Mun Siong Engineering: No surprises (OSKDMG)

(NEUTRAL, S$0.107, TP S$0.118)

Mun Siong Engineering’s (MSE) 3Q11 earnings was within our expectations (+3.1% YoY to S$1.9m), largely due to higher project and maintenance revenue (+16.6% YoY). With 9M11 earnings making up 73.2% of our FY11 estimates, we are maintaining our FY11 and FY12 earnings forecasts. MSE’s focus on growing its maintenance revenue is bearing fruit, with maintenance revenue growth likely to be >50% YoY. In the absence of large EPC projects, maintenance jobs can mitigate the vacuum by providing a stable stream of recurring income. Moreover, MSE’s cash balance of S$17.1m also allows it to do earnings accretive acquisitions and the company has commenced casting its nets for overseas projects in Vietnam and Saudi Arabia. We have updated our inputs for our valuation model to better reflect the current market environment. Based on DCF methodology (WACC of 17.9% and 1% terminal growth rate), we derive a new TP of S$0.118, down from S$0.165 previously. Maintain NEUTRAL.

3Q11 results in line. MSE’s 3Q11 earnings came in at S$1.9m, up 3.1% YoY, largely attributable to a 16.6% YoY hike in revenue and a 3ppt increase in gross margins, but partially offset by higher administrative expenses. 3Q11 revenue came in at S$19m on the back of increased maintenance and project activities.

Silver lining. With MSE’s strong financial position (net cash of 3.8S¢ per share), we believe MSE has the ability to pay out a dividend of 0.5S¢ per share to shareholders, which translates to a decent yield of 4.7%. MSE is also in a position to conduct earnings accretive acquisitions if the opportunity arises.

Growing maintenance earnings base. MSE’s focus on growing its recurring maintenance revenue is paying off, with maintenance revenue expected to grow >50% YoY. We estimate FY11 earnings to come in at S$6.9m, all of which is attributable to maintenance revenue. In times when multi-billion dollar construction projects are scarce, MSE’s maintenance projects would help mitigate the earnings vacuum. Maintain NEUTRAL with a lower TP of S$0.118 based on DCF methodology (WACC of 17.9% and 1% terminal growth rate).espectively.

CSC Holdings: Earnings boosted by property development (OSKDMG)

(NEUTRAL, S$0.10, TP S$0.11)

CSC’s 2QFY12 earnings were above expectations due to a one-off profit contribution (before taxes) of ~$3.7m arising from the development of an industrial property. Stripping away the one-off earnings, pre-tax core construction earnings would be ~S$1.7m, down 67.3% YoY despite a 21.6% YoY jump in core construction revenue. This dip is due to lower margins secured on contracts amid keen competition. Nonetheless, 2QFY12 profit is still a significant improvement over 1QFY12 PBT of S$0.5m, attributable to a 16.8% QoQ increase in core construction revenue. While order book is strong, standing at S$220m currently (+10% from last quarter), margins may only pick up in 2HFY12 due to intense competition. We have raised our FY12 earnings forecast by 34.5% to S$7.1m, to reflect the recognition of the industrial property development earnings. Maintain NEUTRAL with a lower TP of S$0.11 (previously S$0.12), based on 0.8x P/B (previously 0.85x) - the level CSC was trading at post the 2005-2007 construction up-cycle.

2QFY12 results boosted by property development. 2QFY12 earnings rose 30.9% YoY on the back of higher revenue (+42.3% YoY). However, we note that this was mainly due to its industrial property development. Core construction gross margins are still below the historical average of mid teens, coming in at 9% this quarter, due to keen competition. Stripping away the one-off earnings booster, CSC’s pre-tax core earnings would come in at S$1.7m, down 67.3% YoY, but up significantly from last quarter’s pre tax earnings of S$0.5m.

