Midas Holdings - Investors have taken the last train out; we stay put (CIMB)

Current S$0.34

Target S$0.36

We visited the company after its dismal 3Q. We expect another 1-2 painful quarters, until railway development recommences. We also believe a cash-strapped Railway Ministry in China will be the industry’s main growth obstacle.

While we maintain our FY11 EPS, we slash FY12-13 to capture slower revenue recognition, and higher operating and financing costs. Our TP falls accordingly, still based on 8x CY13 P/E, industrial peers’ 5-year forward average. However, maintain Neutral as we believe the negatives have been priced in.

Recurring pain

Midas’s 3Q pain could be blamed on slower train deliveries and higher operating/finance costs following its recent capacity expansion. In the aftermath of two railway accidents, the Chinese government had halted railway development. This led to slower deliveries for existing contracts and growing inventories in the industry value chain. Further, a cash-strapped Ministry of Railway (MoR) started withholding payment to its major suppliers. As a result, Midas’s key clients and the industry’s largest paymasters, state-owned locomotive producers CSR and China CNR, have been delaying payments too. Midas’s collection days grew to 311 in 3Q. It had to finance its working capital with short-term financing. We do not see any quick solutions in the near term.

The real issue

Liquidity appears to be flowing back into the industry recently with the MoR repaying CSR and CNR Rmb23bn in arrears. This should alleviate Midas’s cash flow. However, the key issue is whether the MoR still has the ability to fund development projects to meet the targets spelt out in China’s 12th five-year plan. The market does not believe so, judging from the escalating yields on its recently issued corporate bonds. In response to mounting debt concerns, new Railway Minister Sheng Guangzu plans to reduce railway investments by 30%. This could impede growth in the railway development industry.

All priced in

As we believe Midas’s 0.7x P/BV valuations have priced in the negative news, we maintain our Neutral rating.

Frasers Commercial Trust: Expecting better performance in FY12 (OCBC)

Results within expectations. Frasers Commercial Trust (FCOT) delivered 4QFY11 DPU of 1.52 S cents on the back of a 4.8% YoY growth in NPI to S$24.3m. This brings the full-year DPU to 5.75 S cents, which is roughly within our and consensus expectations of 5.6 S cents and 6.0 S cents, respectively. Key drivers for the quarterly NPI came from strong contributions from Central Park (+26.8%) and Caroline Chisholm Centre (+13.6%), due to improvement in occupancy and rental rates, and strengthening of AUD against SGD. Average 4QFY11 portfolio occupancy rates also tracked a substantial improvement from 90.8% in 4QFY10 to 98.0%, underpinned by healthy rates of 97.8% for Singapore and 99.8% for Australia. As at 30 Sep, we note that the weighted average lease to expiry (WALE) was at a healthy 3.6 years, thanks to long Australian portfolio duration of 6.8 years.

Expecting improving performance. Going into FY12, we maintain our view that FCOT may continue to post improvement in its operating performance, barring any fallout in the office rental market. According to management, 29.3% of the gross rental income is due for renewal, of which 16.0% is attributable to the expiry of China Square Central (CSC) master lease arrangement in Mar 2012. We understand that CSC's average passing rents of S$6 based on the underlying leases is below the recently contracted rents of S$6.30-8.00, while its underlying occupancy is at a strong 95.7%. With management's intention not to renew the lease but to take over the management of the property upon its expiry, we are likely to see further rental growth on this front. This is in addition to the weighted average increase in portfolio step-up rents of 3.9% expected in FY12.

Maintain BUY. Following FCOT's decision to embark on an early re-financing exercise to take advantage of the prevailing low interest rate environment, the group also reported on 22 Nov that it had secured a new A$105m loan facility. We note that this facility, which will be used to repay the outstanding amount of A$103.4m relating to its existing A$150m loan facility, has an interest rate based on Australian BBSY rate plus margin of 1.55% (vs. existing 2.65%). Hence, we may expect DPU uplift from interest savings. We make minor adjustments to our FY12 forecasts to factor in these recent developments. Our DDM-based fair value, however, remains unchanged at S$0.87. Retain BUY on FCOT.

ST Engineering: Recent decline provides better entry point (OCBC)

Shares hurt by weak market sentiment. Since our last report on 8 Nov 2011, Singapore Technologies Engineering's (STE) share price has fallen 5.3% while the FTSE Straits Times Index (FSSTI) declined 6.0%. This was due to weak market sentiment as a result of the current global uncertainties. Despite announcing a sizable contract win worth S$441m on 18 Nov 2011, its share price has eased 2.5% compared to 1.9% drop in FSSTI. Although STE's earnings are fairly resilient, its share price declined in tandem with the sell-off in Singapore equities, albeit at a lower rate than the broader market.

Clinched S$441m new order. STE last week announced that its American subsidiary, VT Halter Marine, has won a shipbuilding contract from Hornbeck Offshore Services, Inc. This contract is worth US$353m or S$441m. The contract constitutes the construction of eight 97.2m long Offshore Supply Vessels (OSV). VT Halter Marine has started initial engineering work and actual construction of the vessels is expected to begin in 1Q12. Deliveries are scheduled for between Oct 2013 and Sep 2014. In addition, there are options for up to 24 vessels, possibly raising the total value to more than S$1.7b. At end-3Q11, STE's strong order book stood at S$11b. This latest contract win has added at least 4%, depending on the take up of options, to its order book.

EPS growth has been stable. Exhibit 1 shows the YoY earnings per share (EPS) growth of STE and its four main segments of Aerospace, Electronics, Land Systems, and Marine since 2005. While the EPS of individual segments could fall by more than 20% in a difficult year, STE group-wide EPS growth has been fairly stable through the years, including 9M11 when it recorded 7.4% of EPS growth. With the bulk of its revenue well supported by a healthy order book, STE's earnings have been remarkably resilient.

Reiterate BUY. As the global outlook is likely to remain volatile in the coming months, this will mean that the operating environment will be challenging for most corporates. In this climate, we continue to favour the defensive stocks, which will offer a better hedge against any sharp erosion in earnings. As STE's share price has corrected in recent weeks and together with an estimated dividend yield of 5.6%, we reiterate our BUY rating for the stock. We have a fair value estimate of S$3.01.

