CapitaLand - Caught in an ebbing tide

We have downgraded our rating for Capitaland to 3 from 2 after the government’s announcement (on 14 September) of measures to ensure a ‘stable and sustainable’ property market, including a surprise (in our view) withdrawal of the Interest Absorption Scheme (IAS). We expect CapitaLand’s shares, a proxy for the Singapore property sector, to be pulled down by the negative sentiment.

We see CapitaLand’s share-price driver as deal flow (capitalproductive announcements, including the possibility of monetising its China-mall assets or a major acquisition) and not the state of the Singapore residential market, although the company is poised to launch The Interlace next month. We have not changed our earnings forecasts.

We have lowered our six-month target price, to S$3.84, based on a reversion to its average premium to NAV (based on our estimates) of 29% over the past five years, from S$4.30 (based previously on one-half standard deviation above the average NAV premium). We have not changed our NAV estimate of S$2.98.

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Singapore Post: Time to factor in growth possibilities

Bumping up earnings estimates. We have tweaked our earnings estimates to take into account G3 Worldwide Aspac (G3AP)'s contribution to the group's revenue. We had earlier refrained from doing so given the uncertainty of its impact in the face of a fragile global economy. Although the general mood is still cautious given that government stimulus packages have not resulted in a sustained recovery in consumer spending (amongst other risks present in the global system), we now deem it appropriate to increase our earnings estimates by about 6% to incorporate G3AP's earnings. Overseas revenue now accounts for 8.2% of total revenue compared to only 0.4% previously.

Recovery underway but not time to party. Composite leading indicators of key OECD countries are continuing their upward trend after reaching their inflexion points around 1Q09. 2Q09 GDP growth cues have also been largely positive, especially for Asian economies. While there are still doubts on fundamental recovery in the financial markets, there is no denying that an improvement in investor sentiment has allowed companies and banks to raise capital and shore up their balance sheets. However, certain risks, such as 1) deteriorating personal credit and loans in the US, 2) possible build-up of asset bubbles in China, and 3) possible weak private sector spending in major economies after government stimulus plans wear off, threaten to destabilise the global economy and hence Singapore's economy. As SingPost's earnings are significantly correlated with Singapore's GDP growth, it is worth noting the possible trajectories of the global economy.

Worldwide postal sector only feeling a pinch. According to a Universal Postal Union survey, postal operators are definitely feeling the effects of the crisis, but are "not showing signs of an economic depression". Shares of listed postal operators have performed well during this crisis, given their relatively defensive nature (Exhibit 2). Besides having a decent dividend yield, SingPost is also pursuing growth, as seen by its recent M&A deals, enhancing the attractiveness of the stock.

Maintain BUY. SingPost is still the dominant player in Singapore's postalindustry despite threats from new competitors, and we foresee its strong operating and free cash flows to continue to buttress its reputation as a stable and well-run business. Meanwhile, it is taking the opportunity to grow its regional network during this downturn, which is definitely a positive development. With the incorporation of G3AP's future earnings, we have also raised our fair value estimate to S$1.09 (prev S$0.97). Maintain BUY.

Singapore Exchange - Downgrading to Neutral

Trading volumes have increased in recent weeks, and we believe these higher levels are sustainable due to an economic recovery and a decline in risk aversion among investors. We raise our FY10/11/12 EPS estimates for Singapore Exchange (SGX) from S$0.35/0.40/0.46 to S$0.39/0.43/0.48, and our price target from S$9.00 to S$9.20. However, we believe the stock is fully valued at current levels and thus downgrade our rating from Buy to Neutral.

We expect foreign inflows to Asia to continue because of its better economic growth prospects relative to the west. Additionally, we think local retail participation in Singapore’s equity market could rebound after having fallen from an average of 15.2% of household wealth in 2003-07 to an estimated 9.3% at the end of 2008. However, we believe this will be offset by fewer Chinese listings because of the better valuation premium commanded by similar listings in China.

We believe SGX’s main risk, the potential break-up of its monopoly, has been mitigated by its announcement of a joint venture with Chi-X to set up the first exchange-backed “dark pool” in Asia. We think this partnership should eliminate criticism of SGX’s monopoly status and allow it to defend its market share.