Lifting earnings forecasts but risks remain. We raised our FY12 earnings forecast by 34.5% to S$7.1m, on the back of a 1ppt increase in gross margins from 8% to 9% (to factor in the property development contribution) and tweaked our expenses. While we view the 21.6% YoY and 16.8% QoQ growth in this quarter’s construction revenue as a positive, indicating that a strong pipeline of projects are out for grabs, downside risks to our earnings estimate remains. These include unforeseen project delays, as well as additional and prolonged pricing pressure in the sector. Thus, we maintain our NEUTRAL recommendation on the stock for now.

Broadway Industrial: Outlook dampened by Thai floods (OSKDMG)

(SELL, S$0.33, TP S$0.30)

Forex losses larger than estimated; reiterate SELL. Broadway reported losses of S$9.9m in 3Q11, mainly attributable to flat revenue growth and a huge net forex loss of S$13.2m. Taking out the impact of forex impacts, PATMI of S$13.7m for 9M11 accounted for only 61.2% of our initial estimates. Due to the massive Thai floods and supply chain disruption, we expect 4Q11 results to be worse than 3Q11. FY12 is likely to be a backend loaded year as its Hard Disk Drive (HDD) business will only resume normal production towards second half of next year. As such, we lower our core earnings estimates by 26.0% in FY11 and 13.4% in FY12 to S$16.6m and S$23.8m respectively. Maintain SELL, with a new TP of S$0.30 pegged to 5.3x FY12 earnings (5-yr historical average).

Hedging too much. Though hedging for forex risks is necessary, we opine that Broadway is currently holding too much forward contracts that are long-maturity (average of 2 years) and out-of-money (average strike price of S$1.23) , exposing the group to even more risks given the macro uncertainties. Nevertheless, if the exchange rate of USDSGD were to stay put at 1.27 by end of this quarter, we expect the group to revert back S$4.5m of its losses provided in 3Q.

Wuxi plant to take over Thailand production. Following the massive Thai floods (its plant is submerged in 2m high water), Broadway is now looking to ramp up its Wuxi plant (currently 50% utilised) production in order to fulfill Seagate and Hitachi’s orders in time. We expect the Broadway to sustain its production capacity amid higher costs as new workers are being hired in Wuxi while salary expenses continue to incur in Thailand (US$400,000/mth) despite no production.

… but will still be hit by the supply chain disruption. While Seagate’s facilities are not affected by the floods, there will be supply chain disruption as a result of shortage of key components such as sliders and motors. This will eventually slow down Seagate’s production and in turn negatively impact on Broadway. As such, we believe that the group’s HDD business will only be able to resume normal production towards second half of FY12 as the whole industry recover from the flooding woes.

Hyflux - Transitional quarter (DBSV)

BUY S$1.41 STI : 2,810.04

Price Target : 12-Month S$ 1.78 (Prev S$ 2.07)

Reason for Report : Earnings and TP revision

Potential Catalyst: Contract wins, stronger than expected execution of orderbook

DBSV vs Consensus: Lower because of conservative sales and new win assumptions

• 3Q11 significantly below expectations; sales shortfall due to transition to Tuaspring from large scale MENA projects

• Revenue to improve in 4Q but contract flows may still be slow; cut FY11/12F earnings by 15-35%

• TP lowered to S$1.78; maintain Buy in view of decent upside and positive long term prospects

Weak quarter reflects transition from MENA to Tuaspring. Sales of S$87.7m (-36% y-o-y) and headline net profit of S$12.6m (- 34% yoy) were below our estimates of S$129m and S$18m respectively. Excluding S$5m exchange gain, S$13.2m of disposal gain and S$3.3m in fair value loss on derivative financial instruments, Hyflux would have incurred an operating loss of S$2.1m, as Tuaspring is still in the early stage of ramping up and could not fill the gap left by large scale MENA projects. We have pushed out some recognition of Tuaspring to FY12. 9M11 earnings accounted for 56% of previous earnings

Improvement expected in FY12 – orderbook still intact, Tuaspring unlikely to defer. The poor showing was disappointing but we expect earnings momentum to rebound as the ramp up of Tuaspring accelerates into FY12. Current EPC orderbook stands at a firm S$1.1bn to cover 1.4x FY12F sales. We understand Hyflux is scouting for new opportunities in China, India, SEA, Latin America and Australia but we do not expect new contracts soon as management is more selective on capital intensive projects given the tight credit environment. Our FY12 new win assumption is only S$500m, compared to S$980m of actual contracts secured YTD in FY11.