BreadTalk Group (KE)

Background: BreadTalk Group was formed 11 years ago and has transformed itself from a local bakery into a multi-brand F&B player across Asia, with more than 500 outlets. Its three main business segments are bakery (own and franchised), food court and restaurant.

Recent development: BreadTalk has entered into a Heads of Agreement to subscribe for $18m junior bonds, including preference shares, with Perennial Real Estate’s subsidiary PRE 8. PRE 8 recently purchased Chijmes for $177m, which the firm could leverage on and secure prime retail space in the future. This is similar to its investment in 112 Katong, the former Katong Mall, in November 2009 when the group subscribed for $10m junior bonds. The project is nearing completion and has secured approximately 95% occupancy rate as of last month.

Our view

3Q11 results. Driven largely by outlet expansion and higher same store sales, BreadTalk’s main segment, bakery sales, grew by 20.4% YoY to $45.9m in 3Q11, while restaurants grew by 37.3% and franchise, 8.7%. Operating margins improved by 5ppt through cost management.

Double-digit growth YoY. The group has consistently achieved double-digit growth in all segments in the past five years. Previously, start-up losses and underperformances from the new restaurant brands and concepts weighed on its profits. BreadTalk has slowed down the opening of restaurants and focused on expanding through the franchise model of its bakery brands, BreadTalk and Toast Box. Since 2008, it has established more than 40 franchised outlets each year.

Thailand Din Tai Fung sees overwhelming response. The first Din Tai Fung restaurant in Bangkok opened in May this year and is already profitable. Encouraged by the response, the group plans to increase its brand offerings by operating food courts and atriums in Thailand.

Healthy cash flow. BreadTalk’s cash flow has remained healthy, buoyed by strong operating activities. The group currently is in a net cash position of $52.8m, which translates to 35% of its market capitalisation. It has also bought back 1.09m shares since June this year for $0.46-0.59 each. We estimate the stock is trading at a discount against its peers’ PER of 17.8x with an annualised PER of 15.8x. This is considered conservative as the last quarter is usually its strongest.

Key ratios…

Price-to-earnings: 13.7x

Price-to-NTA: 2.1x

Dividend per share/ yield %: S$0.01/ 1.9%

Net cash/(debt) per share: S$0.19

Net cash as % of market cap: 35.0%

Share price S$0.54

Issued shares (m) 280.8

Market cap (S$m) 149.9

Free float (%) 41.6

Recent fundraising activities Nil

Financial YE 31 Dec

Major shareholders Quek Tong Meng – 34.0%

YTD change -15.8%

52-wk price range $0.46-0.72

Telekom Malaysia (KE)

Event

TM’s 3Q11 results were above expectations at the core level, led by strong broadband-related contributions. We raise our FY11-12 forecasts by 11% and 15%, respectively, as we factor in the Axiata share sale gain as well as higher Internet contributions over the next two years. In addition, we lower our beta assumption from 0.9x to 0.86x, in line with recent lower volatility for dividend stocks. Our DCF-derived valuation target for TM thus increases from RM4.60 to RM4.84. Maintain BUY.

Our View

Strong performance at core level. After removing the non-operational and unpredictable items, such as a RM122m unrealised forex loss on long-term US$-denominated bonds, a RM278m gain on the sale of Axiata shares, and a RM60m provision to write off obsolete copper PSTN network assets as TM migrates to an all-IP core network, we estimate 3Q11 core net profit rose by 44.5% YoY to RM182m, well above our expectation of a 20% increase.

Margins continued to surprise on the upside. As alluded to last quarter, TM managed to keep margins on the boil with EBITDA margin reaching 34.6% in 3Q11, driven by strong Internet revenue growth as Unifi accelerated its run rate to add 55,400 subscribers in 3Q11. At 33.7%, 9M11 EBITDA margin is well above earlier guidance of 32%, and management expressed optimism that 4Q margin should be maintained, at the least.

Fixed broadband, especially Unifi, giving TM a new lease of life. Unifi is more than delivering on its earlier potential. As at end-3Q11, TM has signed up 164k subscribers with stable ARPU of RM184 a month and the take-up is still accelerating (run rate so far in 4Q11 is 18.8k vs 3Q run rate of 18.5k). In fact, Unifi is now EBITDA positive. Also, TM has almost the whole field to itself as competitors are still sorting themselves out and rival products are not expected to hit the market until 2H12, at this stage.

Action & Recommendation

Maintain BUY on TM for its increasingly attractive growth profile and appealing dividend yield of 5.9%. TM offers a unique blend of growth and defensive characteristics for investors as superfast broadband gives it a new lease of life.

CapitaLand: China residential headwinds intact, low exposure (OSKDMG)

(BUY, S$2.46, TP S$3.52)

We paid a visit to China for an update on CapitaLand’s assets in Shanghai, Suzhou and Hangzhou. While we conclude sites acquired through the OODL transaction are in good locations and present a value proposition, we believe any upside potential for CapitaLand regarding its China residential exposure is capped in the near term with policy headwinds intact. That said, we highlight CapitaLand’s only c.14% China residential exposure of which CapitaLand’s poor share price performance, if attributed to concerns over China residential exposure, is largely overdone. The bright spot lies with its commercial/retail exposure through 65% owned CMA. Maintain BUY, TPS$3.52 with stock attractively priced at c.44% discount to RNAV.

Residential headwinds intact. Post site visit with takeaways from management and project sales staff on site, we believe the government has a strong hand at regulating both prices and volume through buying restrictions, lower LTVs and project sales licences. Policy reversal is unlikely in the near term at least till 2H12.

Only c.14% China residential exposure, concerns overdone. We believe investors’ concerns on the China residential segment is likely to persist. However we highlight only c.41% of CapitaLand’s China exposure lies in the residential segment with a residential pipeline of c.24,000 units translating to CapitaLand’s c.14% effective exposure to the China residential segment. With CapitaLand’s poor share price performance underperforming Singapore residential barometer CDL, if largely attributed to investors concerns on the Chinese residential market, is largely overdone in our view.