We continue to derive our price target using a DCF-based methodology, explicitly forecasting long-term valuation drivers with UBS’s VCAM tool. Our new price target reflects our higher estimates. Our key assumptions include a WACC of 8.9% (previously 8.6%) and a long-term growth rate of 3%. The change in WACC is due to higher beta.

Neptune Orient Lines NOL - Downgrade to Hold

Recent surge in share price. The share price has risen by about 20% since our last report on 2 September 2009. We would like to highlight that NOL is still expected to post a full year loss of US$633m in FY2009F. Although we are anticipating a recovery in 2010, it is projected to report a loss of US$131m in FY2010F. It is only in FY2011F that we expect a profit of US$208m.

Dowgrade from Buy to Hold with fair value at S$2.12. We have a fair value of S$2.12 for the stock. This works out to 1.2 times book value for FY2009F. We derive our fair value based on expectations that NOL will start recovering from the downturn in FY2010F. Due to limited upside of 11.6% to our target price, we downgrade the stock from buy to hold.

SMRT - Ridership figures could have a lag in the recovery in GDP

Weak start at Circle Line due to poor connectivity however mgmt expects impact to be minimal. SMRT average daily rail and bus ridership in Aug09 grew by 1.6% YoY and -1.2% YoY to 1.4m and 0.8m, respectively. The trend has been weaker than expected due to poor ridership at its core North East South West (NSEW) lines as a result of the slowing economy.

In addition, ridership at Circle Line (CCL) has been below our expectations of 55k in average daily ridership. Stripping out CCL ridership of more than 30k in average daily ridership, the core ridership at NSEW lines would have declined by 0.5% YoY. YTD SMRT's ridership for rail grew at 2.6% YoY and bus at -0.7% YoY.

Revised our ridership forecast downwards. We have revised our FY09E ridership forecasts for rail from 6.4% YoY to 3.5% YoY and bus from 0.8% YoY to -0.5% YoY. We have revised our earnings downwards by 2-3% in FY10-12E to account for the lower ridership in our forecasts partially offset by higher rental revenue assumptions (due to the redevelopment of five MRT stations), lower staff costs, lower depreciation and higher EBIT contribution from bus and taxi divisions.

Lowered our TP from S$2.05 to S$2.00; Buy. SMRT offers a defensive yield of 5.0%. Our revised target price is based on our DCF valuation using a COE of 7.5% and a TGR of 1.0%. Our S$2.00 TP implies a PE of 17.0x FY10E. Downside risks: rebound in the oil price, lower ridership, reduction in fares, taxi competition and disease outbreak.

StarHub confident of extending EPL rights

The likelihood of any irrational bidding for the English Premier League (EPL) rights may be limited due to a risk of regulatory intervention to keep prices in check, we believe. Also for StarHub, the standalone economics may not be appealing, and investment is largely justified on the opportunity cost analysis. SingTel will also need to consider its ADSL coverage/quality issues. A joint bid may not be acceptable to the FA Premier League as it reduces pricing tension for future auctions. Our base case is StarHub winning again, otherwise a wholesale deal (for access to their HFC and/or even content) cannot be ruled out, in our view.

There has been no significant change in the operating environment — competition is benign and the macro impact moderating. We expect revenue growth to remain benign this year at 1-2%, with margins largely stable. On NBN, the company does not expect significant pricing pressure in the consumer segment and sees upside from nonresidential and government segments. In the local fixed network market, the incumbent SingTel has ~75% share and StarHub ~25%.

StarHub is one of the few global carriers with a Femtocell product. It offers it for up to four 3G phones for S$32.10/month and includes unlimited local calls and SMS. Although these are still early days, Femtocell could be a niche segment and good for the carriers as it overcomes coverage issues/reduces capacity on the macro network. However, the customer needs to be offered strong incentives to take up this service, and revenue upside may be limited. Issues around interference, handover and bandwidth efficiencies are being addressed.

Our DCF-based 12-month price target of S$2.35 assumes a WACC of 8% with a terminal growth rate of 1.5%.

Singtel - The Indian Connection

Bloomberg reported that Bharti Airtel (India’s biggest mobile phone company with 102.4 subscribers, of which quarterly record of 8.44 mln was added in Q2) and MTN (South Africa’s biggest wireless company) have reached a US$24 bln preliminary accord to buy each other’s shares, as a first step leading to a merger.