Cut FY11/12F earnings by 35%/15%, TP lowered to S$1.78. as we pushed out some sales from FY11 to FY12 and dropped gross margin by 4-5ppts. Hence, our SOTP-based TP is lowered to S$1.78. Notwithstanding the EPS and TP revisions, current share price still offers 25% to our TP. Maintain BUY.

Singapore Airlines - Tepid outlook (DBSV)

HOLD S$11.29 STI : 2,810.04 (downgrade from BUY)

Price Target : 12-Month S$ 11.20 (Prev S$ 15.00)

Reason for Report : 1HFY12 Results

Potential Catalyst: Improvement in operating numbers

DBSV vs Consensus: We have now cut our forecasts to be slightly below consensus.

• 2Q net profit of S$194m up by over three fold q-oq but dives 49% y-o-y – below expectations

• Advance bookings showing weakness, especially in US and Europe

• FY12F/13F earnings cut by 27%/17%

• Downgrade to HOLD, TP cut to S$11.20

2Q12 earnings disappoint. SIA’s 2Q12 EBIT declined 64% y-o-y to S$123m despite a modest 2% increase in revenue to S$3.7bn, as fuel costs rose 29%. However, due to higher non-operating income of S$53m vs S$18m a year ago, net profit posted a smaller decline of 49% to S$194m. For 1H12, net profit declined 62% yo- y to S$239m. An interim dividend of 10Scts was declared (1H11: 20Scts)

FY12F and FY13F earnings cut by 27% and 17% respectively, on lower yield assumptions. With the US and Europe economies still mired in uncertainty, yields are likely to remain under pressure as demand remains weak. We lower our passenger yield assumptions for SIA from 12.3Scts in FY12F and 12.5Scts in FY13F to 12Scts and 12.3Scts respectively. This is still marginally higher than 11.9Scts yield in FY11, though. Accordingly, FY12F and FY13F earnings are cut by 27% and 17% to S$685m and S$893m respectively.

The Group’s balance sheet remains strong with net cash of c. S$4bn or over c. S$3.30 per share.

Downgrade to HOLD, TP cut to S$11.20. With our cut in earnings forecasts for SIA, we lower our target P/B valuation multiple for SIA to 1x P/B, against FY13F ROE of 6.7%. A stronger growth outlook for the US and Europe could be a catalyst for the stock to re-rate.

Sembcorp Marine - Driven by Songa Eclipse (DBSV)

BUY S$4.10 STI : 2,810.04

Price Target : 12-month S$ 4.60 (Prev S$ 4.80)

Reason for Report : Revision in earnings forecasts, TP; new FY13F

Potential Catalyst: New orders, uptrend in margins

DBSV vs Consensus: FY11 above consensus by 2.6% on higher margins

• 3Q11 core PATMI down 9% y-o-y; 9M11 forms 71% of our FY11F

• Slow order wins in 3Q led to reduced orderbook of S$5.2bn, book-to-bill of 1.3x

• Demand for offshore projects remains strong; Petrobras’ rig tender (worth up to US$4.2bn) remains the wild card

• FY11F/12F revised -2%/-5%; maintain BUY, TP S$4.60

Lumpy earnings buoy 3Q11. 3Q11 core PATMI fell 9% y-o-y to S$222.5m, but was up 49% q-o-q, boosted by profits from the completion and delivery of Songa Eclipse semi-submersible, which formed around half of 3Q11 earnings. Excluding this, 3Q was below expectations, due to 1) slower drawdown of its order book and 2) lower EBIT margins.