Positive on OODL transaction post site visit. We gather on-site update on a number of sites OODL transaction eg. The Pinnacle, The Metropolis and the Raffles City Chang Ning site. We conclude sites are in good locations and present a value proposition.

WORLD PRECISION (Lim&Tan)

BWPM.SI - S$0.515

• At the analyst briefing yesterday management disclosed that they are confident of meeting consensus full year profit estimate of Rmb180mln, implying 4Q’11 profit of Rmb37mln, up 42% from last year’s Rmb26mln.

• While this represents a pick up from 3Q11’s 13% growth rate, it nevertheless represents a slowdown from 1H2011’s 66% growth rate, reflecting the tightening measures in China as well as export slowdown to US and Europe.

• More importantly, management expects 1H2012 to be flattish versus 1H2011 as they are already running close to full capacity at their existing production facilities in Danyang coupled with austerity measures in China and the uncertain macro environment. Their new plant in Shengyang is only expected to start operations in 2H2012 and hopefully by then China will start to loosen their monetary policies to kick-start the economy again. This should help them re-start their growth momentum in 2H2012.

• Management is comfortable with the company’s financial position with cash of Rmb78mln and shareholders funds of Rmb922mln against short term debts of Rmb130mln and long term debts of Rmb130mln. Management disclosed that they still have Rmb300mln worth of credit facilities available to them at 6% interest rate from ICBC. This coupled with their operating cash flow of Rmb100+mln a year should be enough to fund their capex commitment of Rmb200+mln in the next 2 years.

• In line with their historical dividend payout ratio of between 30-40%, management said that they will be targeting to maintain this ratio in Feb’12 when they release their full year results which will translate to a dividend payment of between Rmb54mln and Rmb72mln. At its last close of 51.5 cents, yield is between 5% to 7%.

• At 51.5 cents, market cap is S$206mln, PE is 6x and price to book is 1x. Valuation is right in the middle of its historical trading band.

• Since our Neutral/Hold recommendation in Aug’11, the stock has been flattish and we see no reason to change it.

Spindex (KE)

Background: Spindex supplies precision-turned machined parts such as shafts, sleeves and fasteners used in imaging and printing, industrial machinery, automotive and consumer products. Imaging and printing products include copiers, fax machines and printers; industrial machinery includes electric drills; automotive includes sensor assemblies, throttle mechanisms and gear shafts; while consumer products include washing machines, irons and fishing rods.

Recent results: Full year to June 2011 results were weakened by forex losses from the soft US dollar, lower write-back for inventory obsolescence and a higher effective tax rate. Net profit fell 39% to $3.7m. However, costs were tightly controlled and balance sheet remained in a net cash position.

Key ratios…

Price-to-earnings: 7.7x Price-to-NTA: 0.5x

Dividend per share / yield: 0.9 SGD cents / 3.6%

Net cash as % of market cap: 53%

Share price S$0.25

Issued shares (m) 115.4m

Market cap (S$m) 28.8

Free float (%) 69.7

Recent fundraising activities Nil

Financial YE 30 June

Major shareholders Tan Choo Pie (24.4%) Peter M. Collery (6.1%) Yeoman Capital (5.9%)

YTD change -28%

52-wk price range S$0.21-0.36

Source: Company

Our view

A mature cash cow. Spindex is a tightly-run company in a mature industry. Its low fixed-cost cost structure gives rise to steady cash flow, which has assured shareholders of a good stream of dividends in the past five years (average 30% payout). Net cash as at June 2011 currently makes up 53% of its market cap. Further, its fixed assets are highly depreciated, which explains why, despite a 39% earnings drop in FY Jun11, gross margin was maintained within the long-term 18-21% band.

New focus. While earnings growth has been lacking in the past few years, Spindex is potentially getting a new lease on life although this is not yet apparent. It has invested heavily in the China automotive sector, jacking up its capex to $5-7m in FY Jun10-11 after holding it below annual depreciation at just $1-2m in FY Jun08-09. Automotive-driven revenue growth has outpaced other industry segments but the overall impact has been masked by the decline in the traditional imaging and printing business.

Betting on China automotive buyers. Spindex sees enormous potential in the automotive industry in China and plans to aggressively expand and market to new customers within this segment. China new car sales are expected to slow next year due to the economic slowdown, tighter monetary policy and increased competition. However, due to the push to go local in car part production, we expect China to remain the world’s biggest and fastest-growing vehicle market.

Cosco Corp (KE)

Event

Cosco has undergone some routine management changes, with a new president and executive director installed due to its group-wide rotation policy. We see no positive or negative implications from the new appointment. The focus remains Cosco’s muted prospects and the negative sentiment towards the stock. We are cutting our target price to $0.72 on our lowered SOTP valuation, given the weak market outlook. Reiterate SELL.

Our View

Mr Jiang Li Jun has relinquished his position as Cosco’s president and has been replaced by Mr Wu Zi Heng. Mr Wu has been with the Cosco China group since 1982, but mainly in shipping operations. While Mr Jiang was successful in steadying the business at his appointment in 2008, Cosco has not taken any significant leaps forward during his tenure. We do not expect Mr Wu to be able to make any immediate impact, especially in the current weak market environment.

Cosco will continue to execute on its sizeable US$6b orderbook. However, margins will still be depressed due to learning curve issues on the offshore sector. Bulk shipping newbuilds are still dogged by execution issues and low pricing. Our outlook for new order wins is also not positive, and even if there are new contracts, they may be secured at the expense of margins just to utilise capacity.

Our revised sum-of-the-parts valuation of Cosco indicates a lower fair value of $0.72. Key assumptions include an earnings multiple of just 10x for its core FY12F shipyard earnings, while the market value of its bulk shipping fleet is calculated by applying a 50% discount to its book value.

