Epicentre: Impact following Steve Jobs' passing (DMG)

(BUY, S$0.52, TP S$0.60)

Following the announcement of Apple’s founder Steve Jobs’ passing, Epicentre tumbled 10%

before closing up 1% yesterday. Likewise, shares of Apple Inc’s remained relatively unchanged.

We believe this is reflective of investor confidence in the future of Apple. Jobs had named his

successor Tim Cook whom he had relinquished his position to on 24Aug11 and with the current

products it has in its stable, the general market believes Apple’s current products will last

several product cycles due to its forefront technology. We re-iterate our BUY call on Epicentre

with a TP of S$0.60, pegged to 9x FY12F P/E. At current price, stock offers a decent 6% yield.

Passes on a day after new product launch. On Wednesday, Apple’s founder Steve Jobs

passed away at age 56 following a long battle with cancer. He was the man behind the creation

of the Mac, iPhone and the iPod. In January he had relinquished his day-to-day duties at Apple

but still remained very much hands-on until 24Aug11 when he announced he could no longer

meet his duties, naming Tim Cook as his successor. His passing comes a day after Tim Cook

unveiled its latest smartphone, the iPhone 4S.

Future of Apple? Apple Inc’s stock price has remained relatively stable, just slipping 0.4%

following Jobs’ death. Epicentre saw its stock dive 10% after the news but closed unchanged

yesterday. The resilience of Apple’s share price is reflective of investor’s confidence in the future

of the company as Jobs has managed to select and train a reliable successor. His creations

such as the iPhone, iPad and Mac is likely to be able to survive several product cycles ahead.

According to industry research firm Gartner, the iPad currently dominates the tablet industry with

a 73% market share and expects it to have at least 50% market share through 2014. For the

record, Epicentre commands an estimated 30% market share of the iPad market in Singapore.

Supply Chain Sector: We favour SCMs with less upstream and industrial exposure (DMG)

(OVERWEIGHT)

Concerns on global economic growth have escalated in recent weeks. Within the supply chain management (SCM) sector, the most adverse effect from an economic slowdown will be felt on corporates that have (1) greater exposure to industrial commodities and (2) more upstream industrial commodity assets. Within the three corporates we cover under this sector, Glencore meets the criteria. We believe Glencore’s earnings could be most adversely affected, whereas Olam’s is seen to be most resilient given its greater dependence on agriculture produce (77% of gross contribution). Since global equity markets started their sharp downtrend in early Aug 11, Glencore’s share price has fallen 15% in S$ terms, whereas Olam’s has fallen 16%, and Noble by 32%. We feel that the risk-reward trade-off favours investors buying into Olam and Noble, while holding Glencore.

Glencore susceptible to softness in industrial commodity prices. Between end-Jul and end-Sep 2011, copper and zinc prices fell 28% and 24% respectively, and these two industrial commodities are key contributors to Glencore’s earnings, as Glencore has upstream businesses for these commodities. If prices for these commodities remain soft, Glencore’s earnings could see re-rating going forward. Our Glencore target price of HK$52.13 is derived from SOTP methodology.

Olam’s earnings seen to be resilient. Olam has the greatest percentage exposure to agriculture produce, amongst its peers. Olam has also shown its execution capability by recording a 3-year net contribution CAGR of 33%. New projects such as the Gabon urea manufacturing facility (to be operational mid-2014) will also boost earnings. With Olam’s earnings resilience, we recommend investors to BUY into Olam given its current attractive price. Our Olam target price of S$2.98 is derived from a 3-stage DCF model.

Noble’s potential listng of agri business to support share price. Noble has just announced its intention to possibly list its agri business on the SGX. We believe this will unlock value as the agriculture business deserves a higher P/E than the industrial business in the current global economic climate. Noble’s earnings is also seen to improve with recent acquisitions such as Sempra Energy Solutions in 2010. Given the sharp decline in Noble’s share price since end Jul 11, we see value. Noble is on our BUY list, with a target price of S$2.00, derived from a FY11 P/E multiple of 15.3x.

Offshore & Marine: Petrobras opens tender for 21 rigs (DMG)

(Overweight)

Singapore yards may get something out of the latest Petrobras tender. We have highlighted in our previous reports that Petrobras is a wildcard that the market has largely ignored given persistent disappointment in the timing of the contract award. Upstream reported today that Petrobras has opened the bids for the charter of 21 ultra-deepwater rigs and we are more confident that the full award will materialise this time. Last year, we were skeptical on the full award of all the 28 rigs given potential hurdle in financing the newbuilds. With the setup of Sete Brasil as a holding company for all the rig assets with the backing from pension funds, banks and Petrobras, we think chances are higher this time around that all the remaining 21 rigs will be awarded. We believe that Keppel and SMM could win up to six rigs each. A win from Petrobras will be a bigger boost to SMM’s order book and we believe share price could show greater reaction as well. We are Overweight on the offshore & marine sector.

Keppel, SMM and Odbrecht could win up to six newbuilds. Key takeaways from the latest Upstream report: (1) Petrobras has received offers for five rigs from Ocean Rig and 21 rigs from Sete Brasil. Ocean Rig is the lowest bidder with a day rate of US$584k. Sete Brasil is partnering several domestic and foreign players (see Figure 1) to own the rigs with day rates in the range of US$619k for the drillships and “slightly higher” for the semi-submersible rigs. (3) Shipyard construction costs are estimated at US$600-700m/rig. The first contract for seven drillships awarded to EAS was priced at US$662m/rig. We believe the shipyard contracts will come in at the top end of the estimated range. Key risks in running a shipyard in Brazil are execution risk (potential delays) and cost control (shortage of skilled workers and wage inflation).

Impact: More significant for SMM. With the Brazilian-built ultra deepwater rigs costing US$600m-700m/rig, Keppel and SMM could win up to US$4.2b (S$5.4b) each. Currently, Keppel and SMM has outstanding order book of S$10.2b and S$5.8b respectively. A win in Brazil will be more significant to SMM’s order book and we believe its share price could react better than Keppel. Wining an order could also allow Sembcorp to establish a presence in Brazil. Valuations in the sector are attractive: stocks are now trading at 9-10x forward P/E vs. trough of 4-5x during the global financial crisis and 22-30x during the peak.