenues from 28 serviced residences acquired in Oct’10 which offset the loss of income arising from divestments. On a same store basis, topline was S$0.5m (or 1% lower) due to weaker Japan & Vietnam, offset by strong Singapore operations. Portfolio wide RevPAU increased 11% yoy to S$146/night. NPI margins improved to 55% (vs 45% a year ago) mainly due to the inclusion higher-margin master leases and an improvement in RevPAU portfolio wide. Distributable income came in 112% higher yoy at S$26.3m lifted by interest savings from refinancing activities. DPU grew by only 21% to 2.33 S cts on a larger unit base.

4Q11 to moderate sequentially. Portfolio performance has remained fairly consistent and strong since the beginning of 2011 with Singapore and London continuing to enjoy the aftereffect of the group’s refurbishment works supported by strong underlying demand for rooms. Both markets saw RevPAU hikes in excess of 11% and other markets remained relatively stable. Its Japan’s operations also came off its low with 23% qoq improvement in RevPAU. Looking ahead, we understand demand for rooms will continue to remain strong, but performance will moderate slightly in 4Q on a sequential basis as Europe moves into a seasonally weaker quarter (where guests profile mix is largely lower-yielding leisure guests).

Un-locking value at Somerset Grand Cairnhill could be re-rating catalyst, BUY TP S$1.34. We believe a divestment of Somerset Grand Cairnhill Singapore is likely if it is to be redeveloped. This transaction will unlock value for ART, empower the REIT with firepower to make opportunistic acquisitions. ART trades at an attractive 0.8x P/BV and offers FY11-13F yields of >8.5%

Ascott Residence Trust: Defensive master leases (OCBC)

3Q results in line. Ascott Residence Trust (ART) announced a 3Q11 distribution of S$25.3m, up 112% YoY. The distribution per unit amounted to 2.23 S-cents. This came in broadly in line with our expectations as 3Q11 distribution income made up 26.3% of our FY11 forecast. 3Q11 topline of S$72.9m, up 57% YoY, was also in line and constituted 25.7% of our annual estimates. We saw revenue improve YoY mainly due to an additional S$31.7m contribution from 28 properties acquired in Oct 10, partially offset by the divestments of Ascott Beijing and Country Woods. We continue to see YoY expansion in gross margin to 55% in 3Q11 from 45% in 2Q11 on the back of higher margins for master leases and higher rental rates.

Portfolio performance buffered by master leases. The 28 properties on master leases and management contracts with minimum-guaranteed income (out of 64 portfolio properties) contributed 46% of 3Q11 gross profit. We continue to believe that the longer weighted average tenure of these leases (~7 years) will inject stability into earnings and buffer ART against potential macro volatilities in the UK and France where the bulk of exposure is. For properties on management contracts, we continued to see pressure on a YoY same-store basis in China, Indonesia and Vietnam. As a result, 3Q11 revenues on a same-store basis decreased 1.2% YoY to S$41.3m. Group 3Q11 REVPAU increased 11% YoY, however, fueled by improved performances in Singapore and the UK.

S$393m to be refinanced in FY12. As of end 3Q11, ART's gearing was stable at 41.4% with a relatively well spread-out maturity profile. We expect about 35% (S$393.1m) and 11% (S$123.2m) of ART's debt to be rolled over in FY12 and FY13, respectively. The bulk of the group's debt is denominated in Euros (48%) and Japanese Yen (25%) and evenly distributed between floating (54%) and fixed debt (46%), which puts ART in a relatively neutral position in terms of currency and interest rate exposure.

Maintain BUY at revised S$1.13 fair value. We continue to see value in ART given defensive earnings from master leases and management contracts with minimum-guaranteed income. In addition, its portfolio is diversified across geographically which would buffer earnings somewhat against regionspecific weaknesses. We also expect redevelopment details for the Somerset Grand Cairnhill Singapore to be a potential upside catalyst. Given heightened macro uncertainty, however, we lower our REVPAU assumptions for management contracts and update our country-specific discount rates to reflect increased macro-risks. Hence we revise our fair value estimate to S$1.13 from S$1.35 previously but maintain BUY.

Mapletree Logistics Trust: Another display of robustness (OCBC)

Within expectations. Mapletree Logistics Trust (MLT) produced a good set of 3Q11 results, which was within our expectations. Revenue grew by 25.4% YoY to S$68.3m, driven by contributions from accretive acquisitions, positive rental reversions of 22% and improvement in occupancy rate to 99% (98% in 3Q10). While NPI increased at a slightly slower pace of 23.7% due to higher number of multi-tenanted buildings and repair works, amount distributable to unitholders was up 29.7% on lower other expenses and partial distribution from divestment gains of 9 and 39 Tampines. This translates to a DPU of 1.69 S cents (+9.7% YoY due to enlarged unit base), or an annualized yield of 7.8%. For 9M11, revenue and DPU tallied S$196.4m and 4.84 S cents respectively. These formed 75.6% and 77.8% of our full-year estimates (74.7% and 71.2% of consensus), respectively.

Strong capital management. As at 30 Sep, the group's aggregate leverage was at 41.3% (relatively unchanged from 40.6% in 2Q), still healthy in our view. Subsequent to 3Q, management also updated that it had successfully refinanced JPY17b (S$281m) of debt maturing in 2012 by extending its maturity to 2018. This substantially improved its average debt duration from 2.7 to 3.7 years and brought down its proportion of debt maturing 2012 from 31% to 14%. Hence, we do not foresee any major refinancing risk in the coming year.

Diversified portfolio to provide stability. Going forward, MLT cautioned that the Asian economies are not likely to escape unscathed with a deepening euro zone debt crisis and stagnating US economy. As such, it will remain watchful of the evolving environment and maintain a disciplined approach towards investment activities. However, management added that it is still seeing active customer enquiries and high rate of renewal/ replacement of expiring leases thus far (88% of NLA due for renewal has been renewed YTD). Moreover, it expects its diversified portfolio and healthy weighted average lease to expiry of six years to provide relative stability in its operating performance.

Maintain BUY. MLT is also focusing on asset management initiatives to identify growth opportunities and optimize yield. On this front, the group identified 21/23 Benoi Sector as a suitable redevelopment opportunity (which may potentially add 70,000 sqm GFA to its portfolio). While more details will only be announced in due course, we are positive on this development as it clearly shows MLT's proactive approach to enhance value. We maintain our BUY rating on MLT with revised fair value of S$1.07 (S$1.06 previously), after factoring in the 3Q results.

Keppel Corporation: 3Q11 results slightly above expectations (OCBC)

3Q11 net profit slightly above expectations. Keppel Corporation (Keppel) reported an 18.1% YoY rise in revenue to S$2.7b and a 33.3% increase in net profit to S$406.1m in 3Q11, such that 9M11 figures accounted for 74% and 78% of our full year estimates, respectively. Results were also better than the street's expectations. Operating margin in the O&M segment was strong at 26.0% in 3Q11 compared to 19.0% in 3Q10. At the pre-tax level, the O&M division saw a 10% increase in net profit to S$1.06b in 9M11, while infrastructure registered a 42% rise to S$108m due to better performance from Keppel Energy. However, the property division reported a 21% fall in pre-tax profit to S$334m with lower share of profit from associated companies.

Not affected by turmoil in the financial markets. According to management, enquiries for new rigs continue to be healthy and the level remains the same compared to three months ago. The group also has not felt the impact of a credit crunch, as customers so far have not exhibited any difficulties in making milestone payments. Despite the uncertainty in the financial markets, fundamentals in the oil and gas industry remain sound due to favourable demand and supply dynamics. However, if the situation in Europe deteriorates and drags down sentiment further, oil prices could dip to US$60-70bbl over the short term, slowing new order flows.

Backed by strong order book. Keppel O&M has secured S$8.7b worth of orders YTD, topping our new order estimate for the year. The net order book stood at S$9b as at 30 Sep 2011 with deliveries extending into 2014. The group still has three outstanding rig options, all of which will expire by the end of this year. Management revealed that they all belong to rig operators, and we estimate the combined value of these options to be around S$2b.

Sees good prospects for deepwater solutions; maintain BUY. Keppel is optimistic with regards to the demand for its deepwater solutions with the projected increase in capital expenditure for the next few years. Drilling in the North Sea has also been revitalized by new major oil finds, and the Gulf of Mexico is seeing a return to normalcy with more permits being issued. Meanwhile, as we roll over our valuation to FY12F earnings and update the market value of the group's listed entities, our fair value estimate slips from S$12.12 to S$12.02. Maintain BUY.

Guthrie GTS Limited (KE)

Background: One of the oldest companies in Singapore (founded since 1821), Guthrie GTS Limited is a mini conglomerate engaged in property, investments, engineering and leisure businesses. It owns a 50% stake in Jurong Point I and II, estimated to be worth close to $1.2b, and some office and retail units at The Adelphi.

Recent developments: Guthrie entered into a framework agreement with Asia Retail Mall Limited (ARML) on 10 October 2011 to monetise its investment gains in ARML I, II and ARMF II Tampines for $124.4m in cash and convert ARML into a perpetual corporate fund vehicle, known as Pramerica AsiaRetail Limited. It has received shares worth $30.8m, representing a 1.9% stake in Pramerica AsiaRetail.

Our view

Minimal involvement. Pramerica AsiaRetail will be managed by Pramerica Real Estate Investors. Its initial portfolio of assets will consist of six suburban retail malls (with a connected office tower) in Singapore, namely, Tiong Bahru Plaza, Century Square Shopping Centre, Hougang Mall, White Sands Shopping Centre, Tampines 1, Liang Court and Central Plaza, as well as four suburban retail malls in Malaysia. Guthrie’s involvement in the management of these malls is through an existing mall management company, AsiaMalls Management Pte Ltd.