Action & Recommendation

Cosco’s stock price has declined by 13% since we cut our recommendation to SELL. With shipyard multiples set to head lower in the current market environment, we further reduce our target price to $0.72, based on our new SOTP valuation. Our forecasts remain unchanged, supported by the group’s current US$6b orderbook. However, the outlook for bulk carrier newbuilds appears bleak and the offshore market is dead quiet. Reiterate SELL.

Lian Beng: Another new addition for development. (OCBC)

New addition to the development business. Lian Beng (LBG) recently announced that, through its 50% owned JV, Spottiswoode Development Ltd., it has acquired the site of Dragon Mansion, situated at Blk 14, Spottiswoode Park Road for S$130m. The freehold site has a plot ratio of 2.8 and can potentially be redeveloped into a 36-storey residential development with potential gross floor area (GFA) of 118,943 sqft (including 10% bonus balcony areas). At the stated purchase price, land cost, based on total potential GFA, amounts to c.S$1093 psf. Given the site's freehold status, its prime location near Tanjong Pagar, and the fact other projects at the Spottiswoode area have fetched selling prices around S$2000 psf, we feel the acquisition cost is not excessive.

Continuing search for attractive opportunities. Along with Midlink Plaza, LBG has already deployed around S$260m during the past couple of months for approx. 247,019 sqft of development area (128,076 sqft of commercial area and 118,943 sqft of residential area). Based on our dialogue with management, we found that the group is undertaking these developments partly due to the receipt of returns from OLA Residences and Kovan Residences and also because they believed these sites were priced appropriately and represented good investment opportunities. The management also stressed that while the group will keep a lookout for development opportunities, construction will remain the focus of the group. We believe these developments are positives for LBG, as both are good locations and offer LBG chances to add construction projects to their order books.

Mandai Industrial development selling well. LBG launched the 55%-owned Mandai Industrial development only as recently as the 4Q of CY11 and to date, more than 90% of the development has already been sold. We believe this partly reflects the demand of industrial space but it is also testament to LBG's acumen of investing in property developments. We believe that LBG can also execute its latest commercial and residential developments well.

Impacts will mostly be felt after FY12. Most of the financial impacts of these latest land acquisitions will only be felt after FY12. After speaking to the management, we update our assumptions for strong sales from Mandai Industrial and factor in the additions of these new development resources. This raises our earnings estimates for FY12 and FY13 by c.8% and 17% respectively. Keeping our P/E ratio peg of 5x, this raises our fair value estimate to S$0.55 from S$0.51 previously. Maintain BUY rating.

GREAT EASTERN / OCBC (Lim&Tan)

GE.SI - S$12.84 / OCBC.SI - S$7.90

• OCBC’s purchase of 490,000 GE shares on Tuesday (when GE traded at $12.86-12.92) may well lead to speculation of a third attempt by OCBC to privatize its insurance subsidiary. (Note that counting on such an outcome after OCBC bought 820,000 shares in Sept’08 would have been off track.)

• OCBC made its first attempt in May 2004 offering OCBC shares for GE. The offer raised OCBC’s stake from 48.7% to 81.1%, making GE its subsidiary.(Note GE was trading at $11.30 when OCBC struck, ie stock is not a lot higher today than 7 years ago; and OCBC then at $4.875 after adjusting for stock split).

• In Jun’06, OCBC offered $16 cash per GE share, raising its stake to 87.10%.

• The question is at what price will OCBC likely try again (just for illustration, at $13, the remaining GE shares not owned would cost $790 mln), taking into account: a. the impact of the resultant goodwill on its capital ratios, which are the highest among the Big 3; b. GE’s embedded value of $7075 mln and NAV of $3828.4 at end 2010 / Sept’11 respectively, vs current market cap of $6077.42 mln.

• Bloomberg records show 4,545,030 GE shares (or only 1% / 7.5% of freefloat) being held by institutional shareholders, such as First State, Vanguard, Putnam, Allianz.

• GE peaked at $22.40 in July’07 (along with global markets before the financial crisis hit), and bottomed at $7.77 in Feb’09. Its stock performance in the last 2 years is not very different from other stocks in the financial sector. But neither has its performance, no thanks to the volatile financial markets.

• GE shares may therefore be worth picking up, especially given the general market weakness. (Note however trading in GE is rather illiquid.)

• We maintain preference for DBS in the sector.

Singapore Airlines - Not much to look forward to (DBSV)

HOLD S$10.55 STI : 2,717.20

Price Target : 12-Month S$ 10.00 (Prev S$ 11.20)

Reason for Report : Comparison vs 2008/09 crisis

Potential Catalyst: Stronger than expected demand or yields

DBSV vs Consensus: We have reduced our FY12F/13F earnings, which are now roughly line with consensus

• Demand outlook muted as economic woes continue to plague the US and Europe

• FY12 and FY13 earnings cut by 15% and 19% as we lower our yield assumptions

• SIA to remain profitable but only at 5% ROE; balance sheet firm with c.S$3.30 net cash per share

• Maintain HOLD, TP lowered to S$10 (0.9x P/B).

Outlook dimmed by US and Euro zone. With the US expected to continue to register sub-par growth and the Europe region mired in uncertainty, we expect demand from these areas to remain weak. As these two regions account for over 40% of SIA’s passenger business, we project SIA’s carriage growth to be in the low single digit region for the next few quarters.

Unexciting yields on muted demand. Whilst we project the demand-supply mismatch to improve as SIA slows its capacity expansion, and hence for load factors to remain stable, yield recovery has stalled in the last two quarters as demand slackened. We expect SIA’s passenger yield to flatten out for the next 2 quarters before gradually improving in FY13. Factoring in lower yields on account of the uncertain outlook for the US and Euro zone, we cut FY12 and FY13 net profit forecasts by 15% and 19% to S$583m and S$726m respectively.

Plus point is SIA’s strong cash position. SIA’s balance sheet is firm with net cash of c. S$3.30 as at the end of Sep 2011. Whilst the possibility of a special cash payout is diminished as earnings are expected to head lower, the cash should help shore up its share price.

