Frasers Commercial Trust - Gravitating towards an exciting year! (DBSVickers)

BUY S$0.83 STI : 2,825.10

Price Target : 12-Month S$ 1.05

Reason for Report : Post NDR update

Potential Catalyst: Lower financing cost,positive rental renewals, asset repositioning and acquistions

DBSV vs Consensus: Slightly higher rental outlook

• Steady portfolio performance with enhancements/repositioning and capital management to boost DPU

• Resilient earnings tied by long/master leases

• Attractive valuations; maintain BUY, S$1.05 TP

Multi-pronged growth strategies to drive DPU. In a recent NDR with FCOT, investors view management’s efforts to reshape its portfolio and strengthen its balance sheet as proactive steps to steer the reit in the right direction. Performance portfolio has improved remarkably compared to the last crisis with occupancy standing at a high of 98% and signing rents moving up nicely. Meanwhile, its balance sheet has improved with gearing at 37% and the imminent refinancing that is likely to lower all-in interest cost by 50-100 bps. The recent approval for an outline planning permission (OPP) to redevelop KeyPoint as well as possible asset enhancement plans at China Square Central (CSC) upon expiry of the master lease in Mar 2012 should further help to optimize portfolio yield.

Stable earnings supported by “sticky” tenant base and long leases. Excluding CSC’s master lease (expiring in Mar 2012), almost half of its revenue is tied to master/long leases of up to 25 years. This would ensure resilient and stable earnings, while allowing the trust to enjoy positive rental reversion. At the same time, we note that rents for its SG portfolio are competitive, hence it is able to cater to a “niche market” ie cost conscious small-to mid-size companies or relocating tenants from soon-to be demolished older buildings. In addition, our scenario study shows that FY12/13F DPU will only fall by a marginal 2-5% should reversion rents fall by 5-10% or to 2009 levels for its SG portfolio, hence minimizing downside risk should there be an economic slowdown.

Attractive valuations at 7.4-7.8% yield. At 0.61x P/BV NAV, FCOT’s implied property yield is significantly higher than the current book cap rates. Therefore, we see potential for the gap to narrow as the group executes its multi-pronged strategies. FY11/12F yields of 7.4-7.8% are also much higher than its peers at 5.6%-6.6%. Maintain BUY at an unchanged DCF-backed TP of S$1.05.

ECS Holdings Ltd - Higher risk profile; but focusing on addressing key issues (OCBC)

Maintain BUY

Current Price: S$0.55

Fair Value: S$1.04

Focusing on working capital improvement. We believe that ECS Holdings' (ECS) key focus would be to manage its working capital over the next two quarters, which could mean softer top-line growth. Recall that its net gearing ratio had jumped up to 86.5% in 2Q11, beyond management's target of maintaining it below the 70% mark. This is further exacerbated by an increase in the group's cost of debt due largely to higher borrowing rates in China. Nevertheless, management recently updated us that the working capital situation of the group has since improved.

Impact of HP's decision to possibly spinoff or sell its PSG business… Regarding HP's decision to spin-off or sell its Personal Systems Group (PSG) business, ECS opines that the impact of a spin-off (most likely outcome) is likely to be mitigated as it is expected to continue to act as a regional distributor for PSG. This business contributed ~18% of ECS's total purchases (contribution has been declining) and ~8% of its total net profit.

…likely to be limited. Assuming ECS loses the entire 8% contribution in its FY12F net profit in a worst case scenario, which we believe is unlikely, we estimate that our fair value would only decline by 4.4% (would not change our recommendation). Moreover, even prior to HP's announcement, we had expected contribution of HP's PSG business to form a smaller proportion of ECS's top-line and bottom-line moving forward. This is due to continual efforts by management to broaden its vendor and product base as a means of diversifying its business. We understand that ECS is seeking to negotiate for more regional distributorship agreements with leading vendors such as Asustek, on top of existing regional partnerships with leading vendors such as Apple and Dell. We believe that these negotiations would be aided by ECS's extensive network coverage in its addressable markets.