Opportunistic player. Together with joint-venture partner Lee Kim Tah Holdings, Guthrie still owns Jurong Point I and II whose value has yet to be unlocked. It is currently developing a commercial property near the Paya Lebar MRT station in conjunction with Low Keng Huat and Sun Venture Commercial. On the residential property front, it is developing an 806-unit public housing project in Yishun, called Adora Green, under the Design, Build and Sell Scheme. Guthrie appeared opportunistic in its recent ventures and was quick to lock in gains in the case of the sale of strata office units at The Adelphi.

Return cash to shareholders? Guthrie made fair value gains of $125.7m in 1H11 and will likely book $124.4m (11.5 cents per share) in realised gains for the divestment of investments in ARML, II and ARMF II in 2H11. A potential catalyst is the return of cash to shareholders, though the return of all cash gains is unlikely due to its current development commitments.

Key ratios…

Price-to-earnings: 4.2x

Price-to-NTA: 0.6x

Dividend per share / yield: $0.025 / 5.5%

Net (cash)/debt per share: $0.44

Net gearing: 0.6x

Share price S$0.45

Issued shares (m) 1,077.9

Market cap (S$m) 485.1

Free float (%) 29.6

Recent fundraising Nil

Financial YE 31 December

Major shareholders Anthoni Salim and Putra Masagung (GA1821 Pte Ltd) 68.9%

YTD change +0.38%

52-wk price range S$0.375-0.536

Keppel Corp (KE)

Event

Keppel Corp’s 3Q11 net profit came in strongly at $406.1m, up 33.3% versus 3Q10. This was ahead of our and market expectations. The offshore and marine (O&M) division is still the star performer, with margins improving further. While the market may be concerned about future orders for O&M, Keppel continues to strongly execute and capitalise on what it has in hand. Maintain BUY with the target price raised to $12.60.

Our View

The O&M division achieved revenue growth of 23.6% QoQ and EBIT growth of 33% YoY, with margins rising from 24% to 26%. Keppel’s margin improvement continues to be driven by higher efficiencies and better pricing on more recent orders. We expect margins to continue to trend upwards and probably plateau at around 28%.

While Keppel Land is expected to record a gain of $492.7m from the divestment of Ocean Financial Centre to K-REIT, the impact on Keppel Corp at the group level is neutral due to eliminations from both these companies in its stable.

Year-to-date, the O&M division has secured new orders worth some US$7b and its current orderbook stands at around US$7.2b. Management contends that the outlook remains good, with enquiry levels high, despite the current uncertain economic outlook. This reinforces our positive view on the long-term demand for offshore assets.

We also remain optimistic about Keppel’s prospects in Brazil. However, we have yet to factor this into our earnings in view of the uncertainty surrounding the timing of the award of contracts.

Action & Recommendation

We raise our earnings forecasts by 6.5% for FY11 and 5% for FY12. While cash flow has turned negative due to higher working capital requirements, management does not see this as an impediment to its dividend payout potential. Our FY11F yield stands at 4.1%. Our SOTP-based target price is raised to $12.60 from $11.88 on the back of the upward earnings revisions.

Sabana Shari’ah Compliant REIT – 3Q FY11 Results (POEMS)

Buy (Maintained)

Previous Closing Price S$0.905

Target Price S$1.080 (19.3%)

• 3Q11 revenue $17.4m, NPI $16.6m, distributable income $13.6m

• 3Q11 DPU of 2.14 cents

• Incorporated new acquisitions and raised DPU by 1.5-1.8% for FY12-15

• Increased cost of equity to 10% to account for heightened macro-economic risks

• Maintain Buy recommendation but trim target price to $1.080

3Q FY11 results

Sabana REIT reported slightly higher gross revenue and net property income, with an increase of 0.1% q-q to $17.4m and $16.6m respectively in 3Q11. Distributable income was $13.6m, 1.5% q-q lower than previous quarter due to higher other trust expenses. With a dip in distributable income, DPU pared down to 2.14 cents. The cumulative DPU for the reporting period between January and September was 7.36 cents, forming c.72% of our FY11 DPU estimates. Sabana’s portfolio was revalued to $901.3m, up 5.9% from $851.0m last year. Owing to the revaluation surplus, NAV per share inched up to $1.08 inclusive of distributable income as at end-September 2011, from $1.00 as at end-June 2011.

Hit $1 billion asset value set forth in IPO

Four industrial properties were acquired in 3Q11, with a combined GFA of 634,085 sq ft and worth approximately $132.3m. Coupled with the existing property portfolio, the asset value marginally surpasses the $1 billion target and uplifts the aggregate GFA to 3.9 million sq ft. The purchases were wholly funded by debt and therefore DPU accretive. With the incorporation of the purchases, DPU for FY12-15 rose in the range of 1.5-1.8%. While the gearing ratio is expected to increase to c.32.2% upon completion based on our model. This leaves Sabana REIT with a debt headroom of c.$130m given 40% leverage.

Brace for economy slowdown

Singapore’s PMI New Orders and New Export Orders contracted four months in a row, putting a brake on manufacturing sector. The anticipated repercussion will weigh on the demand as industrialists will be more cautious in their expansion plans given the grim global manufacturing data. On the back of heightened recession risk, some industrialists may choose to give up some spaces to save on occupancy costs. 2012 will be challenging year as about 15 million sq ft of industrial space is expected to come on stream. Capital and rental values for industrial property market are likely to stall by the end of 2011. Mild correction in industrial property prices and rents could be on the cards if negative feedback loop in the global economies continued to prevail.

Valuation

All 19 properties except 9 Tai Seng Drive are signed under master lease agreement, with next renewal still a distance (2013) from now. This will bring along income stability to the unit holders. On a side note, we assume occupancy to drop in 2013 as the head tenant may not renew the contract when the bulk of the master leases are to expire. Hence, FY13 DPU will slide down but recover in FY14 and FY15. Another takeaway is that Sabana REIT will keep refinancing risk at bay as loan will only mature in 2H 2013. However, we raised the cost of equity to 10% to take into consideration of escalating macro-economic risks. This trims our target price to $1.08 and it still warrants a buy call with a potential upside 19.3%.

China Animal Healthcare Ltd - In Search of Greener Pastures (AMFraser)

BUY

F A IR V A L U E : S $ 0 . 39

LAST CLOSE: S$0.27

Previous: BUY Previous: S$0.345

Potential delisting from SGX. China Animal Healthcare (“CAH”) announced they are evaluating a potential delisting from the SGX whilst continuing to maintain their primary listing on the HKEx. They have consulted the SGX who has no objection to any potential delisting, as long as various conditions are met. We believe that if the move is successful, CAH will see a significant jump in share price when primarylisted in Hong Kong.

Unique proposition on HKEx. CAH’s peers in the animal drugs and vaccine business in China are listed on the Shanghai and Shenzhen stock exchanges—they do not have direct comparables on the HKEx. This makes their primary listing a unique proposition for Hong Kong investors. Their peers listed on the Chinese stock exchanges are trading at an average 12-month historical PER of 30x (see exhibit 1). This compares favourably with CAH’s current PER of 13.5x. We believe Hong Kong investors can better appreciate CAH’s business model and ascribe a valuation closer to their Chinese-listed peers.

Re-rating potential. Since 2007, many SGX-listed companies with core businesses in China have delisted from the SGX and re-listed in Hong Kong. Want Want China Holdings, a Taiwanese food manufacturer, delisted from the SGX in 2007 to re-list on HKEx in 2008 after a corporate re-organisation. Their PER on re-listing in Hong Kong was ~20x FY08E earnings, compared to 10-15x historical PER while trading on the SGX. In 2009, Sihuan Pharmaceutical Holdings, a manufacturer of cardiovascular drugs, achieved an almost 10-fold increase in valuation following their US$741 million IPO in Hong Kong. For sofa manufacturer Man Wah Holdings, despite a weaker IPO sentiment in March 2010, they still managed to double its PER upon relisting. Having said the above, we should still caution that CAH’s case is not a conventional de-list-then-re-list exercise, and hence, may not generate the same outsized buzz.

Good business outlook. A delisting exercise without a good fundamental story is naturally futile. With increasing affluence among the Chinese middle-class, the macro story of strong chicken meat and pork demand remains intact. The ever-present threat of inflation also causes farmers to be more concerned with the survival of their livestock. Hence, barring any unforeseen natural disasters, demand for animal drugs and vaccination should continue to be strong. Within the industry, CAH remains the market leader in powdered drugs with the largest sales and technical staff of ~1800. Their vaccine segment is also performing well, and going into FY2012, we expect the FMD vaccine to overcome the initial hiccups.

Raise FV to 39 SG cents and maintain BUY. We change our valuation methodology from DCF to a PER peg of 14x to FY2011 estimated EPS (adjusted for FV gain in derivative instrument) of 2.8 SG c. This gives us an FV of 39 SG cents. As this is still a 44% premium over the last close price of 27 SG cents, we maintain our BUY recommendation.