Maintain HOLD, TP cut to S$10.00 Our TP of S$10.00 is based on our current forecasts, which is predicated on our base case scenario of sub-par US growth (2.5% GDP growth for FY12F) and zero growth for the Euro zone. However, if the demand environment worsens significantly, SIA could trade down to -2 standard deviations or about 0.77x P/B, translating to c. S$8.50.

ARMSTRONG (Lim&Tan)

S$0.245-ARMS.SI

• Armstrong continued its fifth day of share buy backs yesterday after having re-started its buy back program on 16/11/11.

• The company bought 900,000 shares at 23.83 cents, spending $214,470, the most since 16/11/11. While it represented a significant 78% of yesterday’s traded volume, its lower than the previous day’s 88% and 98% achieved on 17/11/ 11.

• Having bought 6,291,000 shares representing 12.5% of the maximum buy back allowed, the company can still buy back 43,929,735 shares. As yet end Sept’11 Armstrong’s cash holdings total close to $25mln versus debts of close to $22mln.

• Since the company re-started its latest share buy back program on 16/11/11, it had bought an average of close to 80% of the daily traded volume. The aggressive buy backs have seen the stock outperforming both its close peer Adampak as well as the market by rising 6.5% (versus Adampak’s 6.3% decline and the market’s 3.3% decline).

• While its continued aggressive buy backs could continue to support the stock, we note that at 1.23x price to book, its at quite a big premium to Adampak’s 1x and is already in line with the market’s 1.25x, and business prospects and profitability remains weak in the near term.

• Coupled with SGX buy back ruling not allowing firms to buy back shares 5% above the last 5 day’s average price (about 24 cents for Armstrong’s case), we are maintaining our Neutral recommendation.

LMA International NV (KE)

Background: LMA International is a market leader in supraglottic airway management devices that are used to support the airways of patients undergoing surgical procedures. The company sells its LMATM laryngeal mask airway devices in more than 100 countries and has offices in North America, Australia, Germany, Italy, Singapore and Canada, as well as an international distribution network.

Recent development: LMA reported record 9M11 revenue of US$92.7m, representing a 16% YoY increase. Corresponding net profit rose by 71% YoY to US$13.0m if litigation settlement gains and non-cash stock compensation charges were excluded. The good performance was driven by strong market growth in the US and continued demand across other world markets.

Key ratios…

Price-to-earnings: 11.9x

Price-to-NTA: 2.2x

Dividend per share / yield: S$0.01 /3.1%

Net cash/(debt) per share: US$0.053

Net cash as % of market cap: 16.2%

Share price S$0.325

Issued shares (m) 586.612

Market cap (S$m) 190.0

Free float (%) 36

Recent fundraising activities Nil

Financial YE 31 Dec

Major shareholders Robert Gaines-Cooper (27.3); UBS (14.4); Porter Orlin LLC (14.4)

YTD change -1.52%

52-wk price range S$0.270-0.405

Our view

Kulim manufacturing facility to offset price pressures. LMA’s new manufacturing facility in Kulim, Malaysia, is expected to begin operations in 4Q11. Currently planned solely for the production of the LMA SupremeTM, it is expected to reduce production cost for this product by about 30%. This would help mitigate downward pricing pressures and allow overall gross margins to be held steady at about 59-60%.

Three-year sole source supply agreement. LMA recently signed a sole supply agreement for its airway product with Novation LLC, a leading healthcare group purchasing organisation in the US. This enables it to secure 100% of Novation’s airway product orders although it sacrificed a couple of percentage points in margins in order to seal the deal.

Previous acquisitions contributing. In the first half of this year, LMA acquired Wolfe Tory Medical for its atomisation products and Vitaid Limited for its Canadian distribution network. These two acquisitions have started contributing to sales growth in the third quarter. LMA is on the lookout for more synergistic acquisition opportunities with its net cash of US$21.3m.

Stable performance with reasonably cheap valuation. LMA has been delivering stable growth and its current valuation looks reasonably cheap. If 9M11 net profit (excluding litigation gains and stock compensation charges) were annualised, the stock would be trading at FY11F PER of only 7.6x. The company recently bought back 780,000 shares for between $0.31 and $0.34.

CitySpring Infrastructure (KE)

Event

CitySpring Infrastructure last week appointed a new chief investment officer to lead its hunt for fresh investments. But this move has had no positive impact on the unit price as the company’s balance sheet is still not strong enough for M&A activities despite the recent capital injection. Having underperformed the STI by 12% since the rights issue, CitySpring’s unit price is at an all-time low – 12.7% below the rights price – and it offers a dividend yield of 9.5%. Maintain HOLD and target price of $0.35.

Our View

CitySpring bought Basslink, its first and only acquisition post-IPO, for about S$1.5b in July 2007. Approximately 75% of the acquisition price was funded by the A$ bonds while the remaining 25% was initially funded by a bridge loan then. Since then, the company called two rounds of equity fundraising to address the Basslink-related loans. The dismal acquisition track record and existing debt obligations will make the closing of future deals highly challenging.

Under the new rule 704(31) of the SGX-ST listing manual, CitySpring disclosed several conditions that would cause a default of its loan agreements with DBS Bank, interest rate hedges and other facilities. These include a cessation of Temasek Holdings’ ownership of all units in CitySpring, removal/resignation of trustee-manager and/or more than 50% change in board directors (after Temasek’s stake slips below 20%). Currently, Temasek’s unitholding in CitySpring is 37.4% and the risk of a sell-off weighs on price performance.

Action & Recommendation

CitySpring’s underlying businesses are defensive in nature and have remained stable. Management guided for a full-year DPU of 3.28 cents per share. Our target price of $0.35 is based on the discounted free cash flow-to-equity model using a higher cost of equity of 10.4% (previously 8.3%). Maintain HOLD.

Bumi Armada Berhad: 3Q results within expectations (OCBC)

3Q results within expectations. Bumi Armada Berhad (BAB)'s 3Q revenue increased by 23% YoY to M$404m while PATMI fell 7.5% YoY to M$93m. Over a nine-month period, revenue and net profit were M$1.2bn and M$235m respectively. Both formed 74% of our full year estimates. The performance across each business segments was varied. BAB's key business segments (i.e. FPSO and OSV) performed very well with substantial growth in both revenue and net profit. In contrast, the Transport & Installation (T&I) business reported a small operating loss of M$8m, largely due to the dry-docking of a vessel. The group also recorded about M$16m of earnings from jointventures, mainly from its ONGC FPSO contract.

