ARMSTRONG, kim eng maintain HOLD
-Seagate Technologies announced last night that it will lay off 2,000
workers in Singapore as it is moving its HDD manufacturing operations out
of Singapore to other locations such as Thailand, China and Malaysia, as
part of its move to reduce costs by having fewer manufacturing locations.
Seagate accounts for 12-13% of Armstrong’s group sales, 37% of its rubber
sales and 56% of total hard disk drive sales. However, we do not foresee
any negative impact on Armstrong from this development. The company already
supplies to Seagate across all of its Asian manufacturing sites through its
Ang Mo Kio purchasing hub, which will be retained along with its
administrative headquarters, media operation as well as product
development. Currently, Armstrong supplies 56% of Seagate China’s rubber
and foam part requirements, followed by Thailand 21%, Malaysia 16% and
Singapore only 7%. The last is likely to be reallocated to the rest of
Seagate’s sites.
-However, the automotive side of its business is doing well, especially in
China, which is expected to have posted double digit gains in revenue
during 2Q09, as the impact on Peugeot from political tensions between China
and France has been less severe than expected. Going into 2010, Armstrong
is also gaining traction on new products, specifically a car seat related
part which is worth 10x in value than its highest value part to-date. Going
forward, we foresee upside to earnings if the current strength continues.
-Maintain Hold on Armstrong although this development may dampen sentiment
toward the stock in the short term.
CSC HOLDINGS, cimb maintain NEUTRAL $0.22($0.17)
- Slightly above expectations. 1QFY10 net profit of S$6.0m (-56% yoy) was
slightly above market and our forecasts, constituting 27% of our full-year
estimate. This was on the back of better-than-expected margins through
strong cost management. 1Q10 revenue fell 48% yoy to S$81.4m, on lower
demand for construction services due to the global economic slowdown.
- Gross margins improved to 18.6% from 14.3% in 4Q09 and 18.4% in 1Q09.
This was a reversal from previous quarters on the successful implementation
of stringent cost management, despite falling contract values in tandem
with lower building material prices. The bulk of the revenue was from
public-sector projects while Malaysian operations contributed more with
several projects in the Klang valley, CIMB Tower at KL Sentral and work
done on portions of the double track railway project.
- Outlook. Order book crept up to S$120m from S$110m as at 31 Mar 09,
reflecting the slow start of private residential projects. However,
sentiment among property buyers appears to be improving, which may prompt
developers to launch their projects, creating demand for foundation
engineering services. CSC continues to guide that numerous projects from
this year’s government budget to pump-prime the economy could materialise
in 2HFY10. However, even if CSC secures new contracts, FY10 revenue and
profits are likely to be lower yoy.
- Maintain Neutral. We raise our FY10-12 net profit forecasts by 27-36% to
reflect potential new orders in 2H10. After our earnings upgrade, our
target price for CSC has been lifted to S$0.22 from S$0.17, still based on
8x CY10 P/E, the industry’s mid-cycle valuations. Nevertheless, CSC may
find it a challenge repeating its performance last year. Maintain Neutral.
HI-P, csfb assuming coverage OUTPERFORM with target price $0.9($0.59)EPS
for FY09/10 raised by 5% and 3%
- Hi-P delivered stronger-than-expected June-quarter results, with revenues
at S$177.6 mn (-37% YoY) and core earnings at S$24 mn (-27% YoY). 6MTD
results have achieved 47% and 62% of our full-year revenue and earnings
estimates, respectively.
- Management is guiding for revenue and profits in 3Q09 to decline both
sequentially and YoY, with current programmes at maturity. However, new
projects should kick-off in 4Q09, led we believe by wireless segment
contribution from RIMM.s Bold, and orders from HTC/Apple and Gillette/Braun
within the consumer space.
- Going forward, Hi-P aims to leverage on the recent Jiamao acquisition to
boost its electronics (FPCB manufacturing) capabilities. We have kept
revenue forecasts largely unchanged, but raised earnings by 3-4% on
stronger margin assumptions.
- We favour Hi-P for its undemanding valuations . at 5x P/E, and cashed-up
balance sheet, at 40% of its market cap. We peg our target price at 8x P/E,
a 40% discount to larger and more liquid Venture, or S$0.90 (was S$0.59)
and assume coverage with OUTPERFORM. Key risk would be the
slower-than-expected ramp-up from key clients.