K-Reit Asia - Expected move, unexpected timing (DBSVickers)

HOLD S$0.93 STI : 2,724.69

Price Target : 12-Month S$ 1.32

Reason for Report : 3Q results, company update

Potential Catalyst: Improved global economic conditions

DBSV vs Consensus: Slightly below

• Results in line, 9M DPU forms 78% of our FY11F estimate

• OFC acquisition, a long-term strategic positive

• Limited near term sector catalyst; maintain Hold

In line with expectations. 3Q gross revenue and NPI declined by 14.5% y-oy and 16.3% to S$18.6m and S$14. 6m respectively due to the sale of KTGE Towers, which was partially offset by contributions from its Australian portfolio. The 4.6x increase in associates’ contribution (one-third stake in MBFC Phase 1) lifted distributable income to S$26.7m (+17.7%), translating to a DPU of 1.96Scts. 9M DPU forms 78% of FY11F estimates. Portfolio occupancy remained healthy at 98% with limited leases up for renewals for the remainder of the year.

Strategic long-term positive move. Separately, K-Reit announced that it is purchasing an 87.5% interest in Ocean Financial Centre (OFC) from Keppel Land at S$2.013b or S$2,600psf including an income support of S$170m until end 2016 or 4.25% cap rate. Net of the S$441.8m adjustments including ongoing construction of the carpark and retail podium and other transaction costs, total consideration will be S$1.578b. Although timing was a little unexpected, we see this deal as a strategic long-term positive for Kreit with the ability to deepen its presence in the prime CBD area, upgrade its portfolio quality as well as ensure a strong and stable income stream for unitholders through the long leases and a blue chip tenant base. Committed occupancy at OFC is at 79.6% with underlying monthly rent of $9psf. Kreit will fund the purchase with S$602.6m debt (38%) and S$976.3m (62%) of equity through a 17-for-20 rights issue at 85Scts per unit. Gearing is expected to head up to 41.6% post acquisition.

Maintain Hold. Our current numbers have not included the OFC acquisition. In terms of financial impact, the purchase is likely to be accretive, lifting our FY12 DPU estimates by 4.4% on a fully diluted basis while book NAV per unit could moderate to cS$1.19 based on Dec 2010 balance sheet due to the enlarged unit base. In terms of valuation, our current target price of $1.32 could potentially be diluted by 11%, after taking into account the expansion in issued units and factoring in the additional contributions as well as rolling forward into FY12 numbers. Post acquisition, we believe Kreit would gain more brand recognition and visibility as the largest prime commercial landlord and as the 3rd largest Sreit by asset size. However, current global macro uncertainties could likely be an overhang in the office sector. Maintain Hold.

Keppel Tele & Transport - Logistics outlook overshadows cheap valuations (DBSVickers)

HOLD S$1.21 STI : 2,724.69

(Downgrade from BUY)

Price Target : 12-Month S$ 1.35 (Prev S$ 1.65)

Reason for Report : Change in recommendation and TP

Potential Catalyst: Further progress in data-centre business

DBSV vs Consensus: FY11F/12F earnings 15%/16% below consensus

• 3Q11F pre-exceptional earnings were below expectations due to logistics weakness.

• Data-centre business is fairly resilient but logistics segment may feel the impact of export slowdown in China. Lowered FY11F/12F EPS by 13%/15%.

• Downgrade to HOLD at lower TP of S$1.35. Cheap valuation and 3% yield to protect downside.

9M11F core earnings comprise 60% of our previous FY11F estimates. Excluding S$22.3m exceptional gain, net profit of S$13.3m (-13% YoY, -25% QoQ) came below our estimate of S$17-18m. Logistics segment was the main culprit as (i) a key warehouse in Singapore was closed for capacity doubling, and (ii) an associated company was disposed off in China resulting in exceptional gains.

4Q11F likely to improve, but FY11F/12F may grow slower than earlier expected. We estimate 4Q11F earnings of S$18m, up 35% QoQ. Post redevelopment, a key Singapore warehouse is likely to be leased out in 4Q11F. KPTT increased its stake in an associate to 100% from 50% earlier, which should start contributing from 4Q11F onwards. Nevertheless, we lowered FY11F EPS by 13% and FY12F EPS by 15% to reflect slower growth in logistics business due to export slowdown in China. On an optimistic note, KPTT has been growing its river port logistics business in China to benefit from rising domestic demand in the long term.

Ex-M1, core business is trading at only 8x FY12F PE. We revised our TP to S$1.35 based on core business valuation of 10x blended FY11F-FY12F PE excluding M1. Due to the capex intensive nature of the core business, we conservatively lowered our PE multiple to 10x from 12x earlier. Downgrade to HOLD for limited upside potential.

Keppel Land - Divests OFC (DBSVickers)

BUY S$2.69 STI : 2,724.69

Price Target : 12-month S$ 4.18

Reason for Report : Company update

Potential Catalyst: Divestment of assets

DBSV vs Consensus: Above

• Recycling $1.57bn of proceeds through sale of OFC

• Attributable net gain of S$492.7m

• Maintain Buy, S$4.18 TP

Divests OFC on a 99-year basis. Keppel Land is proposing to divest its 87.5% stake in Ocean Financial Centre (OFC) on a 99-year interest to KReit for S$2.013bn or S$2600psf, inclusive of up to S$170m of income support till end 2016, implying a 4.25% cap rate. This is within valuers’ valuations of S$2.01-2.054bn. The deal will allow Kepland to lighten its balance sheet while enabling Kreit to upgrade its portfolio to become the largest landlord in the prime Raffles Place/MBFC area. Kepland has a call option to acquire its stake in OFC back at the end of 99 years at a price of S$1. OFC is a 4th generation building sitting on the same site and is currently 80% committed with blue chip tenants such as ANZ, BNP Paribas and Drew & Napier. The office tower obtained TOP in Apr 2011. The deal is subject to minority and unitholders’ approval at an EGM on Nov 10th.

Net gain of S$492.7m. The selling price is within our expectations. Kepland is expected to receive cash proceeds of S$1571.3m after taking into account S$441.8m of adjustments for net liabilities for construction of the carpark and retail podium. Netting off S$456.5m for subscription for its pro-rata 46.4% stake in Kreit’s fund raising exercise, the group would recognize an attributtable net gain of S$492.7m. As a result, balance sheet will be strengthened with net gearing declining to a low of c3% (based on June 2011 numbers) while ROE should rise to an estimated 18% on the back of the capital recycling. This will provide the group with significant capacity for reinvestment into commercial and residential projects in both Singapore and overseas, including China. YTD, Kepland had spent S$900m to purchase 3 sites in Singapore and China.

Maintain Buy. We have yet to revise our FY11 earnings to reflect the OFC divestment gain. Including the $492.7m gain, net profit for FY11 could reach $858m for the year. The group is well placed to reinvest its gains and this should bode well for future reflation in RNAV from any reinvestment exercise. The stock is currently trading at a steep 52% discount to its RNAV of S$5.57 and we expect this monetization exercise to narrow this gap closer to our target price of S$4.18, based on a 25% discount to RNAV. Maintain Buy.

CapitaMalls Asia Limited - Improving China operations (DBSVickers)

BUY S$1.25 STI : 2,720.21

Price Target : 1.93 (Prev S$ 2.51)

Reason for Report : 3Q11 Results

Potential Catalyst: Improving China cashflow, capital deployment

DBSV vs Consensus: FY11 above, FY12 below

• In line set of results, achieved 83% of FY11 forecast

• Portfolio operations improving, better China cashflow expected from new acquisitions

• Adjusted FY11/FY12 forecasts by 33%/-15% to update on mall completion schedule

• Maintain Buy with revised TP of $1.93

Within expectations. CMA reported 3Q net profit of $36.5m, - 30.3% yoy on a 57.3% higher revenue of $66.9m. This was due to reduced associate contributions from lower development profits from Orchard Residences, forex losses, provision for HK listing expenses of $4.7m and absence of divestment gains. This was partially offset by rental revenue from Queensbay Mall in Malaysia and higher fund and property management fees. For the 9M, it achieved PATMI of $250.6m, 83% of our FY11 forecast.

Stabilising operations. On the operations front, portfolio occupancy remained at 96-97% while YTD shopper traffic and tenant sales continued to improve yoy by 3-8% and tenant sales +7-17% (excl Japan –7.2%). Same store NPI growth range from 5- 20% translating to a NPI yield of 3.9-6.7%. Spore operations remained stable, generating NPI yield of 5.7% and PATMI of $47m. China remained stable at 5.5% NPI yield with PATMI of $7m, thanks to better fee income, partially offset by forex translation loss. Msia contributed $9m on a NPI yield of 6.5%. Looking ahead, Hongkou Plaza in Shanghai, CM Crystal in Beijing and CM Xuefu in Harbin are expected to open in Q4 and another 8 (2 Spore, 6 China) in 2012. This will increase the completed portion of China portfolio to c60% be end 2011. Forward cashflow should also improve with recent acquisition of Minhang and Hongkou Plaza and as the development pipeline is gradually converted to operating assets. In addition, new acquisitions will extend the visibility of growth ahead. YTD the group had invested c$2b worth of new acquisitions. Balance sheet remains healthy with gearing at 6% and expected to rise a little higher by year end.

Maintain Buy. We have adjusted FY11 and FY 12 earnings to $299m (+33%) and $222m (-15%) to update the completion schedule of malls under development. We continue to like CMA for its pan Asian retail real estate exposure and its deployment of balance sheet capacity into new investments. Maintain Buy. However, we are revising TP to $1.93, premised on a 20% discount to RNAV of $2.41, from $2.51 previously (based on a 10% premium) to move it in line with the assumed TP discount for Hang Lung Properties.