Higher risk profile; but still warrants a BUY. While the risk profile of the group has increased over the past couple of months, in our opinion, we expect management to focus on addressing these key issues. For now we maintain our estimates and BUY rating with an unchanged fair value estimate of S$1.04 (based on 7x blended FY11/FY12F core EPS). ECS is trading at 3.3x FY12F PER, below its average forward PER of 3.5x during the 2008-2009 global recession. As such, we believe that the market has already priced in the uncertainties concerning both the group and macro economy. Risks to our target price include a sharper-than-expected slowdown in consumer spending on electronics products and corporate spending on IT upgrading.

Jump in net gearing ratio. ECS's net gearing ratio increased from 65.8% in 1Q11 to 86.5% in 2Q11, beyond management's target to maintain it below the 70% mark. This was due to higher working capital requirements and increased bank borrowings to fund its aggressive expansion plans. Looking ahead, we opine that there is increasing financial risk on the group given that its cost of borrowing has also spiked up due largely to higher interest rates in China. Moreover, we believe it is unlikely for ECS to use equity financing at this stage given the recent sell-down in its share price (ECS had just announced its intention to withdraw its TDR application in Aug 2011). Hence we are positive on management's priority to focus on its working capital management in the immediate term to ease its financial strain, although this could mean softer sales growth.

Futrure expansion plans. China remains a key geographical market for ECS. The group is seeking further penetration into lower-tier cities in China. Four offices have been set up in 1H11, with another three slated to be opened in 2H11. There are also plans for 13 new offices in FY12, but this is subjected to review depending on how well it manages to control its working capital in the next couple of quarters. India and Vietnam also remain as viable new target markets although this is unlikely to happen in the near future despite the potential of these geographies, in our opinion. Although the group has carried out extensive research on these areas, we believe it will manage its expansion plans less aggressively moving forward to focus on improving its working capital before embarking on penetration into new territories.

Popular Holdings reports 1QFY12 results (DMG)

The news: Book retailer cum boutique property developer Popular Holdings reported a net profit of S$10.2m for 1Q FY12, up 25% y-o-y, boosted by higher earnings from the publishing and property divisions. On a segmental level, turnover for the retail and distribution division rose $0.9m to $101.8m while PBT declined $1.6m, from $4.6m in 1QFY11 to $3m in 1QFY12, mainly due to start-up costs incurred on the opening of 6 new stores and higher operating expenses. With a net addition of four outlets, Popular ended the quarter with a total of 143 retail outlets spread across Singapore, Malaysia and Hong Kong. The publishing division posted a 7% improvement in pretax profit to $6.2m with turnover flat at $23.8m. Property division contributed pretax profits of $3m from the sale of additional units at 18 Shelford while construction of 8 Raja is in progress and expected to obtain tOP by end 2013.

Our thoughts: Popular’s balance sheet is rock-solid with net cash of $105m, or 12.5

cents/share, representing 80% of its market cap of $132m. This is the result of: 1) a highly cashgenerative book retailing and publishing business that is the market leader in the pre-school textbook space in Singapore and Malaysia; 2) Two rounds of rights issues in recent years that further boosted its cash position; 3) Profit contribution from its property ventures. Cash should continue to pile up given the steady sale progress at 18 Shelford and impending completion of 8 Raja project, which should be well-received being located in the popular Balestier enclave, near CDL’s The Arte. Yet the stock continues to trade at a steep discount of 33% discount to NAV, even before factoring in potential profit contribution from 8 Raja. We believe the discount is due to the group’s venture into the property development business, which it has designated as a new core business. In today’s market, ‘pure-plays’ are in vogue and given Popular’s lack of track record in the property development business as a listed entity, it is not surprising that the market has accorded a discount to the stock for its business diversification. An alternative way of managing its surplus capital, via a more generous dividend payout policy, could perhaps do more wonders for the stock. We do not have a rating for the company.