Bharti is to buy 49% of MTN for US$14 bln, while MTN will acquire 33% of Bharti for US$10 bln. If consummated (which requires 75% approval by shareholders of MTN), the deal will:

- create the world’s biggest mobile phone company with 200 mln subscribers and US$20 bln annual revenue;

- will dilute Sing Tel’s existing 30% stake in Bharti. (Sing Tel has said it was prepared to invest a further US$3 bln by buying more Bharti shares from minority shareholders of MTN receiving Bharti shares, to maintain the stake.)

The proposed merger between Bharti and MTN was first announced on May 25th, with Bharti offering 86 rand plus half a Bharti share for every MTN share. Yesterday, MTN closed at 127 rand and Bharti at 409.35 rupees. Bharti’s latest offer values MTN at 145 rand per share. (Bharti is generally believed to be anxious to merge with MTN given the rapid inroads into its market by Vodafone and Reliance.)

We remain Neutral on Sing Tel, which has no particularly attractive atrribute:

Sing Tel’s main attraction is its defensiveness, which is not appealing in current bullish market environment.

The 3.9% yield at $3.17 based on 12.5 cents paid for ye Mar ’09 is only average.

And as has been our stance all along, Bharti, AIS of Thailand, Globe Telecom of Philippines, Telkomsel of Indonesia are mere portfolio investments of Sing Tel, no basis for re-rating of the stock. (Note results comments have tended to focus on contributions from associates, which in turn are often subject to currency fluctuations.)

Wilmar - Listing on track

The listing of Wilmar’s China business is on track, with the company targeting the end of 2009. The proceeds would mostly be used for expansion purposes, ie, investing in new processing and distribution facilities. We think new segments such as rice and wheat can start contributing meaningfully in the next few years, driving the long-term earnings profile for the company.

We believe growth in China portion of the business will be muted compared to the rest of Wilmar’s business in the near term due to regulatory constraints (we expect the market share to remain stagnant of consumer pack and crushing businesses). However we believe the medium- to long-term outlook is strong as new facilities and new businesses will come onstream.

Margins in both crushing and refining are a function of volatility; however, Wilmar could take advantage of its market leadership and scale up to better time purchases and sales to make better spreads than its peers.

Wilmar took a price cut for its consumer products in July to pass on lower raw material costs. Thus, margins in 3Q consumer pack business can be lower q-q but still be substantially higher y-y, in our view.

We maintain our price target of S$7/share (with an implied China value at ~US$14.5bn at 19x FY10F earnings of ~US$760mn for China business).

Genting Singapore - Even odds

RWS could beat consensus forecasts in its maiden year of operation in 2010, and boost GENS’ earnings by 210.0% and 50.3% in 2010-11. Recommend HOLD due to limited upside to fair price of S$0.95.

We initiate coverage on Genting Singapore (GENS) with a HOLD call and a DCF-based fair price of S$0.95/share, which implies a target 2011 EV/EBITDA of 12.7x. While we believe Resorts World@Singapore (RWS) could trounce consensus forecasts in its maiden year as a casino operator in Singapore in 2010, a peakish market outlook could prompt investors to cash in following GENS’ 98.9% ytd price appreciation. We expect GENS to trade in the S$0.90-0.95 range, with the top end having already factored in continuity of the Singapore casino licence and scarcity premium for comparable Asian gaming-consumer plays. As our fair price has limited upside potential, we recommend HOLD with an entry price of S$0.80.

Earnings on a roll. We project GENS’ earnings to surge 210.0% and 50.3% to S$295.2m and S$443.8m in 2010-11 as RWS’ casino operations go into full swing by 1Q10, ahead of rival Singapore casino operator Marina Bay Sands. GEN could beat consensus forecasts of S$105.3m given its firstmover advantage, and with the partial deferment of expansion of the less profitable non-gaming operations.

Leveraging on Asia’s sizeable VIP and Singapore’s domestic gaming markets. RWS should be able to capture 5.0% of Asia’s VIP market (estimated at US$9b-10b p.a.) and 12.5% of Singapore’s gaming market (estimated at S$9b-10b p.a.). This excludes the full grind market potential which RWS could tap from neighbouring countries such as Malaysia, Indonesia, and possibly even China. This is based on the premise of RWS’ strong global network, favourable tax structure and strategic location in Asia.