HPH Trust: Weak Sept volumes; YTD growth within estimates (DMG)

(BUY, US$0.615, TP US$0.75)

YTD Sept throughput in-line our forecasts but below mgnt guidance. Sept throughput volume for Yantian fell 4.6% YoY while COSCO-HIT volume rose 4.5% YoY. Yantian Sept throughput was slightly weaker than what we expected. YTD growth at Yantian and COSCO-HIT of -0.1% and 6.7% were within our FY11 estimates of 0% and 5%. We maintain our belowconsensus FY11F throughput growth forecasts of 3%/5%/0% for HIT, COSCO-HIT and Yantian respectively. Management guidance of 8-9% throughput growth for HIT and Yantian is not achievable, in our view, and the numbers may be guided down in the upcoming results. We maintain BUY with an unchanged DCF-derived TP of US$0.75. Our DPU estimates of US5.34¢ for FY11F (annualised) and US5.57¢ for FY12F are 9.5% and 15.5% below mgnt’s forecasts. HPHT is a 9% yield stock at this price.

Flat YTD throughput volume at Yantian. Sept throughput volume at Yantian fell 4.6% YoY and YTD growth of -0.1% was short of management’s guidance (stated in prospectus) of 8.7%. Yantian throughput was one of the weakest in the Pearl River Delta region due to slowdown in trade flow with Europe and the US. We maintain our estimate of zero throughput growth for Yantian in FY11.

Kwai Tsing terminals YTD growth still positive. Sept throughput at Kwai Tsing terminals fell 1.8% YoY but YTD throughput remained positive at +1.8% YoY. COSCO-HIT registered 4.5% YoY growth in Sept and YTD growth of 6.7% was better than the total throughput growth at Kwai Tsing terminals. We estimate Sept throughput at HIT of around 3%.

Valuation: We keep our financial forecasts unchanged. Our DCF-derived TP of US$0.75 is based on 8.34% WACC, 2-3% growth in FY13-20F and 2% annual growth until expiry of concession agreements.

CapitaMalls Asia Ltd - A transitional 4Q ahead (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$1.25

Fair Value: S$1.48

Positive set of 3Q results. CapitaMalls Asia (CMA) reported 3Q11 PATMI of S$36.5m which came in above our expectations, mostly due to improved gross margins and lower admin expenses, partially offset by a larger than expected forex loss. 3Q11 topline of S$66.9m was in line as YTD revenue now constitute 75% of our FY11 forecast. We were mildly surprised that mall opening costs have stopped escalating this quarter given the heavy pipeline of malls in 4Q11 and that management fee and property income EBIT from China has improved on a QoQ basis (management fee: S$2m in 2Q11 to S$4m in 3Q11; property income: S$-1m in 2Q11 to S$4m in 3Q11) despite Minhang Mall being only newly opened.

Focus on Hongkou opening ahead. Judging from the price reaction yesterday, we believe the market viewed 3Q results in a positive light. Looking ahead to 4Q11, we expect three malls to start operations: Hongkou (Shanghai), CapitaMall Crystal (Beijing) and CapitaMall Xuefu (Harbin). The market would likely focus on management's plans to start operations at Hongkou in 4Q11 given that it is a key component of CMA's Chinese portfolio by value. We had visited Hongkou last month during a fact-finding trip and believe that it is on course to open in 4Q11.

A transitional 4Q11 as portfolio matures. In our view, a key transition would occur in CMA's Chinese portfolio in 4Q11. By end FY11, 59% of CMA's Chinese portfolio is slated to be made up of operational malls, in terms of NAV, as compared to only 35% now. The implication is that, with an increasingly operational portfolio, we would see reduced drag on CMA's return on assets and increased operational traction as income from operational malls offsets opening costs at uncompleted malls. In addition, we note that CMA has slipped into a net debt position versus net cash end of 2Q11. Including the recent Suzhou acquisition, we estimate CMA's outstanding capital commitment at ~S$2.7b over the next three years and this could suggest a phase of capital recycling over FY12-13, especially if management wishes to continue in an active acquisition stance while staying under 30% net gearing.

Maintain BUY at S$1.48 fair value. We raise our FY11 PATMI forecast by 5.9% but pare our fair value estimate to S$1.48, versus S$1.54 previously, due to changes in values of REIT holdings and an increased weight of 30% to our bear case scenario given heightened macro-economic risks since our last update. We use a scenario-weighted sum-of-the part RNAV model to value CMA. Maintain BUY.

Amtek Engineering (KE)

Opportunity for short-term trade. If you buy the stock before 4 November 2011 and are willing to hold it until after 9 November 2011, you will still get an attractive dividend. Yes, Amtek’s last results were disappointing and the outlook is not promising but shareholders can still look forward to a $0.055 per share dividend (55% of FY Jun11 earnings). Also, the threat of a stock overhang has reduced now that Capital Group has exited and the stock is half of its $1.30 IPO price.

Our view

Low risk of further stock overhang. Capital Group left the stage just last month after Temasek bailed out earlier in January. Capital, which had bought into the stock via open market transactions shortly after it was listed last December, reduced its stake to below 5% on 1 September after building it to 7.1%. In contrast, Standard Chartered Private Equity, one of the two investors who took Amtek private in 2007, has been rebuilding its stake to just under 30%.

Pale shadow of its IPO self. Today, Amtek is trading at just 6x historical EPS and 1.9x book compared to 27x historical EPS and 4x book at the time of its relisting (offer price was $1.30). Other than the general market sell-down and the general consensus that its IPO price was too expensive, one other reason could be its below-consensus full-year earnings, which were hit by the stronger US$ and higher raw material costs.

But cash flow remains strong. Despite missing expectations last year, Amtek generated positive free cash flow of US$30m that took net gearing down from 0.9x in FY Jun10 to just 0.1x. It also ringfenced 55% of earnings for dividends, in line

with its 50% policy. With only US$20-25m in capex expected annually, future dividends should be secure.

Business

Provider of end-to-end EMS solutions.

Key ratios…

Price-to-earnings: 6.4x Price-to-NTA: 1.9x

Net gearing: 0.1x Return on equity: 32%

Dividend per share / yield: S$0.055 / 8.1%

Share price S$0.675

Issued shares (m) 543.2

Market cap (S$m) 366.7

Free float (%) 39.8%

Recent fundraising activities Dec 2010: IPO at $1.30, 200m vendor shares

Financial YE 30 June

Major shareholders Metcomp (30.3%), StanChart Pvt Equity (29.9%), Mgt (5.3%)

YTD change -46%

52-wk price range S$0.58-1.37

Singapore Press Holdings - Interesting insights (KE)

Event

? We hosted a post-results luncheon for Singapore Press Holdings (SPH) last week. In a lively exchange with fund managers, CEO Alan Chan, CFO Tony Mallek and Senior VP of Finance, Ms Babsy Young, offered interesting insights into the workings of the group.

Key Takeaways

? To questions about SPH’s monopoly in print advertising and the impact of declining readership on ad rates, Mr Chan was quick to defend that the ad rates for the group’s selected newspapers have gone up every year between 2004 and 2008 and were not cut even during the global financial crisis. The last increase was in March this year, he said. To counter online media rivalry – Yahoo! News is posing the strongest challenge in terms of readership – the group recently launched its iPad and iPhone apps to sell news subscription. It charges an additional $2 on top of the normal newspaper subscription from the current quarter.

? SPH’s equities investments are in Singapore and mainly in M1 and StarHub in which it holds 13.9% and 0.8% of the shares, respectively. It has less than 10% of the equities investments in industrial REITs and Suntec REIT. The target benchmark return is 4%.

? A dedicated property investment team will spearhead the growth of SPH’s property asset base. However, no target size has been set yet. A spin-off of assets into a REIT is possible over the long term when the assets grow in numbers. In fact, its total investment portfolio value of $2.7b is now bigger than Frasers Centrepoint Trust’s $1.5b. Management is still keeping an eye out for sales of GLS sites and possibly TripleOne (said to come with a $1.2b price tag) and 313@Somerset.

? Worries over a dividend cut in the absence of a formal dividend policy were assuaged on management’s assurance that the group’s impeccable track record of 100% payout will not be broken as long as the current CEO is at the helm.

Action & Recommendation

We reiterate our BUY recommendation on SPH with a target price of $4.17, based on a total return of 16.7% (FY Aug12F yield: 6.4%).

Keppel Land - Reward for shareholders beckons (KE)

Event

? Keppel Land’s 3Q11 PATMI came in at $58m, 6.6% higher than a year ago, which we think is largely in line with consensus estimates. PATMI for 9M11 contracted by 25.1% YoY to $191.8m, but we expect earnings to be back-loaded. Upon the successful divestment of Ocean Financial Centre (OFC) to K-REIT, KepLand is likely to reward shareholders with a bumper dividend and recycle the rest of its capital into new investments. Maintain BUY.

Our View

? Due to the irregularity of overseas project completions, net profit from property trading fell by 42.3% YoY to $116.5m for 9M11. However, we expect some back-loading of earnings, as phases of its projects in China, such as The Botanica in Chengdu, Central Park City in Wuxi and The Springdale in Shanghai, are scheduled to be completed in 4Q11.

? More important, the demand for KepLand’s township homes continues to be healthy. In particular, the group sold nearly 1,200 homes in China in 9M11, of which about 780 were sold in 3Q11 alone. The best-selling project is The Botanica Phase 6 with about 450 units sold in the quarter. To-date, KepLand has achieved sales of RMB1.05b from 119,200 sq m.

? KepLand recently announced that it will be monetising its 87.5% stake in OFC to K-REIT at a valuation of $2b, or $2,600 psf, backed by a five-year rental guarantee of up to $170m, subject to the approval of minority shareholders/unitholders. Upon completion of the deal, expected to be no later than year-end, KepLand will book in a net gain of $492.7m (33 cents per share). With that, its shareholders can perhaps look forward to a bumper special dividend of around 17 cents per share.