FPSO business powering ahead. On a sequential quarter basis, BAB's FPSO revenue increased by 37.5% to M$178m (2Q11: M$129m) while net profit almost doubled to M$65m (2Q11: M$34m), attributable to the recently secured M$1.46b Apache contract. In addition, it is also working on the US$620m ONGC contract. As the contract is secured through BAB's 49.9%- owned joint venture with Bombay-listed Forbes & Company, earnings on the project would be reported on its P&L using equity accounting. With strong market demand, management is looking to secure two good FPSO projects annually over the next few years.

Other segments' results mixed. Its OSV segment performed very well during the recent quarter. Buoyed by high utilization rates (around 90%) and new vessel additions, revenue increased by 14% QoQ to M$134m (2Q11: M$117m), while operating income doubled to M$40m (2Q11: M$20m). However, the T&I segment registered a M$8m operating loss (2Q11: M$25m operating profit), partly due to the dry-docking of Armada Installer to retrofit its pedestal crane. As for the newly set up Oilfield Services (OFS) segment, revenue and profit recognition remained lumpy due to lower volume of work (compared with other segments). For 3Q11, OFS revenue and net profit were M$45m and M$26m, respectively.

Maintain HOLD with M$4.00 fair value. We continue to like BAB's resilient earnings profile; its revenue are backed by an order-book of M$10.3bn (M$7.2bn of firm contracts and M$3.1b of optional extensions). Meanwhile, the stock is set to join the MSCI Malaysia Index at end-Nov 11. We increased our valuation peg to 21x (from 18x previously) and raised our fair value estimate to M$4.00. Maintain HOLD.

Lian Beng Group (KE)

Event

Lian Beng’s 50:50 joint venture with Centurion Properties bought the 68-unit, freehold Dragon Mansion at Spottiswoode Park for $130m last week. The redevelopment can yield 118,943 sq ft of GFA, implying a sale price of $1,093 psf ppr and an estimated breakeven of $1,580 psf. As a comparison, projects in the primary market in the area, comprising Spottiswoode 18 and Spottiswoode Residences, are selling at a median price of $2,000 psf. Maintain BUY.

Our View

Dragon Mansion was first put up for sale in May with a reserve price of $150-156m but was unsuccessful. It returned to the market in October, gunning for $132-142m. We understand the tender drew a handful of bids but Lian Beng’s bid of $130m came out tops. Two adjacent projects, Roxy Pacific’s Spottiswoode 18 and UOL’s Spottiswoode Residences, are over 90% sold at a median price of $2,000 psf. This bodes well for the redevelopment of Dragon Mansion, which will see little competition. We have yet to factor in any earnings contribution from this project.

The sale of M-Space, Lian Beng’s industrial project at Mandai Estate, has been very positive. A check with the marketing agent SLP International indicates that the project is over 90% sold at an average price of $650 psf. When the project is completed by the middle of next year, we estimate the pre-tax development profit of $30m will give a boost to FY May13 earnings.

With the addition of Dragon Mansion, Lian Beng has an attributable unsold landbank of 84,574 sq ft. We expect the group’s earnings to continue to be largely (over 60%) driven by construction, backed by a strong orderbook of $761m excluding the expected contracts from Mandai Estate ($66m including the construction of worker’s dormitory), Midlink Plaza ($45m) and Dragon Mansion ($42m).

Action & Recommendation

We maintain our BUY recommendation on Lian Beng with a target price of $0.62, pegged at 6x FY May12F PER.

LMA: Turnaround play with attractive upside (OSKDMG)

(S$0.32, Fair value $0.45-0.54)

The news: We recently hosted LMA to a series of investors’ meetings. LMA is a medical consumables company that designs, manufactures and distributes its proprietary range of supraglottic airway management devices used in anaesthetic operations. The company is a global leader in its category with 75% global market share. One quarter of the world’s operations under general anesthetic employ LMA products.

Key takeaways: (1) Investors like LMA’s dominant position in the laryngeal mask range of airway management devices and its asset-light, cash-generative business model; (2) Under current CEO William Crothers who took over in Jan 2010, LMA has engineered a turnaround in its financial fortunes and reversed the declining earnings trend, through renewed focus on its core competencies in airway products in the anaesthetic arena and stringent cost controls. The result of operational improvements is reflected in a 71% y/y growth in net profit to US$13m (excluding nonrecurring items) for 9M11. This momentum is poised to continue as the company continues to ride on the increasing adoption of its devices over the traditional ET tube which is more invasive for patients; (3) The shift from reusable devices towards single-use devices and increasing penetration in emerging markets will provide the impetus for volume growth in the double-digits range ; (4) LMA’s in-house manufacturing facility at Kulim is expected to be ready by 4Q11 and will be progressively ramped up, reaching full utilisation in mid 2012. This will reduce its manufacturing costs by as much as 30% and eliminate production bottlenecks that it encountered with third-party suppliers.

Our thoughts: The stock is currently trading at 8x FY11 P/E, a large discount to global peers’ 16-20x P/E range. With sustainable growth rate at 15%, its PEG is at an attractive 0.5x. On a 10-12x P/E that better reflects its strong franchise, we estimate fair value at a range of 45-54 cents.

Sakari Resources Ltd - Execution should be on track (DBSV)

HOLD S$1.99 STI : 2,697.98

Price Target : 12-Month S$ 2.20 (Prev S$ 2.30)

Reason for Report : Field visit to mines

Potential Catalyst: Weather related demand/ supply shocks

DBSV vs Consensus: Our FY12-13F EPS estimates are lower than consensus on lower coal price and margin assumptions

• Mine visit leaves us confident about volume growth prospects, especially at Sebuku

• However, we lower Jembayan ASP assumptions for FY12 as sub-bituminous market loses steam

• Cut FY12 EPS estimate by 6%, maintain HOLD with slightly lower TP of S$2.20

Mine operations inspire confidence. We visited Sakari’s mines at Sebuku and Jembayan in East Kalimantan recently and returned more confident about the volume growth prospects. Sebuku Northern Leases will be the key volume driver and expansion plans are already ahead of schedule. At Jembayan, the growth profile is not as exciting, though, partly due to infrastructure constraints and partly as a measure to go slow amid a well-supplied sub-bituminous coal market.

