ASCOTT REIT, ocbc downgrade to HOLD from BUY with target price $0.61($0.57)
JAYA by cl
KS ENERGY, daiwa maintain UNDERPERFORM with target price $0.92
MIDAS, kim eng maintain BUY with target price $0.82
SGX, ssb maintain BUY with target price $9.50($8)
ASCOTT REIT, ocbc downgrade to HOLD from BUY with target price $0.61($0.57)
-Lower credit ‘tail risk’ has boosted unit price. Since we re-initiated
coverage in April 2009, Ascott Residence Trust (ART) has seen a 41%
increase in its unit price on the back of, we believe, lower risk of a
systemic credit breakdown. World governments have 1) committed to
maintaining the viability of credit institutions and 2) also introduced
fiscal stimulus packages. According to The Economist, fiscal packages in
Asia are much larger than elsewhere (relative to GDP). China, Japan,
Singapore, South Korea, Taiwan and Malaysia have all announced fiscal
packages of more than 4% of GDP. Fiscal spending in the US, in contrast, is
equivalent to about 2% of GDP.
-Private sector keeps wallet shut. This economic stimulus has yet to
translate into private spending. In China for instance, foreign direct
investment fell for the eighth month in a row from a year ago. Investment
fell 17.8% YoY in May to US$6.4b after falling 22.5% in April. FDI data is
a reasonable proxy for the extended stay business. The green shoots getting
heavy media coverage have yet to translate into ‘real’ business decisions
in our view. Companies are still wary about committing to aggressive growth
expansions. We think this is especially true of the financial sector, which
has traditionally paid top-dollar for extended-stay accommodations.
-Don’t expect a 2Q miracle. In line with this view, we expect 2Q results to
be largely unchanged versus 1Q09. We estimate that 2Q distributable income
would fall 10-20% YoY but marginally improve on a QoQ basis. We understand
that Singapore occupancies have stabilized but rates have come down - this
could imply further RevPAU weakness in 2Q09. Performance in other major
markets is stable to slightly negative.
-Time for a little patience. As such, the jury is still out on corporate
spending and travel. We do not believe there is enough justification to
upgrade earnings forecasts. Our investment thesis stands we see nearterm
yield volatility but believe ART’s long-term prospects are sound. ART is
only trading at 0.44x book but we do not think current levels provide the
best entry point for investors, in view of the near-term fluctuations in
yield and RevPAU. We advocate patience for now and downgrade our rating for
ART to HOLD. Our S$0.82 SOTP value incorporates our assumption of an equity
issue of S$160m at the S$0.55 price level (up from S$0.45). Our fair value
estimate for ART is S$0.61 (S$0.57 previously), at a 25% discount to our
SOTP value.
JAYA by cl
- Jaya announced that certain of its lenders have indicated their intention
to review the credit facilities extended to the group.
- As a result the board has appointed an independent financial advisor
(nTan corporate Advisory) and a legal advisor (Baker & McKenzie) to help
Jaya review its strategic options.
- Jaya will seek a standstill of the repayment amounts owed to lenders
pending a restructuring of the group’s operational and financial
arrangements.
- The current slowdown in the shipping industry and the tight credit
environment have prevented the company from disposing vessels at a rate
necessary to selffund its committed build program.
- The company indicated that its capital commitments for materials and
subcontracted labour for its construction program were in excess of S$700m
at the end of June 2008.
- So far there has been no break in the Jaya’s operations and management
indicated that it expects to continue with its day to day activities.
- We highlighted Jaya a month ago as one of the companies that was in need
of new funding.
- Jaya’s gearing as of the end of March 2009 was 85%. The company had
S$395m in debt of which S$229m was ST debt.
- The company was a high risk player as it build offshore support vessels
without having signed contracts with specific buyers in the hope of getting
higher prices for its vessels. This strategy worked well in the upmarket
but has led to a lack of sales in the current downmarket.
- As a result, the company is left with a number of high costs vessels that
it can not sell.
- On top of this company has committed to buying engines and materials for
close to 70 vessels, the majority of which it will not be able to sell at a
profit.
- At this point Jaya is unable to pay back the S$229m in ST loans with
S$22m of cash on its balance sheet.
- The company only generated S$19m in operating cash flows in 2008 and has
lost S$27m in operating cash flows so far in 9M09.
- With the majority of the vessels that Jaya is building catered for
shallow water, where there is currently an oversupply problem, we see
little chance of the vessels being sold. Hence, we don’t expect much of an
improvement in the company’s operating cash flows in the next year.
- We could not reach management for further clarifications. No briefing or
conference call for analysts is planned.
- The stock is trading again tomorrow.
KS ENERGY, daiwa maintain UNDERPERFORM with target price $0.92
- KS Energy (KSE) announced on 4 June 2009 that it was offering warrants on
a one-for-four basis at S$0.20/each. The warrants have a S$1.40 conversion
strike price and a conversion period from 7-24 months after issuance.