Action & Recommendation

With the divestment of OFC, KepLand has cut its direct exposure to the Singapore office market from 25% to 12% as a percentage of gross asset value. This potentially reduces some overhang on its share price. In addition, it is in the perfect financial position to recycle its capital should the opportunities arise. Maintain BUY with a target price of $3.55, pegged at a 30% discount to RNAV. We also forecast a total dividend of 29 cents per share, which translates to an enticing 10.6% dividend yield.

Keppel Land: Awaited asset injection a net positive (DMG)

(BUY, S$2.72, TP S$4.91)

Injects OFC into K-REIT. KepLand announced the divestment of its 87.5% stake in OFC (999- yr lease, 850 yrs lease remaining; 884,957 sf NLA) into K-REIT, priced at $2,013m translating to 2,600 psf NLA. The transaction entails income support of $170m for a period of 5 years, as well as a call option which effectively allows KepLand to retain its residual interest at the end of the 99-yr lease. KepLand has committed to take-up pro-rata entitlement of K-REIT's proposed 17- for-20 rights issue (Kepland holds a 46.4% stake) at $0.85. Excluding its gain attributed to stake in K-REIT, net gain on book value amounts to c.$492.7m.

A net positive for KepLand, reflects cautious mood. The income support is expected to fill in the gap on fitting out periods, as well as lower rates that were pre-committed during the recovery phase for the recently completed OFC with avg rents c.$9 psf. Stripping out the income support from the transacted price assuming full utilization, we derive $2,380 psf, still positive in our view versus $2,159 psf embedded in our RNAV for KepLand. We believe this swift transaction prestabilization of OFC reflects KepLand’s cautious stance on the office sector.

Uncertainty of business model, special dividend? i) Gearing falls to 3% from 37.6% post transaction reflecting a strong balance sheet, which we believe raises the possibility of special dividend if capital deployment opportunities remain protracted ii) We previously raised the potential market concern of the uncertainty revolving around KepLand’s business model with this potential transaction which materialized, transforming KepLand towards a pure play China/Singapore developer currently experiencing headwinds in both markets which leaves KepLand with remaining 19% of RNAV to office exposure.

Maintain Buy, TP$4.91. We factor in the one-time gains to FY11 earnings, as well as OFC divestment to K-REIT and consequent increase in AUM to RNAV. TP is raised to $4.91 based on 20% discount. Maintain BUY on deep value.

Singapore Airlines: September 11 Stats: Hanging on in There (DMG)

(BUY, S$11.29, TP S$12.23)

SIA’s revenue passenger kilometer (RPK) in September grew 4.7% y-o-y, while the load factor improved by 3% m-o-m to 79.6% owing to capacity cuts on its medium- to long-haul flights. On the cargo division, we have been harping on the issue that it will benefit from demand for urgent air freight shipments, following the global supply chain disruption caused by the Japanese earthquake and tsunami. While the numbers have yet to show evidence of such demand, we foresee that the shipment rush would kick-in over the next two months. We believe the downside risks on the share price at this level are limited in the near term, unless the developed economies dip into recession. With a decent price upside of 8.3% and a dividend yield of 2.7%, we maintain BUY on SIA at an unchanged FV of SGD12.23.

Cutting capacity. RPK for the month of September grew by 4.7% y-o-y (1.4% m-o-m, 3.8% YTD) while the load factor increased by 3% m-o-m to 79.6% (down by 0.7% y-o-y and 1.9% YTD)) owing to the capacity cuts (which includes frequencies) on its medium- to long-haul flights. Likewise, Silk Air also saw capacity cuts compared to the previous month, although this was not done aggressively considering their encouraging growth in passenger numbers (RPK up by 1.2% m-o-m, and 12.6% y-o-y). Save for West Asia and Africa which saw stronger loads on the Indian subcontinent flights, all other regions reported weaker load factors, particularly the developed economies.

Cargo yet to see any rush in urgent deliveries. SIA’s cargo side saw its freight tonnage kilometer coming in flat at a marginal 0.1% m-o-m growth despite progressively toning down its capacity. We believe that the cargo division will benefit from demand for urgent air freight shipments, following the global supply chain disruption caused by the Japanese earthquake and tsunami. While the numbers have yet to show evidence of such demand, we foresee that the shipment rush would kick-in over the next two months.

Maintain BUY. We maintain our FV of SGD12.23 with a BUY call. Since our BUY call back in August, the counter has been performing relatively better than the STI, outperforming in both absolute and relative terms by 1.2% (benchmark at -1.9%) and 3% respectively. We believe the downside risks at this level are limited in the near term, unless the developed economies dip into recession, which our economists see as highly unlikely. Furthermore, with its strong balance sheet, SIA should be able to weather the tough times as it has never, even during past crises, reported a full year loss. SIA’s average forward P/BV of 1.2x fell to a low of 0.8x during the last global financial crisis when its forward ROE for 2009 was at only 1.6%. Our FV of SGD12.23 is premised on a P/B of 1.1x, noting that its FY12 ROE is forecast at 3.3%. With a decent price upside of 8.3% and a dividend yield of 2.7%, we maintain BUY on SIA at a FV of SGD12.23.

Sino Grandness Food Industry Group Ltd - A bold move to secure the future (AmFraser)

BUY (Unchanged) FAIR VALUE: S$0.61

LAST CLOSE: S$0.405

Previous: S$0.88

Raising funds via zero-coupon CB. We met the Management of Sino Grandness (“Grandness”) to understand more about their recent fundraising exercise. The structure of the RMB100m zero-coupon convertible bond appears risky at first glance due to the high interest ‘penalties’ and ambitious valuation and conversion targets. We do not dispute that. However, further research and insights from Management allow us to better put things in perspective.

Beverage business recap and updates. Grandness introduced a range of mixed vegetable/fruit juices under their “Xian Lü Yuan” brand in Q2FY2010. Sales of the beverage grew strongly to hit RMB177.8m in FY2011H1. We estimate the net profit margin for this business to average 22%, translating to a net profit of RMB39m for the half-year. To date, the Company has successfully pushed their beverages into major supermarkets (e.g. Carrefour, Tesco, Jusco, Parkson, etc.) and other distribution channels like convenience stores, restaurants, etc. We understand they have about 9000 retail points currently and Management is keen to open more channels. They aim to commission a production facility at their existing site in Sichuan by end- FY2011 to double the ~40,000 tonnes of beverages per annum capacity they currently have via their OEMs. RMB70m of the sum raised would then contribute towards a new facility at their site in Hubei that, when completed in mid-2012, will add another 40,000 tonnes of capacity.

Likely Scenario. Our discussion with Management led us to increase our forecast of GFHK’s NPAT for FY11, FY12 and FY13 to RMB80m, RMB125m and RMB175m (previous: FY11:RMB80m; FY12:RMB100m; FY13:RMB125m) respectively. Conversion conditions will then fall into Scenario 5 in Exhibit 1. We further analyse the peers in the nonalcoholic F&B sector listed on the Hong Kong, Shenzhen, Korea and Taiwan Stock Exchanges (see exhibit 1). From the table, the average PER of peers are 19.5x, 31.9x, 23.5x and 21.3x respectively. Taking the HKEx’s 19.5x as a base-case, we believe it is possible for GFHK to list at 9x FY2013 NPAT. The CB holders would need to be diluted >45% during listing before they would prefer to redeem the CBs.

Lower FV to 61 SG c and maintain BUY. Despite our relatively bullish analysis above, we cannot ignore the fact that this is an exercise in advanced forecasting based on current assumptions. In reality, uncertainties abound that are largely beyond the Management’s control, e.g. changes in listing regulation, financial market downturns, deterioration in business climate, etc. Failure to list in FY2013 brings about a hefty interest expense. However, at this juncture, we have only included the interest expense of RMB13m (amortised into FY11-14) and professional expenses of RMB7m into our earnings model. To take into account the increased risk, we are ascribing a 5x PER (previous: 7x) to FY11 estimated EPS of RMB 0.645. This reduces our FV to 61 SG c from 88 SG c. We believe the last close price of 40.5 SG c has priced in much of this uncertainty and hence, we maintain our BUY recommendation.

SALIENT TERMS OF CONVERTIBLE BONDS

• RMB100m zero-coupon rate convertible bonds (“CBs”) issued by indirect wholly-owned Hong Kong subsidiary, Garden Fresh (HK) (“GFHK”), to be subscribed at 87% and due on 19 Oct 2014. Grandness will guarantee the repayment.

• Deducting professional expenses of RMB7m, RMB70m out of the net proceeds of RMB80m will be used as capex in the beverage business. The remainder will be used for advertising and promotional activities.

• Conversion or redemption is at the option of the bondholders at maturity date or at IPO (conversion only). Bondholders have right to extend the maturity date to 30 Jun 2015;

• Conversion ratio is dependent on the projected or actual net profit of GFHK in FY2011, FY12 and FY13;

• Interest rate upon redemption is revised upwards if GFHK does not manage to list on an approved stock exchange before maturity or fails to list at a price-earnings ratio of more than 9 times;

• An event of default is declared if FY2012 NPAT is less than RMB80m. This leads to a 23.9% annualised interest cost.

Advantages to Grandness.

• Avoids dilution at listed-company (i.e. “Grandness”) level while getting the funds to the division with the expansion plans; and

• Defers and minimises dilution at GFHK until 2013/14 when the division has grown its NPAT.

Risks to Grandness.