Expect reserve upgrades in 2H12. Drilling programme at Sebuku Northern Leases is well in progress and we should expect an update on resource/ reserve numbers at Sebuku in 2H12. Initial estimates of resources stand at about 30-40m tons. At Jembayan, 85% of the concession area has been explored, while the current reserves number pertains to about 40% of the area, and hence incremental upgrades to reserves can be expected.

Earnings remain vulnerable to coal price changes. Coal prices have been on a seasonal decline in 4Q11, down 6% QTD to US$114 per ton. While this is expected and does not impact our benchmark coal price estimates, we ascribe a higher discount to Jembayan coal in FY12, as the subbituminous market may not be as tight as earlier expected, with imports from India on a slower growth trajectory. As a result, we cut our FY12 EPS estimate by 6.3% and lower our TP to S$2.20. Maintain HOLD, as earnings remain vulnerable to coal price changes amid macro uncertainties. However, we might turn buyers of the stock at levels below S$1.80 as we reckon SAR is unlikely to trend towards 2008-09 trough valuations again, given a better execution track record, a more robust volume growth profile and potential for improved margins from increased sales of higher quality Sebuku coal.

CapitaLand Limited - Expect a strong launch at Bedok Residences (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$2.54

Fair Value: S$2.92

Sales to start this week - pricing above expectations. Preview sales for CapitaLand's (CAPL) Bedok Residences would begin this Wed, 23 Nov 2011, and the 583-unit condominium development is priced indicatively at S$1,200 to S$1,400 psf which is somewhat above our expectations. We understand that the launch was originally planned for a balloting system but was switched to a physical queue (first come first serve - one buyer one queue) on Sunday evening. In our view, CAPL likely wanted to get a more concrete sense of buyer response in view of macro-economic uncertainties and a competing launch at Bedok Reservoir by UOL, priced tentatively at S$1,100 psf based on market talk.

Expect a strong launch performance. We visited the show flat area yesterday afternoon, some twelve hours after the announcement of a physical queue system, and found ~500 people already in the line for preview sales. All five groups in the line that we spoke to were hired by agents to wait in the place of buyers. After enquiring with three agents, however, we found they would only hire a replacement to wait in line if we were committed to buy and submitted cheques. From these data-points, we judge that there is robust demand for the launch and expect a strong sales performance in terms of both units sold and average selling prices later this week.

Market likely to react positively. We believe the market would react positively to a strong sales performance as it is likely, at this juncture, not fully priced into the share price, which has faced recent headwinds from increasing macro worries and inflection points in Chinese property prices. Maintain BUY at an unchanged S$2.92 fair value estimate (20 % discount to RNAV).

More details of site. The Bedok Residences project is a JV between CAPL and its 65.5% subsidiary, CapitaMalls Asia, which gives CAPL an 82.75% effective stake. The site was bought for S$788.9m in Sep 2010, and has a site area of 268,047 sq ft with a lease term of 99 years (plot ratio 3.5). The development is located at the junction of New Upper Changi Road/Bedok North Drive next to the Bedok MRT station, and is designed to be an integrated project with a condominium above a one-stop shopping mall and a bus interchange. For the residential component alone, assuming construction cost at S$300 psf , we estimate the breakeven to be ~S$900 psf, returning a 31% gross profit margin at S$1,300 psf ASP.

Sakari Resources - Seeing is believing (CIMB)

Current S$2.08

Target S$2.71

Previous Target S$2.99

A recent visit to SAR’s mines strengthens our conviction of its expansion-empowered growth. Sebuku is the crown jewel that should propel SAR’s next phase of growth. Steady earnings growth, generous dividends and undemanding valuations make this a stock to own.

We keep our revenue forecasts but cut FY12-13 EPS by 9-20% as our previous cost assumptions were too mild. As a result, our TP, still based on 9.6x CY13P/E, drops. Maintain Outperform, nevertheless, as its risk-reward is attractive.

Sebuku’s promise

We are convinced that Sebuku will be the group’s major earnings driver over the next three years. Northern Leases have surpassed expectations with initial shipments starting earlier than expected.

With profit margins estimated to be double those of Jembayan, the mine’s ramp-up over the next three years should boost overall profitability.

How to support longer-term growth

We believe that coal prices could soften in the near term on the back of slower Indian demand and a spike in supply from Indonesia given favourable weather conditions.

SAR will make use of this time to review its operations and long-term growth strategy. For instance, it is considering the use of larger equipment to overcome infrastructure bottlenecks at Jembayan. These initiatives, hopefully, will prepare the group for capitalising on higher coal prices when markets tighten.

Attractive valuations

We see value following the stock’s recent decline. SAR trades at 10x CY12 P/E (1.3 std deviations below mean), and offers an estimated 45% 3-year EPS CAGR and a generous 5.9% dividend yield.

STX OSV Holdings - Transpetro contract finally made effective (DBSV)

BUY S$1.09 STI : 2,730.34

Price Target : 12-Month S$ 1.54

Transpetro contracts finally made effective. Over the weekend, STX OSV announced that the contract for 8 LPG carriers for Petrobras Transportes S.A. (Transpetro) has been made effective. Recall that these contracts were originally signed in July 2010, but have not been included in the orderbook. With the contract made effective, this will trigger first down payment and start of the construction and delivery schedule.

NOK3bn boost to orderbook. As a recap, total contract value is c. US$536m (NOK3bn). This will be for the construction of two different types of LPG carriers designed by Hamworthy: 1) fully pressurized LPG carriers – four units with cargo capacity of 7,000m3, two units with cargo capacity of 4,000m3; and 2) two units of semi-refrigerated LPG carriers with cargo capacity of 12,000m3.