Robust deepwater prospects – 8 jack up options outstanding. Despite the ongoing macro uncertainty, industry fundamentals continue to firm up, with activity levels picking up across the offshore value chain. Enquiry levels remain strong for a variety of rigs and platforms. Outstanding options for 8 jack ups worth US$1.6b, with 2 expiring in Dec, could materialize into contract wins in the near term. However, the tighter credit environment could moderate the pace of contract awards, leading to a reduction in our FY11 order wins assumption to S$4.5bn from S$5.0bn previously. Management is guiding for S$4b to S$5b worth of new order wins in 2011. Petrobras remains the wild card not factored in our numbers, which could add US$3.6-4.2bn if SMM is awarded the entire contract for the 6 drill-ships. Current order book of S$5.2b translates into book to bill of1.3x.

FY11/12F reduced 2-5%; maintain BUY with TP S$4.60. We trim our FY11/12F earnings by 2%/5% to account for the weak 3Q11, reduced FY11/12 EBIT margins, and a reduction in our FY11 order wins assumption to S$4.5bn. Our sum-of-parts based TP for SMM is accordingly adjusted to S$4.60 (prev S$4.80) as we roll forward our valuation to a reduced FY12F and adjusting for our recently reduced TP for Cosco Corp to S$0.88. Its strong balance sheet with net cash of S$1.9b should underpin a high dividend payout, translating into dividend yield of 6%. Maintain BUY on SMM.

Hyflux (KE)

Event

We had anticipated earnings risk in our previous update. Hyflux’s 3Q11 results confirmed our fears. Without the one-off PPE sale and forex gain, the third quarter would have been in the red. Profitability this year will likely fall far short of earlier consensus expectations ($80m). We downgrade the stock to SELL.

Our View

3Q11 revenue declined by 36% YoY while net profit fell by 34% YoY to $12.6m. A one-off gain on sale of obsolete equipment ($13.2m) and forex gains ($5.1m) prevented a loss. For 9M11, profit declined by 36% to $34m against a full-year consensus of $80m. This was attributed to lumpy revenue recognition, but we foresee more structural issues here.

Execution on China BOT projects continues to be slow, a worry we have earlier expressed. Despite an estimated orderbook of $330m, only $93m were recognised YTD. This is despite some projects having been won as far back as 2008. We think it is likely that management withheld some of these projects, which might be fundamentally unattractive. With a 25-30 year investment horizon, there is also the issue of whether Hyflux is able to divest these projects.

The cessation of the Middle Eastern projects for now may signal an end to a run of attractive projects for Hyflux. Outside of Singapore, management is focusing on China, India and Australia, though the last two are still potential new markets from which concrete contracts have yet to come.

Action & Recommendation

We cut our earnings forecast to mainly reflect slower execution on the remaining EPC orderbook of about $1.1b. We also lower our core earnings multiple to 12x to reflect higher earnings risk. At its current price, Hyflux is still trading at 2.4x P/B, excluding preference shares. This is a lofty valuation given our estimated decline in ROE to below 15% over the next three years. Downgrade to SELL with the SOTP-based target price cut to $1.15 from $2.16.

Sembcorp Marine (KE)

Event

Sembcorp Marine (SMM) posted 3Q11 net profit $222.5m, down 25% versus a bumper 3Q10. This is in line with expectations. While 3Q11 revenue grew by 16.8% YoY to $1,302.3m, the divergence was due to the difference in revenue recognition on a specific project. There were no major surprises with the group delivering exactly as expected. It is on target to meet our FY11 forecasts. Maintain BUY and target price of $4.95.

Our View

Sales in 3Q11 were boosted by the revenue recognition of the semisubmersible Songa Eclipse, which was previously stalled pending its sale to a new owner. As a result, gross margins were also sequentially lower from 23.6% to 19.7%, but YTD gross margins at 21.9% are still reflective of our full-year projection.