• Potentially expensive cost of funds (i.e. from 18.5% to 34.7% per annum depending on situation) if best-case scenario of listing at more than 9 times FY2013 P/E not met.

Golden Agri-Resources - Gaining leverage with Unilever (CIMB)

Current S$0.64

Target S$0.81

Previous Target S$0.81

Up/downside 26.56%

Regaining Unilever as a customer is another feather in the cap for the group in its quest to become a leading sustainable palm oil producer. This will boost the group’s reputation and downstream sales.

The group could regain sales equivalent to about 3% of revenue. While it does not change our earnings forecasts, it will help bolster its environmental credentials. Still TRADING BUY for the potential short-term bounce due to this news, its attractive valuations.

What Happened

97.2%-owned PT SMART received a purchase order from Unilever yesterday. This is viewed as an acknowledgment of its commitment to sustainability after some of its estates received their Roundtable on Sustainable Palm Oil (RSPO) certification. This is Unilever’s first order since it stopped buying palm oil from Golden Agri in Dec 2009 after the environmental campaign group Greenpeace alleged that the group had cleared forests and environmentally-important peat land to make way for plantation estates.

What We Think

This is a positive development but not a surprise to us. We had earlier expressed the strong possibility of Unilever returning as a customer after Golden Agri received RSPO certification for 14,955 ha of estates on 19 Sept 2011. Unilever is the second customer that has resumed palm oil purchases from the group after a 22-months hiatus. Nestle rejoined the customer list about a month ago. Of the two, Unilever is a larger customer accounting for 3% of the group’s total sales in 2008 vs. 0.2% by Nestle. This news also comes at an opportune time as the group sets out to expand its downstream sales following Indonesia’s recent decision to lower export tax on refined palm oil.

What You Should Do

This development will not impact our earnings forecasts as we have already factored-in higher sales for its downstream operations. However, this and recent events clearly demonstrate the group’s ability to successfully bounce back to restore its sustainable image after being blacklisted by some customers and investors since 4Q09 and 1Q10. It will help improve the group’s appeal to environmentally-conscious investors and buyers. We continue to advocate a Trading Buy as this news could help re-rate the stock.

Marco Polo Marine Ltd - Yard order book rapidly growing (AMFraser)

BUY

FAIR VALUE: S$0.505

LAST DONE: S$0.370

Previous FV: S$0.505

Rapid growth in shipbuilding order book

Yesterday, MPM announced that it has secured a shipbuilding contract worth US$27m for two units of 5,400bhp AHTS. By our calculation, this brings the shipbuilding order book up to S$52.25m, comprising 80% of our projected shipbuilding revenues for FY12. Being only two weeks into FY12 for MPM, this gives us greater confidence that MPM will meet our revenue expectations.

The two AHTS vessels will contribute to MPM in two ways—i) during the shipbuilding process in shipbuilding revenues; and ii) after delivery, the 49% of the charter income will accrue to MPM via the ownership stake in its Indonesian associate PT BBR. In other words, we expect income from these vessels over the next five to seven years.

Further, MPM also has in hand a S$8.5m contract for ship upgrading to be performed through FY12.

In light of the booming Indonesian economy, the growing need for coal transportation and a vibrant offshore oil and gas scene, we continue to see potential for future orders for both tugs and barges and offshore support vessels for MPM from this market.

Third drydock likely complete ahead of schedule

In our initiation report, we highlighted that MPM was constructing its third and largest drydock, and that progress appeared to be well ahead of schedule. We estimate that this drydock should be complete now, a few months ahead of schedule. We expect additional ship repair and conversion income to accrue to MPM as early as 1Q 2012.

Estimates and valuations maintained

MPM’s order book augurs well for a strong FY12, and the early completion of the third drydock yields potential for upward revisions to earnings estimates. Pending the FY11 results announcement in mid-Nov, we leave our FV at $0.505 and continue to recommend a BUY.

Yangzijiang Shipbuilding: Cut to Neutral; switch to Offshore & Marine names (DMG)

(Neutral, S$0.965, TP S$1.00)

Focus on micro financing and investments could weigh down on stock. In light of the rising concerns over informal lending and micro financing in China, Yangzijiang (YZJ) has issued a statement reassuring investors that the company is not affected and does not foresee negative impact on its results from its micro financing investments. While management continues to seek higher returns from investments in financial assets, market is getting cautious following a series of negative perception on informal lending in China. We think the concerns could continue to weigh down on its share price. We downgrade the stock to Neutral with a revised TP of S$1.00 (from S$1.62 previously). We change our valuation methodology from P/E to SOTP as it is a better reflection of the investment positions held by YZJ. We recommend a switch to Singapore Offshore & Marine names given stronger outlook for new orders.

More clarifications but did little to take away the concerns. In the latest announcement, YZJ highlighted that: (1) The RMB247.5m investments in micro-financing companies (Jiangsu Runyuan and Wuxi Runyuan) accounted for less than 3% of its total NTA (as at 30 Jun 2011) and less than 2% of its market cap. (2) Micro financing loan tenures are short term (less than one year) and the loans are offered to rural enterprises, individuals and small/medium technology firms in Jiangsu province. (3) YZJ has made provisions for the investments against unforeseeable losses. The two micro financing companies are profitable at this stage. (4) Investments in held to maturity financial assets are secured against collateral with debt cover of at least 2x.

We expect earnings to peak in FY11F. YZJ is on target to deliver 65 vessels this year and management is confident of delivering at least 30% net profit growth for 9M11 (results out on 9 Nov 2011). We believe FY11F will be a record year for earnings but expect earnings to fall 9% and 7% in FY12-13F respectively.

Valuation: Cut TP to S$1.00. We value YZJ based on sum-of-the-parts (SOTP): (1) net cash, financial assets, and amount due to customers at 2Q11 balance sheet value; and (2) 8x core shipbuilding net income in FY12F.

Second Chance Properties: Change in financial year-end (DMG)

(BUY, S$0.38, TP S$0.53)

From June to August year-end. The Hari Raya festive period (from start of fasting month till Hari Raya day) will move forward by 11 days every calendar year, based on the Muslim calendar. It will soon move towards Second Chance’s current year-end, which falls in June. To enhance its operational efficiencies and to ensure a smooth running of the business during its busy festive season, management will be changing its financial year-end from 30 June to 31 August. Following the change, the next set of financials will cover a 14-month period from 1 July 2011 to 31 August 2012. We maintain our BUY recommendation and TP of S$0.53, based on DDM.

Active management to minimise loss of sales. The two months leading up to Hari Raya is when Second Chance records the highest sales and profits in its retail business. With a June year-end, Second Chance would need to close its stores to conduct a stock take at end June. With Hari Raya occurring in mid-August, and three outlets in Singapore and 36 across Malaysia, a one-day store closure would result in a significant loss of sales during its busiest period. The new year-end would also allow its directors and key management to focus on securing maximum sales and profits during the peak period, instead of having to place attention on auditing and reporting at the same time. The economic uncertainty is not likely to have a major impact as it targets a niche market.

Plans to expand real estate business while keeping retail business. Second Chance is still on the lookout for real estate opportunities to grow the business, with an aim to achieve a market capitalisation of at least S$1b by 2022. It is open to real estate activities such as property development (via joint ventures), and acquisition of distressed properties.

Attractive dividend yield. At S$0.38, Second Chance is trading at an attractive 8.0% yield, which we believe is sustainable, given its stable operating cash flow.

Nera Telecommunications: Special dividends in the works? (DMG)

(BUY, S$0.35, TP S$0.47)

Upgrade to BUY. NeraTel’s 3Q results are in line with our estimates, with net profits coming in at S$2.7m (+76.5% YoY) on the back of revenue of S$36.6m (+0.8% YoY). We expect 4Q net profit to be better than last year’s S$4.2m, driven by strong growth in contribution from the Middle East and North Africa (MENA) region. We upgrade the counter to BUY due to 1) strong demand from MENA, 2) solid financial position with steady cash inflows and 3) high dividend yield with a potential for a special payout. New intrinsic value of S$0.47 based on Dividend Discount Model (WACC: 11.1%, Terminal growth rate: 0.0%) implies an upside of 33.5%.

Strong growth potential in the MENA region. Retaining over 40 experts from the MENA telecommunication business takeover earlier this year has its benefits. NeraTel has since secured tens of millions worth of orders. We are expecting the group to complete S$25.5m worth of orders in MENA in the coming 4Q, with one third being services in nature, and thus yielding higher gross margin (>40%). Post war construction in Afghanistan and the recent flood in Thailand, where NeraTel has an existing presence, should provide further opportunities.

Rock-solid financial position. Assuming it pays out S$14.5m in dividends as in the past (4.0 S¢/share), NeraTel would still have a net cash pile of S$47.5m (13.1 S¢/share). This is mainly attributable to NeraTel’s ability to leverage on its hardware suppliers, resulting in an efficient cash conversion cycle.

A sign of special dividends. We expect NeraTel to maintain its 4.0 S¢/share payout, translating to a yield of 11.4% based on S$0.35. We also observed that the last time cash was above S$50m in 2005, a special dividend (15.0 S¢/share) was announced, though a huge portion of it came from the disposal of business. Nonetheless, another special distribution may be on the way as management indicated that they are comfortable working with a cash position of S$20m.

