Sino Grandness: Proposed issue of RMB100m CBs by its subsidiary (DMG)

(BUY, S$0.42, TP S$0.50)

SFGI announced that its subsidiary Garden Fresh HK (GFHK) has entered into a conditional subscription agreement for issue of RMB100m zero coupon bonds due Oct 2014. While there is no share dilution, we note a minimum RMB133m payback value or 18% p.a. effective interest rate based on our scenario analysis. We revise down our FY11F-FY12F earnings estimates by 4%-9% to RMB162m-RMB172m respectively. We caution that should GFHK fail to generate sufficient cash flow to meet early redemption obligations, SFGI could see claw-backs to its assets as it acts as the guarantor. Given a cautious sentiment towards S-Chips, we lower our target multiple to 4x (old: 6x) FY11F P/E, +0.5SD to its historical mean of 3.5x and derive a lower TP of S$0.50 (old: S$0.76). Maintain BUY.

Rationale. We understand the main intention is for an eventual listing of its fast growing beverage business, which saw a three-fold jump in revenue to RMB178m in 1H11.

Our scenario analysis. Based on the announcement, we identify a best case that leads to an eventual IPO of GFHK by Oct 2014 at 9x RMB250m FY13 earnings. Here, CB holders will likely prefer a 6.7% stake worth RMB150m (vs. redemption at RMB100m principal). However, to support revenue growth to RMB1.3b, we believe GFHK would need more funding for working capital needs, which could lead to a fourth funding exercise under the group since SFGI’s 2009 listing. A worst case scenario would be a non-reply from relevant stock exchange for GFHK’s IPO application, meaning a possible RMB195m repayment or a steep 35% p.a. effective interest cost.

Our base case. Based on our forecasts, we believe the most probable case will be an eventual IPO at ~6.7x FY13 RMB100m earnings estimates, and happens to be one whereby CB holders will be indifferent between conversion and redemption. We assume sufficient internal resources to support growth and haven’t factored in possible fair value gains into our valuation model.

Other details. The CBs can be converted to shares ranging from 6.7% and 19.9% in the subsidiary depending on financial performance. Near term milestone is a minimum RMB80m net profit for FY2012. Net proceeds are estimated at RMB80m, after applying a 13% discount rate to principal sum and deducting RMB7m professional fees. RMB70m will be used for PPE for beverage business, and RMB10m will be used for advertising and promotional activities.

OKP Holdings: King of the road (DMG)

(Initiating Coverage – BUY, S$0.555, TP S$0.80)

OKP Holdings (OKP), the only listed road specialist in Singapore, is set to ride on the nation’s building boom, benefiting from major public works like the S$6-7b North-South Expressway. OKP’s strategic tie up with China Sonangol (CS), which owns 14.2% of OKP, is a gateway to more potential projects. OKP has already secured the building project of luxury condominium Angullia Park from CS, the developer. With a cash hoard of S$98.6m (net cash of 31.9S¢ per share) and a financially strong partner like CS, OKP’s already strong construction earnings may be given an added boost with property. With a record gross order book of S$433.3m, FY11 looks set to be a banner year, with earnings likely to leap over 25% YoY. At current price, OKP trades at 8x prospective P/E, which is a justified premium to peers at ~6.5x, due to its leading position as a road specialist and its heafty cash position. Net of cash, OKP’s FY11 and FY12 P/E falls to 3.4x and 3.1x respectively. Initiate with BUY and TP of S$0.80, based on a target P/E of 6.2x (net cash).

A leading road specialist; strong gross order book of S$433.3m. As at end Aug, OKP has a healthy order book of S$433.3m (+39.8% since Feb 11), spread across 13 projects. The contracts will run till FY14, lending some visibility to its earnings. Solid earnings over the years have allowed the contractor to build up on its cash hoard. With spare capacity to take on sizable projects and strong financial position, OKP is in the right position to ride on the road in Singapore.

Potential earnings booster from property development. CS has acquired Amber Towers and we think OKP could be slated either to jointly develop the property together, and/or go in as a contractor. We have not factored any earnings from its role as a potential developer.

Valued at a justifiable premium to peers. On the back of strong construction demand, we estimate earnings to hit S$21.3m in FY11. Based on net cash target P/E of 6.2x FY12 earnings, we derive a TP of S$0.80 (upside of 44.1%).

Kingsmen Creatives: Share price holding steady (DMG)

(BUY, S$0.56, TP S$0.76)

Kicker from new F1 deal. Kingsmen is the supplier of some Grandstands and Corporate Suites for the F1 race over the five-year contract. It is still not known if Singapore would continue to host the F1 race for a further five years, but if no agreement is reached after next year’s race, Singapore will have to continue hosting the event for another two years (i.e. there will be an F1 race for at least the next three years). On top of the contract value (~S$5m annually), there are additional billings each year for variation orders. Should Singapore continue to host the F1 for a further five years, we believe Kingsmen would remain a choice contractor. Assuming the same contract value and the same parcels of work are assigned, we can expect better margins from the F1 event as the fixed cost of the grandstands would have been fully depreciated.

Greater visibility would help secure more projects. Being involved in the F1 event would help elevate Kingsmen’s visibility in the events space. This would open up more regional opportunities for Kingsmen. Kingsmen is in various stages of discussions for several regional theme park projects. Securing a regional theme park contract would give Kingsmen’s earnings a boost. The upcoming major events next year, such as the Singapore Airshow, are keeping Kingsmen busy. Retail customers are continually refurbishing or setting up new outlets.

May need to raise funds in near future. Kingsmen is looking to build an office building in Singapore as the lease for its current premises will end in 2016. There is a possibility that it may need to undertake fund raising activities for this purpose in the near future.

Share price showing resilience. Kingsmen’s share price has remained stable, hovering around S$0.56, despite the market volatility over the past weeks. We continue to like Kingsmen for its attractive dividend yield. Maintain BUY with TP S$0.76, pegged to 9x FY11F earnings.