SMM is predominantly still executing on its high-value orderbook secured prior to the 2008 downturn. This explains why its margins have held up. Going forward, we expect SMM to progressively switch to jobs that were secured over the past 18 months at a relatively lower

margin. We thus expect margins to broadly decline from 2Q12 onwards. The erosion is in the region of 3-4%, but this will be mitigated by a pickup in revenue generated from its more recent order wins.

SMM has secured US$2.6b worth of contracts YTD with most being jackup orders. There are also eight options outstanding, collectively worth about another US$2b. Net orderbook stands at around US$4.2b, with deliveries up to 2014.

Management has indicated that enquiry levels for the deepwater segment have increased, with buyers now having more certainty of new regulations in the wake of the Gulf of Mexico spill. We expect to see orders for semisubmersibles within the coming months.

Action & Recommendation

Our forecasts are only being adjusted for the $54.4m tax refund due to the favourable tax assessment from the disputed foreign exchange transactions losses in FY09 and FY10. Core earnings are unchanged. We maintain BUY with an SOTP-based target price of $4.95, with the core shipyard operations valued at just 13x FY12F earnings.

Singapore Airlines (SIA SP): 2Q earnings a marked improvement (KE)

Singapore Airlines (SIA) posted 2QFY Mar12 net earnings of $194.2m. While this was a YoY decline of 49%, the number was a sharp improvement from that in 1QFY Mar12 when the carrier spooked the market by barely breaking even.

As expected, significant respite came from lower fuel prices. The airline’s 2Q fuel bill declined sequentially by $30m, or 2%, to $1.41b despite a 4.8% increase in capacity. Average market jet fuel prices contracted by 4% QoQ. Passenger yields were at 11.7 cts/pkm, a marginal decrease from 1Q’s 11.8 cts/pkm. Traffic and load factors remained healthy, as evidenced by its monthly reporting.

However, SIA is not yet out of the woods. For 1HFY Mar12, cargo recorded an operating loss of $31m, while the passenger airline only achieved an operating profit of $53m. This was offset by significant contributions to group earnings from SIA Engineering and SilkAir.

SIA also recorded a one-off non-operating gain of $48.1m in the second quarter, from the return of capital on the redemption of preference shares at associate Virgin Atlantic. We will seek further clarification and details on this issue.

In line with the weaker 1HFY Mar12 performance, the interim dividend has been cut to 10 cents per share from 20 cents per share a year ago. This was within our expectation. Pending SIA’s results briefing today, we are unlikely to change our core earnings significantly and are still confident of earnings acceleration in the second half. This will be driven mainly by lower fuel costs and with loads and yields maintained. Our current FY Mar12 earnings forecast stands at $766m. However, we caution that the recovery remains fragile. Our target price and recommendation are under review.

Hyflux: Downgrade to HOLD on more muted outlook (OCBC)

Poor set of 3Q11 results. Hyflux Ltd reported a pretty poor set of 3Q11 results last evening, with revenue slipping 36.2% YoY and 21.0% QoQ to S$87.7m; management explained the fall was mainly due to a "switching over effect", where its two mega desalination projects in Algeria have entered into the tail end of construction, while it has just embarked on its Tuaspring Desalination project. And because of higher preparation costs for Tuaspring, net profit also declined 33.6% YoY and 13.2% QoQ to S$12.6m. However, we also note that reported net profit was boosted by several one-off items, including S$5.1m forex gain and S$13.2m equipment sale gain. For 9M11, revenue fell 25% to S$285.6m, meeting 48% of our FY11 estimate, while net profit slid 32% to S$33.9m, or 43% of full-year forecast.