Keppel Land: Expecting bumper divestment gains (OCBC)

Divesting 99-year interest in OFC at S$2,600 psf. Keppel Land (KPLD) announced it would divest to K-REIT its 87.5% stake in Ocean Properties Pte Ltd (OPPL), which holds Ocean Financial Center (OFC) - a 999-year leasehold building. For this transaction, OFC is valued at S$2.01b or S$2,600 psf. Net of OPPL's liabilities, K-REIT would pay KPLD S$1.57b for the stake. Note that K-REIT only has a 99-year interest in the OPPL stake and KPLD has an option to buy back the stake for S$1 at the end of the period. In addition, K-REIT would enjoy rental support of up to S$170m until end 2016.

Market likely to view this as positive for KPLD. We believe that the market would view this transaction, which would result in a net gain of S$493m, as a positive development for KPLD. Note that this is subject to approval from K-REIT unit-holders on 10 Nov 2011and that major unitholders KPLD, KCL would be abstaining on the resolution re. the acquisition. Since OFC is currently only 80% committed at average rentals of S$9 psf, this divestment likely came somewhat earlier than expected. The price of S$2,600 psf also came nearer the high end of our estimates, exceeding other 99-year investment transactions year to date, particularly S$2,524 psf for One Finlayson Green in earlier in Mar when the office sector outlook was rosier. However, the effective price for OFC could be as low as S$2,380, depending on how much of the S$170m rental support package K-REIT would draw upon.

Fortified balance sheet and flexibility for capital deployment ahead. Through this transaction, KPLD's net debt to equity ratio would fall from 37.6% to a merely 3% which would fortify KPLD's balance sheet and give management increased flexibility for capital deployment. Given that management continues to see strong long-term prospects in Singapore and China, we believe there could be compelling opportunities for distressed assets should macro conditions deteriorate further.

Further details of transactions. The cash proceeds for this transaction to KPLD are expected to be S$1.57b. K-REIT is likely to finance this by S$602.6m debt and the remaining by equity, and would propose a 17-for- 20 rights issue at S$0.85 per unit to raise S$976.3m. KPLD would then take up its pro-rata entitlement which is S$456.5m, resulting in a net cash inflow of S$1,115m.

Maintain BUY. Pending the approval of the acquisition by K-REIT, we maintain BUY on KPLD with an unchanged value estimate of S$3.97 (20% discount to RNAV).

Singapore Exchange: Headwinds remain(OCBC)

Better than consensus 1Q earnings. Singapore Exchange (SGX) posted a 12% YoY increase in 1Q FY12 revenue to S$178m, giving net profit of S$88m, up 18% YoY, and slightly better than consensus expectations of S$83m. The strong trading activity in Aug helped to lift SGX's performance, as average daily trading value for Aug was S$2.0b, contributing to 1Q12 daily value of S$1.6b, an increase of 9% from the previous quarter. What stood out clearly this quarter was the record derivatives volume, up 33% YoY to a record high of 322,152 contracts per day. This resulted in a 26% rise in derivatives revenue to S$43m. Growth was fuelled by the Indian Nifty, Chinese A50 and Rubber futures contracts.

As a recap, several initiatives were introduced in the quarter including Reach (new securities trading platform), continuous trading for the securities market, and reduced minimum bid-ask spreads (to enhance trading). A total of S$1.3b was raised through equity listing, and it was a slow IPO quarter with only six new listings raising S$150m. The board has also declared an interim dividend of 4 cents for 1Q, unchanged from the last year, payable on 16 Nov 2011.

Headwinds remain; expecting quiet equity fund raising. Current uncertainty in the global environment has dimmed the prospects for SGX, as seen from both the decline in its share price as well as management's cautious outlook for the near term. This could also result in fewer equity or debt issues, as share prices of most stocks are still down year-to-date, and with little price drivers in the near to medium term due to the volatile global environment. Still, SGX's kicked off the financial year with several positives including strong contribution from its derivatives business and greater awareness and interest in ETFs (which saw a nearly doubling in average daily trading value to S$49m in 1Q).

Maintain BUY, but dropping fair value. As challenges remain ahead, earnings visibility is low. We believe that management will continue to roll out new products, to ready for a return in trading activities. As the 1Q numbers were fairly in line with our expectations, we are retaining our full year net earnings projection of S$324.5m. However, valuations for SGX and its peers have fallen in recent months, and we have lowered our valuation from 25x to 22x earnings, bringing our fair value estimate down from S$7.95 to S$7.00. Yield is decent at more than 4.5%. Maintain BUY.

M1: 3Q11 results slightly below expectations (OCBC)

Slightly softer-than-expected 3Q11 results. M1 Ltd reported 3Q11 revenue easing 0.4% YoY and 0.2% QoQ at S$244.8m, or around 4.0% shy of our forecast; this as subscribers may be holding back in anticipation of the new iPhone launch. While net profit climbed 4.1% YoY to S$41.0m, it was down 4.0% QoQ and was also 4.6% short of our forecast. EBITDA also saw a muted rise of 0.1% YoY and QoQ to S$79.3m, while margin was relatively flat at 42.1% versus 42.0% in 2Q11 (43.5% in 3Q10). For 9M11, revenue gained 4.2% to S$747.8m, meeting 73.1% of our full-year forecast, while net profit rose 5.7% to S$126.4m, or around 76.7% of FY11 estimate.

Good interest for iPhone 4S likely. M1 added some 41k new subscribers in 3Q; but it was driven by pre-paid segment with +34k new subs. Its postpaid segment only added 7k new subs; but we believe that consumers may be holding back in anticipation of the new iPhone. According to management, the interest for the 4S has been "good", but it notes that actual purchases may just number in the thousands, driven by upgrade from existing customers on the older iPhone 3G or 3GS. While post-paid acquisition cost for the quarter tumbled 4.4% QoQ and 21.2% YoY, M1 expects it to rise again in 4Q due to both the iPhone 4S take-up and year-end promotions. Meanwhile, M1 revealed that it has 16k NBN fiber customers as of end-Sep, with nearly 45% added in the quarter alone; and as with our earlier report, this is primarily driven by its aggressive promotion of its 100Mbps plan.

Maintains FY11 guidance. M1 continues to guide for earnings growth in 2011, buoyed by continued customer additions and increasing mobile data usage; it has also kept its S$100m capex guidance, with S$10m set aside for its own OpCo (Operating Company). M1 believes that having its own OpCo will help to improve response time and lower operating expenses for both its corporate and residential fixed network customers; although it only expects to reap the benefits in 2012. M1 adds that it will continue to maintain its 80% dividend payout ratio; but notes that the conditions for making another special dividend this year are not optimistic in view of the global and local macro-economic outlook.

Maintain BUY. Given that 9M11 results were still largely in line with our expectations, we are leaving our FY11 estimates unchanged. We continue to like M1 for its defensive earnings and attractive dividend yield. Maintain BUY with an unchanged DCF-based fair value of S$2.79.

Ascendas REIT - Valuation has turned compelling (OCBC)

Upgrade to BUY

Previous Rating: HOLD

Current Price: S$1.995

Fair Value: S$2.23

Sturdy set of results. Ascendas REIT (A-REIT) reported a 9.6% YoY growth in 2QFY12 gross revenue to S$121.7m, due to contribution from completed development projects and acquisitions. While NPI grew at a slower pace of 7.9% YoY due to utility charges and change in lease structure, distributable income was up 14.1% to S$70.5m, due in part to lower interest expenses. On a QoQ basis, gross revenue grew 1.5%, while NPI and distributable income rose 2.0% and 6.9% respectively, boosted by completion of Nordic European Centre acquisition in Jul. 2QFY12 DPU was 3.38 S cents (+2.4% YoY, +5.6% QoQ), bringing 1HFY12 DPU to 6.58 S cents. This is slightly above our expectation, which makes up 54.0% of our full-year DPU forecast (49.5% of consensus).

Strong execution. A-REIT continued to deliver during the quarter, despite the current uncertain economic environment. Occupancy rates improved to 96.4% for the portfolio and 93.0% for the multi-tenanted buildings from 96.2% and 92.5% in 1QFY12 respectively. As anticipated, the group achieved positive rental reversion (1.8-11.6%) across all segments of its portfolio. Management guided that 6.7% of its property income is due for renewal for the remaining of FY12, and that the current market rental rates are still approximately 12-40% higher than the passing rents for area due for renewal. As such, we may see yet another round of positive rental reversion in 3Q.

No major refinancing risk. As at 30 Sep, A-REIT aggregate leverage was at 31.5%, a healthy level in our view. Even after funding all committed investments of ~S$255m (which will see leverage rise to 34.5%), the group still has an available debt headroom of ~S$555m before reaching the 40% mark. This places A-REIT in a comfortable position to fund potential investment opportunities as these arise. The group also recently renewed a S$200m committed revolving credit facility for another five years. Moreover, its debt is relatively well-spread, with no more than S$400m due for refinancing in any one year. Hence, we do not foresee any refinancing risk in A-REIT.

Upgrade to BUY. We raise our FY12 forecasts by 2.4-5.7% to accommodate the 2Q results. Accordingly, our DDM-based fair value is lifted to S$2.23 from S$2.17 previously. We like AREIT for its market leadership, resilient portfolio and proven track record. Noting that the stock has fallen since our last report to a level where we find compelling, we now upgrade AREIT from Hold to BUY.

BROADWAY (Lim&Tan)

S$0.345-BRAD.SI

?? Broadway warned that it will be in the red for 3Q ’11 (expected to be announced on 2 Nov ’11) due to unrealized losses arising from the changes in fair value of certain forward foreign exchange contracts that have been negatively impacted by the recent volatility in USD/SGD and USD/CNY exchange rates.

?? Without the unrealized forex losses, 3Q ’11 would have been profitable.