HI-P, dbs maintain BUY with target price $0.76($0.79) EPS for FY09/10
lowered by 6.7% and raised by18.2%
-Further margin expansion & cash generation in 2Q. Core net profit,
excluding impairment charges and forex losses, came in at S$21m (-28% yoy,
+7%qoq), better than our S$18m projection. Sales of S$178m was below our
S$200m forecast but gross margin improved to 22.8%(1Q09 20%; 2Q08 18%),
benefiting from a better product mix, more value-added processes and
effective cost control. Hi-P generated S$70m FCF in Q2 as cash cycle
shortened to 40 days from 56 in 1Q09. Net cash increased to S$251m, c. 40%
of market cap.
-3Q09 expected to be weaker y-o-y & q-o-q. We expect S$15m net profit in
3Q09, a decline of 41% y-o-y and 6% q-o-q. In view of the delay in ramp up
of new programs (smartphones, notebooks and MP3 players) to 4Q09, we have
cut our full year sales forecast by 13% but raised gross margin assumptions
by 1%pt to19% due to stronger margins in 2Q09.
-S$56m flexible printed circuit acquisition. This acquisition (max flex
capacity 300k sqf) is in line with the group’s integrated strategy and
customers are positive on this new expansion. However, FPC will not
contribute till FY10 and management expects start up expenses to be
incurred in 4Q09/1Q10.
-Maintain Buy, only 4.5x FY09 PE if net of cash. Valuations remain
compelling at 6x FY09 earnings vs historical average of 9x PE multiple. If
net of cash, stock is even cheaper at 4.5x PER with 3-4% yield. Maintain
Buy, with slightly lower target price of S$0.76,still pegged at 9x blended
FY09/10 earnings.
HONG KONG LAND, jpm maintain NEUTRAL with target price $3.20
- Headline net profit to increase 36% Y/Y to US$329 million Hongkong Land
will announce its interim results on August 6 (Thursday) after market
close. We are looking for underlying net profit of US$329 million (EPS
US$0.146), up 39% Y/Y. We expect interim dividend at US$0.06, same as 1H08
levels.
- Property development revenue would include MCL and Sail at Victoria We
have incorporated the booking of Tierra Vue, Fernhill in Singapore, and
Sail at Victoria which was completed in Jun-09 with 75 out of 95 units
sold. The swing to earnings is the booking of sales transactions of Sail at
Victoria as the units were mostly sold in Jun-09.
- Expect positive rental reversion despite higher vacancy We expect gross
and net rental income to grow 27% and 19% Y/Y, respectively, despite the
higher vacancy at Exchange Square 3 early in the year. The spaces given up
by Morgan Stanley at end 2008 were largely filled and hence we expect the
portfolio vacancy to be in line with the overall vacancy in Central of
below 5%. And as asking rents are holding up rental reversion is likely to
remain positive, in our view.
- Expect book value to stay at least flat We do not expect book value of
HKL to be cut back by devaluation. In fact, JLL numbers showed that office
capital value was flat in 1H09 thanks to the abundant liquidity in the
region. Added to this is the potential revaluation of MBFC, which is under
development, according to the revised IFRS.
- Dec-09 PT of US$3.2 We have a Neutral rating and a Dec-09 PT of US$3.2
based on 27% discount to NAV, which is the long-term average NAV discount.
Risks to PT are interest rate risks, cap rate changes and retrenchment of
the financial sector.
LIPPO-MAPLETREE INDONESIA TRUST, ocbc upgrade to BUY from HOLD with target
price $0.5($0.24)
-Distributable income falls YoY and QoQ. LMIR Trust reported a 20.3% YoY
fall in 2Q09 revenue to S$19.5m and a 20.6% YoY fall in net property income
to S$18.5m. The manager said about half of the decline was due to the
depreciation of the IDR against the SGD. The rest was attributed to a
reduction in casual leasing income as well as lower car park and
miscellaneous income. Conversely, revenue and NPI rose 4.7% QoQ and 5.5%
QoQ respectively thanks to the appreciation of the IDR in the past three
months. The positive forex effect offset lower revenue from two of LMIR’s
malls undergoing asset enhancement work. Distributable income, which is
hedged, fell 12.5% YoY and 4.3% QoQ to S$13.9m. Unitholders will receive
1.3 S cents per unit, in line with our expectations.
-Occupancy looks to be stabilizing. Mall occupancy was stable at 95%
compared to three months ago, and outperformed the broader market rate of
84% (Jakarta only, Cushman & Wakefield). Mal Lippo Cikarang’s 86.5%
occupancy is the lowest within the portfolio due to the non-renewal of
anchor space. The manager has temporarily leased the space to factory
outlets but is in discussions to secure longer term leases. We understand
rent reversions are on average 3-5% above preceding rents. The manager has
tried to offset any weakness in rents with shorter lease durations or by
incorporating a step-up component.