Vessels to kick off operations at second Brazilian yard. The construction of these 8 vessels will kick off operations of STX OSV’s second Brazilian yard in Pernambuco, currently under development. Preparatory work for shipyard construction has commenced, with actual shipyard construction to begin by end 2011. While yard construction is expected to conclude in 1Q2014, shipbuilding projects are scheduled to be gradually ramped up from 2013.

91% of FY11 order wins assumption in the bag. This contract will boost the group’s FY11 YTD order wins to NOK8.6bn, forming 91% of our full year order wins assumption of NOK9.5bn. We estimate STX OSV’s orderbook now stands at NOK17.1bn, vs. NOK13.6bn as of end 3Q11, after including the Transpetro contract and the other 2 contracts secured in 4Q11 to date. Book-to-bill has been lifted to c. 1.5x from 1.2x previously.

Boost to longer term earnings visibility. As these vessels will be delivered over 2014-2016, near term impact to earnings is limited, with first revenue contribution expected only in 3Q13. However, this raises longer term earnings visibility, with an estimated 18% of FY13 revenue now backed by secured contracts from 15% previously.

Maintain BUY. No change to our numbers, as this contract was already in our forecasts. However, this removes an ongoing concern among investors over the repeated delays in the contract being made effective. Maintain BUY, TP unchanged at S$1.54.

Sheng Siong Group Ltd (KE)

Background: Dubbed the IPO darling of the year, Sheng Siong is Singapore’s third-largest grocery retailer after NTUC FairPrice and Dairy Farm. Its stores are primarily located in the HDB heartlands, targeting the lower-income mass market. By year-end, the company will have 25 outlets with a total floor area of 348,000 sq ft.

Recent Development: Sheng Siong is holding steady above its IPO price of $0.33, as it delivered a set of expected 3Q11 results. Revenue slipped by 9.3% YoY to $146.3m and net profit fell by 50.9% YoY to $6.6m. The drop followed the closure of its outlet in Ten Mile Junction in November last year and another in Tanjong Katong in September this year, as well as the absence of one-off investment gains compared with 3Q10.

Our view

Better margins. Gross profit margins edged up by 1.4ppt YoY to 23.1% through better sales mix of higher-margin goods, increased direct sourcing and more bulk purchasing rebates. The company targets to grow its house brand from 300 to 1,000 products in order to capture better margins.

Store expansion on track. YTD, Sheng Siong has begun operations in Thomson Imperial Court (November), Teck Whye (May) and Elias Mall (January). Management said it has secured the lease for its Woodlands outlet, which should open by next month, providing an extra 14,239 sq ft of retail space. The company looks set to increase its retail network to 40 outlets.

Lower sales for full year but bottomline may hold. The full year is expected to deliver lower sales due to a lag in revenue contribution from the new outlets and the closure of two main outlets. However, the company has announced the sale of its property on 3000 Marsiling Road, of which a net gain of $11.34m will be recognised in 4Q11. This should have a positive impact on its net margins overall. Main risks include increased competition and difficulties in securing new rental spaces.

Valuations. The stock currently trades at 17.4x core FY10 PER, still at a discount to its closest peer, Dairy Farm. Sheng Siong is committed to distributing up to 90% of its FY11-12 net profit, which could provide a dividend yield of up to 5%.

Key ratios…

Price-to-earnings: 13.1x

Price-to-NTA: 4.0x

Net cash/(debt) per share: S$0.09

Net cash as % of market cap: 21.7%

Share price S$0.405

Issued shares (m) 1,383.3

Market cap (S$m) 560.3

Free float (%) 15%

Recent fundraising activities Aug’11 – IPO comprising 201.5m new shares @ $0.33

Financial YE 31 Dec

Major shareholders SS Holdings (35.7%) Lim Hock Eng (12.7%)

YTD change nm

52-wk price range S$0.310-0.580

Genting Hong Kong (KE)

Event

Genting Hong Kong (GENHK) is trading at 37% off the high of US$0.455 on 1 August 2011, near a 52-week low and at about book value. Although it traded as low as 0.24x book value during the financial crisis in 2008, it was then a pure cruise operator struggling with losses. Today, the company’s financial position and corporate focus are vastly different. We reiterate our BUY recommendation and target price of US$0.45.

Our View

Jointly-controlled entity Norwegian Cruise Line (NCL) reported a strong set of 3Q11 results in its traditionally strongest quarter. Corresponding quarterly net profit grew by 18.5% YoY to reach US$110.2m, indicating that there was no major let-up in cruise activities despite the European debt crisis. It further affirms a successful turnaround from its loss-making years between FY06 and FY09. Travellers International, the operator of Resorts World Manila (RWM), registered a 68% YoY increase in 9M11 net profit to P4.2b (about US$97m), with EBITDA of P6.5b (about US$150m). It is on track to achieve our FY11 net profit forecast of US$134.7m.

Adjusted EBITDA for GENHK had already reached US$208m in 1H11, and NCL’s and Travellers’ 3Q11 performance would add another US$136m to this figure, bringing it nearer to our forecast of US$495m for FY11. From a company which was grappling with losses and high leverage a few years ago, GENHK’s position today is vastly different, with contributions from NCL’s turnaround and RWM which opened its doors in August 2009.

In the recent Cruise Shipping Asia conference, industry players estimated that Asian cruise passengers could reach 11m by 2030, from about 1.5m currently. Star Cruises continues to tap on this growing Asian market by expanding its offerings. SuperStar Aquarius has been deployed to ply the Sanya-Vietnam route for the next five months to attract the growing number of mainland Chinese opting for cruise travel. Competitors such as Royal Caribbean Cruises and Costa Crociere also have plans to sail their ships to China next year, but we believe Star Cruises has an added edge in that it is familiar with the Asian market.

Action & Recommendation

We reiterate our BUY recommendation on GENHK with a target price of US$0.45. The stock currently trades at a lower-than-peers FY12F adjusted EV/EBITDA of only 8.0x.