Slow recognition of orders in China. Based on its last revealed order book of S$2.1b (as of end-Jun) and assuming that it did not add any new orders (it typically does not announce small-order wins), we estimate that the group should be sitting on an order book of just over S$2.0b. The bulk of it will be dominated by Tuaspring (S$750m), which it will effectively recognize over six quarters; O&M orders (S$940m at end-Jun), which extend out to 25 years; and the rest probably from projects in China (S$310m). However, management notes of likely slower recognition of revenue from China; this as it intends to proceed cautiously with its BOT projects in light of the more uncertain demand there now. While Hyflux still sees prospects in China, it concedes that growth will not be as robust.

Main focus now on Tuaspring. Coupled with the uncertain MENA situation, and the slow progress in India, the group will focus most of its energy on Tuaspring over the next few quarters and rightly so. Assuming that 90% of the project will be recognized over the next six quarters, Hyflux should be able to book EPC revenue of some S$112m per quarter; and based on a conservative 10% net margin, quarterly earnings should be around S$12m. Hence at the very minimum, Tuaspring should account for S$448m of revenue and S$48m of net profit next year.

Downgrade to HOLD. Given the poorer-than-expected 3Q results, we are slashing our FY11 estimates for revenue by 27% and earnings by 38%; we are also paring our FY12 estimates by 17% and 21% respectively, mainly to reflect the more muted prospects in China. Our fair value correspondingly drops to S$1.28 from S$1.81, now based on 15x FY12 PER. Downgrade to HOLD.

Sembcorp Marine: Watch the deepwater space (OCBC)

3Q11 results within expectations. Sembcorp Marine (SMM) reported a 16.8% YoY rise in revenue to S$1.3b but saw a 24.8% fall in net profit to S$222.5m in 3Q11. Results were in line with expectations, with 9M11 net profit accounting for 75.9% of our full year estimate. As expected, turnover was bumped up by the resumption of recognition of the Songa Eclipse semi-submersible rig (previously only 30% recognized) which was delivered in the last quarter, and we estimate this contributed about S$540m to 3Q top-line. Offshore and conversion continued its strong showing YTD, with revenue from this segment increasing 53.8% YoY to S$232m in the quarter.

Watch the deepwater space. Management revealed that there have been more enquiries for semi-submersible rigs compared to the previous quarter. Recent news flow also suggests that tightening in the deepwater space is gaining momentum, with more units securing charters recently at favourable day rates. In particular, drilling in the Gulf of Mexico has returned to nearnormal levels with 23 rigs currently drilling wells in water depth greater than 3000 ft . This is the same number compared to two years ago. Although the momentum for newbuild jack-ups has slowed down, SMM said it is still receiving enquiries for such units.

YTD new order wins exceeds FY10. SMM has a net order book of S$5.2b with deliveries stretching till 2Q14. Excluding ship repair contracts, the group has secured S$3.2b worth of new orders YTD, exceeding its S$3.04b new order win in FY10. We keep our full year estimate of S$4.5b while recognizing that the swing factor would come from potential semisubmersible wins. For FY12, SMM is hopeful of clinching work involving jack-ups, semi-submersibles, fixed platforms and drillships. Meanwhile, there are eight rig options outstanding, and we estimate their potential value to be around US$1.6b.

Maintain BUY. Besides an estimated final dividend of S$0.06/share that may be declared in its 4Q11 results, we also expect SMM to pay out a special dividend whose quantum is dependent on potential M&A opportunities. Meanwhile, we have adjusted our earnings estimates to take into account a one-off tax refund that SMM will obtain due to the settlement of its previous disputed foreign exchange transactions. After updating the market value of the group's stake in Cosco Corp and at the same time rolling forward our valuation to FY12F earnings, our SOTP-based fair value estimate falls slightly from S$5.70 to S$5.63. Maintain BUY.

Roxy Pacific Hldgs Ltd - Boost from Kovan Centre gain (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$0.405

Fair Value : S$0.47

3Q11 results boosted by fair value gain. Roxy-Pacific Holdings (ROXY) reported 3Q11 PATMI of S$13.4m (up 50.5% YoY) which came in above our expectations. This is mostly due to a S$9.6m fair value gain from reclassifying Kovan Centre to a development property. 3Q11 top line came in at S$44.4m - below expectations due to slower than anticipated construction progress. We are not overly anxious about this given that all launched projects, except Nottinghill Suites and Wis@Changi, are fully sold and expect the revenue recognition lag to catch up in 4Q11.