-Retail outlook still weak. Macroeconomic news on Indonesia has generally
been quite benign. Low inflation and signs of political stability have
boosted consumer confidence. The IMF forecasts growth of 3.5% this year,
the fastest pace in Asia after India and China. However, the retail
property sector is still plagued by weak demand and oversupply,
particularly in Jakarta’s CBD. The manager guided that rental rates could
remain soft in 2H09 but expected LMIR’s ‘middle market’ malls to show some
resiliency.
-But value exists. We have updated our earning estimates to reflect actual
1H performance. We are expecting portfolio performance to stabilize in
2H09, with a slight uplift from completed AEI projects. Our 2H09 DPU
estimate is 2.76 S cents, up 3.9% HoH. We have also adjusted our valuation
parameters to reflect current market and forex conditions. Our fair value
estimate of S$0.50 (prev S$0.24) is at a 25% discount to our SOTP value of
S$0.67 for the trust. Despite the weak near-term retail outlook, we think
LMIR presents value in the medium-term. Upgrade to BUY (total return of
22%).
ROTARY, ocbc maintain BUY with target price $1.26($0.81)
-Better sequential performance. Rotary Engineering (Rotary) posted 2Q09
results with revenue of S$164.2m (+22% YoY, +24.5% QoQ) and bottomline of
S$13m (+11%YoY, +200% QoQ); 2Q results were inline with our bottomline
estimates but a final phase wind-down of its previous tranche of projects
bettered our topline forecasts. Gross margins were at the lower end of its
guided 18-22% range as revenue are recognised from current projects that
were secured in 2008’s “cost conscious environment”.
-Good balance sheet. Historically, Rotary’s projects have largely been
self-financing, even for its previous mega project of the Universal
Terminal. As such, we do not expect Rotary to require additional
significant amounts of debt except for trade financing for intermittent
gaps. While M&As are an option with a net cash horde of S$110m, we think
that Rotary will explore JVs/alliances first to evaluate the partner and
market it intends to penetrate into.
-Competitor listing. PEC Group (Not Rated) - soon to be listed on the SGX
mainboard (priced at 4x FY09F PER) - intends to have a fabrication facility
in the Middle East by 2010 to compete for projects. Currently, we think
that PEC’s presence should not pose a significant challenge until it firmly
establishes its working relationship with its JV partners and facility.
Moreover, we think PEC will need some time to gain reputability in large
EPC jobs as compared to its strength in maintenance.
-Restoring dividends? After its record earnings year in 2007, Rotary
gradually reduced its dividend payout inline with its bottomline
performance. With the anticipated surge in earnings, we have doubled our
dividend forecasts upwards for FY10F to 4 S cents (prev. 2 S cents). This
brings the yield to 3.5%, a respectable return for an industrial-based
company.
-Calculated expansion pays off; Maintain BUY. Rotary arrived at this stage
with much foresight in its manpower training and calculated Middle East
investment. We have adjusted our estimates to cater to the US$745m contract
value (prev. US$700m) along with increased variation orders for its current
tranche of projects. Our previous concerns on the dilutive effects of the
JV have been alleviated with half of the US$745m to be performed directly
by Rotary instead of its JV. Accretion of SATORP earnings is now modelled
over 3.5 years (prev. 4 years). With better clarity on SATORP, more
regional-based projects slated to come online and improved equity risk
appetite, we have re-pegged our valuation to 12x FY10F EPS (prev. 8x).
Iterate BUY for Rotary with a fair value of S$1.26 (prev. S$0.81).
SEMBMARINE, cimb maintain OUTPERFORM with target price $3.48($3.38) EPS for
FY09-11 raised by 1-8%
- Sales inched up 8% yoy to S$1.5bn, underpinned by rig building, with the
initial recognition of two jack-ups and one semi-sub against one jack-up in
1Q09.
- Margin expansion. 1H09 EBITDA margins expanded 2% pts yoy to 11.8%,
thanks to better yard efficiency and the execution of repeat orders. We
believe the strong margins are sustainable in 2H09.
- Ship repair’s near-term outlook challenging. Ship repair revenue dipped
11% yoy to S$173m as average revenue per vessel slid from S$3.2m to S$2.3m.
This was on the back of scaled-back repairs and maintenance expenses by
ship owners given weak shipping sentiment. Only the big docks have been
fully booked till end- 2009 as visibility for smaller docks remains
limited.