-Impact. In our opinion, the company’s issuance of warrants is an unusual
choice for raising capital, as 1) it will not immediately raise a
significant amount of capital (S$16m-18m in net proceeds from the warrant
issuance), and 2) further capitalraising from warrant conversions is
uncertain given that the warrants are ‘out of the money’. In our opinion,
the warrant issuance is to improve the company’s working-capital liquidity,
rather than prepare the balance sheet ahead of any imminent corporate
action (eg, an asset acquisition).
- We have made some modest adjustments to our FY09-13 balance-sheet and
cash-flow assumptions, but no changes to our FY09-13 net earnings
forecasts. Our EPS forecasts are also unchanged, as the warrants are
currently anti-dilutive.
-Valuation. We have raised our six-month DCF-derived target price to S$0.92
from S$0.72, due mainly to a reduction in the assumed WACC, to 12.4% from
16.0%. The reduced WACC reflects investors’ shift away from the extreme
risk-aversion that was evident from equity valuations in late-2008.
-Catalysts and action.KSE’s stock has risen significantly since the 28
April 2009 price of S$0.715 on the back of higher crude-oil prices and
equity-market levels. However, we think that the company’s fundamentals
should continue to be challenged from 2009- 11 due to downcycles in jack-up
and parts-distribution industries, despite the rebound in crude-oil prices
to more than US$70/bbl from US$50/bbl as at 28 April 2009.
- From an earnings perspective, KSE is theoretically ex-growth in FY09 and
FY10 since it does not have a significant amount of equipment up for new
contracts until late 2010. The company may see all four of its jack-ups
come up for new contracts in late-2010 and 2011, making the state of the
jack-up market very important. We expect jack-up day-rates to remain soft
from 2010-11 due to a significant overhang of idle global jack-up capacity.
- According to Daiwa’s view, the Straits Times Index and crude-oil prices
are both currently more-than-fairly-valued and are at risk of a price
correction over the next six months. We expect KSE’s share price to
underperform the Straits Times Index if stock indices and/or crude-oil
prices decline.
MIDAS, kim eng maintain BUY with target price $0.82
-Secures two contracts worth RMB603m. Midas has secured two contracts worth
RMB603m to supply aluminum alloy extrusion profile for 100 inter-city
high-speed train sets (1,600 train cars) to subsidiaries of the China
Northern Railway Group (CNR Group). This will comprise of a 50 train set
RMB306m contract from CNR Changchun and a 50 train set RMB297m contract
from CNR Tangshan.
-Beijing-Shanghai High-Speed Line. The train cars involved will be part of
the “CRH3-380” project which has speeds of up to 350km/h. We believe these
trains will be used for the Beijing-Shanghai High-Speed train line. This
amounts to a high profile and prestigious project and is also Midas’s
single largest project to date.
-Largest order to date firms up revenue visibility. We estimate these
contracts, which will be delivered from 2H2009 to 2011 will involve about
18,000 tonnes of capacity. Assuming an even delivery schedule, these
contracts alone will utilize about 25% of Midas’s enlarged 30,000 tonnes
per annum production capacity during this period.
-Looks like 3rd line has been pre-booked. We estimate orderbook has
increased from approximately $100m to $230m. This project will involve the
upcoming third production line once it comes onstream in 1Q2010. A minor
portion of the contracts will also be for downstream fabrication work on
the profiles, which we believe will eventually aid Midas’s foray into this
area.
-Picking up speed. As highlighted earlier in our 9 June report “The
Fantastic 4th?”, we believe that more new contract announcements are
likely. The PRC government’s RMB4 trillion stimulus package will continue
to benefit the rail infrastructure sector. We have adjusted our FY11 net
profit up by 4.5% but kept our 12-month price target based on 15X FY10F PER
unchanged.
SGX, ssb maintain BUY with target price $9.50($8)
- Assumes 2010E ADT S$2.1bn, 23x PER — We raise our target price on SGX to
S$9.50 (from S$8.00) based on a new 12-month STI target of 2700 (from
2400). We raise forecasts 7-19% on FY10E average daily turnover (ADT) of
S$2.1bn. The recent STI rally, up 65% in 14 weeks, saw ADT triple from Feb
lows to S$2.1bn/day in May, suggesting a forecast 61%qoq jump in 4Q09E
(June 2009) profit. Our revised FY10 forecast of S$444m is 28% above
consensus. Key risk is after a nearly 100% price jump SGX is vulnerable to
price corrections.
- Citi 12m-STI target 2700 Citi Singapore Strategist Hak Bin Chua has
raised his STI target to 2700 (mid-cycle STI P/B of 1.62x), citing upside
risk to our above consensus 2009E GDP of minus 5%yoy and Singapore being
out of recession possibly as early as 3Q09. Past market cycles suggest that
the STI “normalizes” toward mean P/B levels as expectations of recovery set
in, and may even overshoot the mean during periods of ample liquidity.