Expect neutral reaction to results. We believe the market would be neutral on its 3Q11 results as the earnings beat came from fair value gain. Over the next quarter, the focus would continue to stay on the execution and sales at new projects - Nottinghill Suites (17% sold) and the newly launched Wis@Changi (18% sold). Centropod@Changi (80 Changi Rd) and Treescape (Telok Kurau) are also expected to launch by year end. Eon Shenton (70 Shenton Way), Millage (55 Changi) and Hillview Terrace would launch in 1Q12. In particular, we believe sales at Nottinghill Suites, after the revamping of its showflat, would be a meaningful driver of share price as the market re-evaluates the project's profitability and time-scale given increasing uncertainty in the residential sector.

Paring hotel earnings for FY12. ROXY's hotel, Grand Mercure Roxy Hotel (GMRH), continued to pull in strong numbers. 9M11 average revenue per room (ARR) came in at S$188.4, up 14% from last year and average occupancy rate (AOR) stayed at a healthy 94.1%. As a result, we see 9M11 REVPAR up 14% YoY at S$177.3. Going forward into FY12, we expect weaker numbers due to slower global growth and pare our FY12 REVPAR estimates down by 8.5% to S$162.

Reiterate BUY rating. At the current market cap of S$258m, Roxy Pacific Holdings is trading less than the independent valuation of its hotel asset alone (GMRH) at S$331m or ~S$590K per room. Excluding GMRH, there is an additional net equity of S$128m on its balance sheet. Despite uncertainty ahead, we expect earnings to be buffered by S$519m of unbilled progress billings at mostly sold-out projects and recurring income from its hotel segment (53% of 9M11 gross profit). With updated assumptions, however, our fair value estimate dips marginally to S$0.47 (30% discount to RNAV) versus S$0.48 previously. Maintain BUY.

United Envirotech Ltd - 1HFY12 results mostly in line (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$0.325

Fair Value: S$0.42

1HFY12 results mostly in line. United Envirotech Limited (UEL) reported its 2QFY12 results last evening, with revenue climbing 9.6% YoY to S$25.2m; this largely aided by higher treatment revenue, which grew 54.5%, due to the additions of Hegang 50k m3/day treatment plant and Nansha industrial treatment plant. But net profit tumbled 38.7% YoY to S$3.7m, hit by labor cost, interest cost and taxes. But on a sequential basis, the group showed a pretty good performance, with revenue rising 21.3% and earnings 4.9%. For 1HFY12, revenue grew 1.4% to S$46.0m, meeting 51.7% of full-year estimate, while net profit fell 29.5% to 7.3m, or 41.8% of our FY12 forecast.

Maintains optimistic outlook. Going forward, UEL remains fairly upbeat about its prospects in China, as it believes that there is still a growing demand for membrane-based water and wastewater treatment services; and it further believes that its advanced technologies, particularly Membrane Bioreactor (MBR), have a competitive edge in treating wastewater of a greater complexity to meet the stricter discharge limits. As a recap, the group has recently acquired another waste-water treatment project in China; this after exercising a call option to acquire the entire equity interest of Tongji Environmental (China) Pte Ltd (Tongji) for RMB34.03m. Tongji is the holding company of Aton Environmental (Shenyang) Co, where the latter has a 30-year BOT (Build-Operate-Transfer) concession agreement with the municipal government to treat 50k m3 of wastewater daily.