- Order wins could swing with Petrobras orders. Order book was S$7.9bn with
YTD wins of S$1.1bn, including the latest FPSO conversion of S$160m
announced for MODEC. As for prospective Petrobras new orders, we believe
SMM is positioned to win some contracts in the near term given its track
record with Petrobas and alliance with the MacLaren yard in Brazil. We cut
our order assumption for 2009 from S$3bn to S$2.5bn, to be more
conservative.
- Strong cash. Cash balance was S$2.1bn, of which S$1.8bn was advance
payments from customers. SMM declared an interim dividend of 5 Scts, the
same as in 1H08.
- Raise earnings estimates by 1-8% for FY09-11, to reflect higher operating
margins from rig building, offset by lower Cosco contributions.
- Maintain Outperform; higher target price of S$3.48 (from S$3.38)
following our earnings upgrade, still based on blended valuations. A surge
in its order-win momentum and further margin expansion could catalyse the
stock, we believe.
SEMBCORP MARINE, cl maintain OUTPERFORM with target price $3.25
-1H09 results were ahead of our, and consensus, estimates. Continued margin
expansion evidences robust execution. A steady stream of order wins even in
a tough 2009 augments a sizeable S$7.9bn orderbook providing earnings
visibility into 2011. Some S$1.8bn of net cash allows the company
flexibility in weighing growth options ?organic as well as M&A. A 6% FCF
yield suggests upside to the 4% dividend yield in 2009. We raise our
earnings forecasts to reflect higher Cosco Corp forecasts, consequently
raising our target price to S$3.25. We retain an Outperform rating.
-A strong harbinger for 2H09. SMM 2Q09 profits grew 8% YoY, and were 16%
above consensus and our forecasts. Operating margin continued to expand to
11.1%, averaging 10.5% for the first half and tracking our 10.6% FY09
forecast. With 4 rigs due for delivery in 2H09 vs. 2 in 1H09, margin
expansion should continue, as should earnings growth. A S$7.9bn order book
offers 1.6 years of earnings visibility. Interim dividend of 5 cents offers
1.6% yield; this is adequately supported by 6% FCF yield in 2009.
-Strong balance sheet = strategic flexibility. SMM can be accused of a lazy
balance sheet with a S$1.8bn net cash position that has steadily grown over
the years. On the flip side, this affords the company flexibility regarding
its growth strategy, be it organic or through acquisitions. In a market
where access to capital commands a premium, SMM has oodles of it. Failing a
significant investment over the next 2 quarters, we would like to see a
greater dividend payoutto shareholders.
-Retain Outperform, prefer SMM to KEP. The 28% share price rally since our
note on 13 July has led to the stock hitting our target price of S$3.06. To
reflect the higher earnings forecasts flowing through from Cosco Corp
(COS), we marginally raise our target price to S$3.25 pointing to 2%
upside. If we mark to market the COS stake, SMM? target price would be
S$3.46, pointing to 8.5% upside. Relative to KEP, SMM offers higher
correlation with oil price, greater earnings visibility, higher earnings
growth (30.2% vs. -1.6%) and more attractive valuation, making it our
preferred pick for exposure to the offshore sector.
SEMBMARINE, csfb maintain UNDERPERFORM with target price $2.50($0.95)
- 2Q09 was better than expected, primarily on improved operating margins at
11%, against 9.9% in 1Q09 and our estimate of 9.7% for FY09. Revenue and
net income for 6M09 came in at 46% and 48% of FY09 estimate.
- Management explained margin improvement resulting from job credits
(fiscal stimuli), product mix and efficiencies. As some of these factors
may be transient, we are increasing FY09 margin estimate to 10.5% relative
to 11% operating margin in 2Q09.
- SMM secured another FPSO conversion from Modec, valued at S$160 mn
bringing its YTD contract wins to S$1.1 bn. We have adjusted our order book
and revenue estimates, but have also lowered our new contract win estimates
from 2009-11E (Fig. 2). Net result is higher short-term estimates, lower
long-term forecast.
- We still have concerns about SMM.s exposure to Larsen Oil & Gas, but also
recognise increased risk tolerance in equity markets. Raising target price
to S$2.5 from S$0.95 based on 2010E P/E of 12x, low end of the order
up-cycle period but maintain UNDERPERFORM rating.
SEMBMARINE, daiwa maintain UNDERPERFORM with target price $2.06 ($1.59)
-SembCorp Marine (SembMarine) announced its 2Q FY09 results on 4 August,
after the market closed. Its net profit rose by 7.6% YoY on an 8.0% YoY
increase in revenue.