- How far could the STI rally eventually go? It is important to note that
we are just 14 weeks into this new recovery cycle. Our study of past STI
cycles shows that with one exception (post Sept-01) every STI bull market
recovered at least 90% of the prior bear market points lost, which in the
current cycle implies returning to 3590 on the STI.
- Investment risks Having already rallied c.100% in 14 weeks from its S$4
trough, SGX is susceptible to near-term price volatility and market
corrections. A fundamental medium-term risk would be the entry of a
competitor exchange, which could materially affect SGX’s equity pricing
structure.
YANLORD by cl
- Yanlord Land (YLLG SP, Outperform) is placing new shares and concurrently
issuing convertible bonds. The official announcement is not yet available
but from Bloomberg and our sources.
- Placement offer price S$2.08-2.16, or 6.4% to 10% discount to last close
at S$2.31.
- Target fund raising from placement S$ 200 mn.
- Convertible bond 5 years maturity with conversion price at S$2.6 Coupon
rate of 4.85-5.85%. Convertible from 3rd year with max 105m shrs to be
converted.
- Target fund raising from CB S$275mn
-Reason for fund raising - land acquisitionWe believe Yanlord is seeking
for funding through placement/CB issuance because the company has spotted
2-3 attractive acquisitions in Shanghai, each costing >RMB1b, plus another
project in Chengdu.
- While some might doubt the need for fund raising given Yanlord’s ample
cash position - the company reported a cash balance of Rmb2.7b by end of 1Q
09, and with Apr-May presales of Rmb 3.3b plus part of Feb-Mar presales to
be collected in stages its cash balance is expected to accumulate to RMB7b
cash within the coming months - we believe this shows the company’s
determination to lock in the acquisition opportunities.
-Impacts - NAV to grow 11% by conservative assumptions. This is at cost of
just 1) negligible NAV dilution, 2) neutral gearing impact; 3) some EPS
dilution
- Yanlord will have a potential NAV enhancement of 11% assuming 1) the
company to spend RMB4b on acquisitions, 2) land cost accounts for 40% of
selling price, 3) after tax net profit margin of 20%. This comes at the
cost of
- Negligible NAV dilution the placement price represents 2-5% disc to our
09 NAV estimation and will translate into max of 4% NAV dilution.
- Neutral gearing impactThe company’s 1Q09 net gearing was 53% (before the
strong sale of April and May) with net debt of S$1,054 against equity of
S$2,004m. Post placement/CB issuance, we expect net gearing to drop
marginally to 51% (new net debt of S$1,129m against equity of S$2,204).
[ SECTOR ]
BANK by cl
-Regionally, Singapore banks compare well on balance sheet safety boasting
low gearing and high liquidity. However, for investors looking to reward
growth, we believe these banks will disappoint as NPLs rise to levels
similar to emerging economies resulting in negative earnings momentum,
falling ROEs and an impetus to preserve capital. Hence, we remain U-WT
Singapore banks with UOB our top pick for their better quality loan book
and the potential for an early earnings recovery.
-Safe, liquid balance sheets. Regionally, Singapore banks’ balance sheets
offer relative safety. Strong on-balance sheet liquidity (77% LD ratio) vs.
other developed markets such as Australia (118%), Taiwan (98%) and Korea
(140%). Low gearing levels with equity-to-assets at a healthy 8%, compared
to peers in Taiwan (7%), Australia (5%) and China (6%). These are
particularly important only for growth, but current macro conditions mean
the medium term will be defined by the provisioning cycle instead.
-Loan quality risks… Emerging market style credit growth over the past two
years means Singapore NPLs (3.8% FY09) will be akin to developing market
levels (4.1% Indo, 5% Phils). This is higher than China (1.9% FY09) where
lending growth is resilient, especially towards SOEs. No such backstop for
Singapore, where lending is focused on SMEs. Yet total provisions to loans
(2.3% FY08) is lower than countries with similar NPL levels (Indo provision
levels 4.4%, 4.0% Phils, 3.5% Malaysia). This should not be. Hence, expect
credit charges to be in the higher end regionally.
-…will disappoint growth. Improving NIMs and trading income are structural
positives. But regionally Singapore fares poorly in PPOP to equity (19% vs.
25% HK, 38% Indo). While in cost management Singapore is top-of-the-class,
this is offset by high credit charges (recall DBS 124bps, UOB 148bps in
1Q09 alone). This means FY09 earnings contraction (-29% YoY) vs. HK (+16%),
Oz (+8%). FY10 will see a modest recovery (+8%), but will still lag HK
(+14%).
-Maintain UNDERWEIGHT. The sector trades at 1.3x FY09 PB, cheaper than
history, but FY09-11 ROEs are 250bps lower than history. Stronger asset
quality and the chance of an early write-back cycle makes UOB our top pick,
while the opposite means SELL OCBC.