Finances backed by recent CB issue. While the group recorded cash balance of S$31.9m as of end-Sep, its coffers has just been topped up by the recent completion of US$113m worth of convertible bonds issued to KKR; this is expected to result in a net inflow of US$110m. Given the current credit crunch in China, we believe that the funds inflow could not have come at a better time - this will provide UEL with the financial muscle to pick up potential acquisitions on the cheap. In any case, we estimate that the group is already sitting on an order book of around S$70m, which can be recognised over the next 12 months.

Paring fair value to S$0.42. While 1HFY12 revenue was largely in line, higher cost pressures have depressed earnings. As such, we are using slightly lower margin assumptions and our earnings estimates for both FY12 and 13 drop by 8.4%. And because of the increased volatility in the market, our DCFbased fair value also correspondingly drops to S$0.42, but we maintain BUY for a potential upside of 30%.

HI-P (Lim&Tan)

S$0.61-HIPS.SI

? Hi-P restarted their share buy back program yesterday, having bought 129,000 shares at 60 cents each.

? Their buy back represented 13% of yesterday’s volume of 1,023,000 which is low compared to as much as 70-80% in their past buy back programs.

? This is the first buy back since the company last did on 25 Feb’11 when they bought 168,000 shares at S$1.18 each.

? This being the first buy back, it would likely be too early to judge how successful and powerful it would be in terms of benefitting its share price.

? However, in an overall weak market yesterday (where the Singapore index fell almost 1%), Hi-P’s share price had already outperformed significantly, having risen 7% on just over 1mln shares traded, above its 6 month average of 300,000 shares.

? This is likely due to the fact that the company’s last share buy back program done between June’10 till Feb’11 had seen the stock rise significantly from the 50 cents level to S$1.20, and since the company is again restarting its share buy back program around the same level as their last buy back program, the market would likely see it as a powerful early signal again.

? And both times the company is starting its buy back program when its cash holding accounts for about 40+% of its share price.

? The last time when the company started their share buy back in June’10 till Feb’11, the company’s bottomline swung from its first ever loss in 1Q’10 to hit a record profit of S$36mln in 4Q’10 on the back of maiden contributions from Apple as well as ramp up of shipments from Research In Motion (RIM).

? This time however, management is warning about continued pricing pressures from customers and European analysts are concerned that RIM has missed the window of opportunity presented by Nokia’s falling on hard times.

? Management expect profit to improve in 4Q’11 over 3Q’11’s depressed S$6+mln, but it will not reach 4Q’10’s record S$36mln as well as their usual range of S$20+mln due to continued pricing pressures from key customers, consolidation and impairment charges, rising commodity & labor costs, uncertain macro environment as well as volatile forex rate.

? It is useful to recall how the last share buy back program had pushed the stock above the multi-month range of 50-75 cents, which suggests the 75 cents area would likely present some technical resistance this time around unless of course the operating environment were to improve so dramatically, accompanied by some big order wins for Hi-P.

? However, at 0.9x price to book, which is below its historical average of 1.2x coupled with the company having restarted their share buy back program, we are reinstating our BUY recommendation on the stock. (With the latest book value of 70.65 cents a share, 1.2x price to book translates to 85 cents while at the S$1.24 high in Feb’11, price to book was 1.8x).

SEMB MARINE (LIM&TAN)

S$4.10-SWMS.SI

? Management is, again attributing the y-o-y drop in net profit (to $222.5 mln) to the fact that most of the jack-up rig orders secured since Q4 ’10 “are still at the planning stage”, which continues to underscore the importance of new order flows.

? In the year-to-date, SMM has secured new orders worth $3178 mln, of which $561 mln came after the release of Q2 results in August, admittedly somewhat slow compared to Keppel Corp’s Offshore Division. Net order books stand at $5188 mln.

? Strip out the $52.6 mln exceptional gain a year ago, however, the drop is a more palatable 9%. ? Fact is management remains optimistic of securing more offshore contracts given the still-robust state of the business, with crude where it is (Brent yesterday rose US$1.38 / 1.3% to US$110.72 a barrel).

? At $4.10, trailing PE is 11.2x.

? We maintain BUY.