-The results exceeded our and the Bloomberg-consensus expectations, due
primarily to better-than-expected rig-building revenue and operating
margins. We have revised up our FY09 net-profit forecast by 11.2% due to
adjustments to our assumptions for the rig-building segment. Our previous
FY09 net-profit forecast was 6.8% above the Bloomberg-consensus forecast.
-SembMarine’s orderbook of S$7.9bn represents 482 days of work left, based
on its 2Q FY09 pace of revenue recognition and assuming no new contract
wins. We do expect more semi-submersible and FPSO/FSO contracts to be won
in 2H09 and in 2010, but not enough to prevent a substantial year-on-year
decline in its FY11 net profit.
-We have raised our six-month DCF-derived target price to S$2.06 from
S$1.59 due to a reduction in our assumed WACC from 15.0% to 10.9% to
account for the market’s greater optimism about the global economic
outlook. However, the 35.2% downside to our new target price reflects our
cautiousness about the fundamentals of the rig-building sector.
-We maintain our 4 (Underperform) rating and reiterate our view that
industry fundamentals should remain weak through 2011 and that SembMarine’s
valuation appears stretched.
SEMBMARINE, db maintain BUY with target price $3.80
-Strong operating performance. Sembcorp Marine’s 1H09 revenues were up 24%
yoy to S$2,861m, while net income grew 17.6% to S$258m (about 53% of our
full-year estimates). Gross margins were up from 9.9% in 2Q08 to 12.9% in
2Q09; on a half-yearly basis; they rose from 10.2% in 1H08 to 11.8% in
1H09. Operating profits surged 58% yoy to S$301m in 1H09 (up 50% yoy to
S$167m in 2Q09). As valuations remain attractive, we maintain Buy.
-Conditions in place for industry to recover. As we have highlighted
before, two key conditions are required for a sustained recovery of the
sector (1) improvement/stability in oil prices, and (2) easing of credit.
At current oil prices, investments previously put on hold are now beginning
to return. We also see incremental signs/examples that suggest substantial
easing of credit in the O&M sector.
-Declining reserves to spur investments; SMM continues to win contracts.
The alarming rate of decline of global oil reserves, as highlighted by the
IEA, is prompting countries such as Mexico to aggressively step up spending
within the industry to halt this decline. We expect more countries to
follow suit in the long term. We believe SMM is well positioned to benefit
from this trend, having built up its branding and execution track record
over the years. SMM has announced a new S$160m FPSO conversion contract,
bringing YTD new orders to S$1.12bn.
-Maintain Buy; sound long-term prospects. SMM has a strong net cash
position of S$1.84bn (S$1.18bn in progress payments), which places it well
for potential M&A activities. Our SOTP-based target price is S$3.80 (target
multiple of 15x FY09E earnings for O&M business; market/implied values for
Cosco). Risks unexpected cost escalation, execution risks, foreign currency
volatility, and a sustained plunge in oil prices.
SEMBMARINE, dbs maintain BUY with target price $3.70($3.25) EPS for FY09/10
raised by 4.7% and 5.3%
-Better than expected 2Q09 results. Sembcorp Marine’s (SMM) revenue in 2Q09
was S$1.5b, in line with our expectation for order book drawdown. SMM’s
strong S$145m recurring net profit in 2Q09, vs. our expectation of S$122m,
was due to higher EBIT margin of 11.1% (vs. our estimate of 9.8%). This was
due to better-than-expected operational efficiency and relatively subdued
margin pressure on variation orders.
-Raising profit estimates. We have raised our recurring net profit
forecasts to S$516m (+6%) in FY09 and S$553m (+5%) in FY10. These are due
to the lower order cancellation assumption of 6% (-6ppt), and the higher
EBIT margin estimate of 10.6-10.8% (+0.8ppt).
-S$1.1b y-t-d order wins. SMM’s S$1.1b y-t-d order win has outpaced its
peers, and is on target to reach our S$3b assumption. This includes SMM’s
latest S$160m FPSO contract win from MODEC. Coupled with more spaced out
order book drawdown, SMM’s order book of S$7.9b is now bigger than Keppel
Corp’s S$7.7b.
-Better quality of project enquiries. SMM guides that the quality of
enquiries for rigbuilding/offshore jobs has improved. We expect the
increasing seriousness of the bids as incentives for equipment suppliers to
potentially moderate their prices lower to move sales.
-Raising target price. Our target price for SMM is raised to S$3.70, as we
roll forward SOTP valuation metrics to FY10 EPS on better margin
visibility. Maintain BUY.