?? While the unrealized forex losses are nonoperational and non-cash in nature, it will still reduce the company’s shareholders’ funds from last quarter’s $228mln, and it is the first quarterly loss that the company is registering since it started quarterly reporting in 1Q ’07.

?? 3Q ’11 loss compares with quarter ago’s profit of $3.7mln and year ago’s profit of $12.5mln.

?? Besides the unexpected loss, we believe Broadway as well as the other hard disk drive (HDD) players such as Armstrong, Adampak, Cheung Woh and Miyoshi will be negatively impacted in 4Q ’11 by the severe floods in Thailand, which is a key manufacturing hub for the HDD as well as automotive sector.

?? Given the uncertain bottom-line performance, we use price to book ratio to evaluate Broadway.

?? At its peak levels in 2007 and 2010, Broadway had traded to a high of 1.2x price to book while at its lows in late 2008/early 2009, it had traded down to a low of 0.2x. The last time Broadway had plunged into full year losses in 1998/1999, the stock had similarly traded down to a low of 0.2x price to book.

?? At 0.63x currently, it is only in the middle of the historical range, hence we will still continue to give it a miss for now.

K-REIT / KEPPEL LAND (Lim&Tan)

S$1.03-KRET.SI / $2.72-KPLD.SI

?? K-Reit’s unit price will likely “do little” in the near term following its purchase of 87.5% of recently completed Ocean Financial Centre.

?? Like all its recent yield-accretive acquisitions, the seller is sponsor K-Land which will provide income support for 5 years, and funding will come from a rights issue (17-for-20 to raise about $976 mln) and borrowings.

?? K-Reit is paying $1571.3 mln.

?? K-Land will realize profit of $493 mln.

?? A key reason for not expecting much investors enthusiasm is that interest in the office sector has waned considerably because of the current crisis, which has led many international financial institutions to shrink workforce.

?? K-Reit’s exposure to the Singapore office segment (primarily in Raffles Place, Marina Bay ) will rise to 93% from 89.5%.

?? We maintain BUY on both K-Reit and K-Land, although there is likely no hurry to do so in the case of the former.

M1 (KE)

Event

M1’s net profit of $41.1m (+4.3% YoY) was within expectations but most encouraging is the way the pieces are falling in place for the group in the fixed broadband and Pay TV arenas. Growth potential is building up with the increase in public awareness of fibre broadband that has led to 80% of its broadband sign-ups being fibre-based, and M1’s plans to build its own OpCo that will enhance its competitiveness. Arguably, the group’s earnings are now being depressed by fixed network start-up costs.

Our View Encouraging signs of M1’s evolving business model were (1) more widespread adoption of fibre broadband leading to a 77% YoY (+9% QoQ) jump in fixed services revenue, and (2) continued growth in data ARPU, driven by higher usage of tablet computers. Management reported that 80% of its broadband sign-ups are now fibre-based, with 100Mbps the most popular connection speed. M1 is playing its cards well on several important fronts. Its OpCo will soon be available

for both corporate and residential customers, helping it to benefit from lower wholesale costs and faster time-to-market. In addition, the pay TV model will change from a content-centric one to one based on quality and cost of access, and customer service when the common set-top box is available, possibly in 2013. We do not expect a subsidy battle post-iPhone 4S launch this month, as smartphone penetration is already high and the new phone is not radically different from the old one. While SAC will likely rise in 4Q11 as it is traditionally the seasonal peak, we expect margins to be sustained. Similarly, we do not expect the loss of Vodafone to be damaging as M1 has been preparing for it for more than a year.

Action & Recommendation

Dividend yields are attractive at 6-7%, which should limit downside, while risks and challenges remain about the same as the previous quarter. However, with each quarter, the upside potential should become clearer. Maintain BUY.

Singapore Exchange - More than one way to grow income (KE)

Event

? Singapore Exchange (SGX) announced a very good set of numbers for 1QFY Jun12. Though securities daily average trading value (SDAV) stayed flattish as expected, revenue from the other sources grew by 21% YoY and 10% QoQ. This clearly illustrates that there is a structural growth story to SGX outside of the volatility of market trading conditions. Maintain BUY.

Our View

? First-quarter revenue stood at $178m, up 12% YoY and 11% QoQ. Net profit also grew by 18% YoY, reflecting SGX’s good cost control. The increase came despite SDAV staying flat YoY at $1.6b. As it is, securities accounted for 40% of total revenue in 1QFY Jun12, down from 45% a year ago. This is part of management’s drive to establish more predictable sources of income from derivatives, membership fees and

depository services, among others.

? Revenue from derivatives trading, in particular, was encouraging. Making up 24% of total revenue, it was a record quarter for this segment thanks to strong trading in several newly introduced options/futures. We note that revenue from derivatives have held steady over the past five quarters even while securities trading were fluctuating. Management also highlighted the need to focus on maintaining a tight regulatory

environment to ensure SGX’s competitiveness in the long run.

? We continue to see the steep decline in SGX’s share price as a good buying opportunity. We estimate that current prices imply almost a 5% dividend yield, given the solid cash flow which will improve further when capital expenditure for the REACH engine ends this year.

Action & Recommendation

We lower our SDAV assumption for FY Jun12 to $1.65b from $1.8b, but raise our assumption for non-SDAV revenue. Our target price of $7.80 remains pegged at 25x FY Jun12F, implying a 4% yield. With management’s various initiatives in place, SDAV will bounce back stronger than before and the time to buy is now when it is depressed. Maintain BUY.

Super Group Ltd - Super relocates packaging plant in China (DBSVickers)

BUY S$1.45 STI : 2,778.97

Price Target : 12-Month S$ 1.65

• Relocation of Changzhou plant will net S$10.2m gain over next three years

• No production disruption expected as production less significant than Wuxi plant

• Any possible special dividends will be determined at a later stage

• Thailand plant is currently unaffected by floods

• Maintain recommendation and TP for now

Super will be relocating its packaging plant in Changzhou, China by 31 March 2013 as required by Changzhou's Qishuyan District Government. As compensation, Changzhou's Qishuyan district government will give Super a 120mu land parcel in Qishuyan Economic Development zone and approximately S$12.4m (S$10.2m after relocation costs and expenses) cash.

Super will receive the new land from the government in the following phases outlined below. Based on land transfer completion schedule, we estimate Super to book non-core profits of S$4.24m/S$2.54m/S$3.39m for FY11F/FY12F/FY13F.

No production disruption expected and any special dividends will be decided at a later stage

Super has two key manufacturing locations in China, namely Wuxi and Changzhou. We understand that production in Changzhou is relatively less significant than Wuxi and that any production disruption will be offset by additional capacity from capex expansion in Wuxi. Gains from the relocation may be distributed as special dividends. However, in our view, special dividends, if any, will be determined at a later stage.

Thailand plant is likely unaffected for now based on our geographical analysis

Super has one plant in Plangyao, Chacheongsao, Thailand located some 20km east of Bangprakong River but on slightly higher ground. Based on our geographical analysis of the latest flood situation, the plant location is not affected. Our Thailand research team believes that water will ultimately drain into Brangprakong River as the government takes steps to defend Bangkok by channeling flood waters eastwards from the Chao Phraya River into the Bangprakong River. We estimate that Thailand accounts for 20% of Super’s overall sales. Assuming no contribution from Thailand in 4QFY11 and 1QFY12, Super core earnings will be lowered by 4-5%/4% for FY11/FY12F.

However, we continue to keep our EPS estimates unchanged, noting that reduction in earnings from Thailand will be mitigated by expected non-core gains from relocation of Changzhou plant.

As Super is due to announce its 3Q11 results on 11 November, we retain our EPS estimate, recommendation and TP for now.

M1 Ltd – Within expectations (POEMS)

Hold (Maintained)

Closing Price S$2.48

Target Price S$2.50 (+0.8%)

• 4%y-y increase in profits for the quarter on track to meet our full year estimates

• Lower handset sales due to higher sales of cheaper phones

• Fibre broadband client base reached 16k

• Establishment of OPCO translates OPEX into CAPEX

• Maintain Hold recommendation with target price of S$2.50

3QFY11 in line with our full year estimates

M1 reported 3QFY11 revenue and profits of S$245mn & S$41mn respectively. The key highlight of the quarter is the significant increase in Fixed service revenue due to significant Fibre take up rates during the quarter. The company’s Fibre client base now stands at 16k as of the quarter end. Revenue contribution from handset sales declined 12% due to sales of cheaper phones in the quarter.

Establishment of own OPCO would reduce OPEX into CAPEX

M1 established its own OPCO for the provision of broadband services. By having its own OPCO, M1 would be able to save on connection fees paid to Nucleus Connect of S$21 & S$75 for residential & corporate customers and translates OPEX into CAPEX. The company’s guidance of an initial S$10mn CAPEX for establishing their own OPCO appears very low. Its network roll out had already reached 50% and upon completion of its rollout, 80- 90% of M1’s broadband customers would be served by their own OPCO.

M1’s Postpaid ARPU declined sequentially due to early recognition policy

As mentioned earlier in our reports, M1 employs a fair value accounting policy for the sales of its IPhone plans. Consequently, its Postpaid ARPU booked in the quarter continued to decline as part of the contract revenue had been realised earlier upon initial sale. However, underlying postpaid ARPU remained stable at S$63-64/mth. M1 also reported net adds of 7k & 34k postpaid & prepaid mobile customers for the quarter on low churn rates of 1.3%.

Valuation

We value M1 using a DCF method (WACC: 6.6%, terminal g: 0%) to arrive at our target price of S$2.50. We maintain our view that current market price fairly reflects M1’s outlook and recommend that investors Hold the stock for dividend yields of 6%.