Quick wins and high margins at RWS. The S$5.6b RWS project promises a good payback period of 8-9 years, riding on Singapore’s favourable gaming tax structure which gives RWS an advantage over its competitors in Australia and Macau in the high roller segment. Meanwhile, the non-gaming division (principally Universal Studios) should eventually attain decent returns, judging from Universal Studios Japan’s achievements in recent years.

UK business’ run of bad luck should turn by 2011. GENS’ UK business is projected to recover only in 2011 due to the UK’s prolonged economic slowdown and adverse regulatory environment. Still, earnings could post a positive surprise as 2008’s streamlining and restructuring exercises could save up to £10m annually, but the upside is not significant to group earnings. For details, please refer to our blue-top on Genting Singapore.

Qala will spearhead M1’s entry into the corporate business

M1 announced two significant investments recently. One, it will bootstrap itself a presence in the corporate fixed broadband via the acquisition of Qala, a local internet service provider. Two, it will launch the Novatel MiFi, a battery-operated mobile router that allows users to create and bring with them their own personal wireless hotspot wherever they go, even while in a car or in a remote area where there are no public hotspots.

M1 will pay up to $17.9m (of which $3m is subject to financial targets being met) for Qala, a nine-year old SBO-based ISP originally seeded by Creative Technology but owned largely by two individuals. It provides data and communications services to corporate customers almost exclusively, while in its consumer business, subsidiary QMax is one of three providers of the free nation-wide 1Mbps WiFi service, Wireless@SG.

Qala’s profits are currently negligible compared to M1 but it will allow M1 to provide SMEs with a cheaper alternative to SingTel, which monopolizes the data and telecom needs of companies operating in non-CBD areas. In addition, Qala will be able to cross-sell M1’s consumer Internet services, such as its 7.2Mbps wireless broadband. M1 anticipates minimal capex - no network investment will be needed while backend support can be combined with its existing consumer facility.

We reckon the innovative MiFi device could have a positive impact on M1’s market share in mobile broadband, which stood at 137,000 (dongles only) as at Jun 2009 (estimated to be 25-30% market share). M1 is the first telco in Asia to launch this device. As it allows up to five devices to be simultaneously connected at 7.2Mbps download speed, it may even prompt existing dongle users to switch, depending on the prices for the device and data plans, as well as supplier exclusivity.

We reiterate our view that M1 will have the biggest upside once NGNBN comes online. Its acquisition of Qala is a credible step in filling up its lack of a corporate business, and will give it upside beyond the consumer business alone. We will start to model in NGNBN benefits once there is more clarity. Target price is raised to $2.18 (13x FY09) with higher peer valuations. M1 is still attractive at 7.2% yield. Maintain BUY.

Golden Agri - Stock looks inexpensive, with the lowest PEG ratio in the sector at 0.44x

We have increased our CPO price forecasts due to the El Nino effect. This has a direct bearing on our forecast earnings. We expect Golden Agri’s productivity to rise in FY09-11, as its hectarage matures. Overall, the impact of El Nino should reduce its CPO yield in FY09F to 4.9 tonnes per hectare, from 5.2 tonnes in FY08. However, we expect a marked recovery in FY10 and FY11, to 5.34 tonnes and 5.43 tonnes per hectare, respectively. The amount of mature hectarage should also rise from 247,000 hectares in FY09F to 274,000 in FY11F.

Golden Agri’s balance sheet is unleveraged, in our view. The company raised S$692m (US$423m) in a recent rights and warrant issue, which is to be used to increase planted area by 50,000 hectares per annum over the next three years. We expect the already relatively low (vs peers) net gearing to fall steadily from 9% in FY08 to -5% in FY11. We expect the company to have US$782m in cash in FY09, despite its US$120m capex programme. This offers the capacity to acquire plantation assets, should the opportunity arise. Although the acquisition profile has not been detailed, Golden Agri has the resources to increase its footprint in regional plantations.

We now forecast a 2% decline in net earnings in FY09, but a 12% increase in FY10 and a 25% increase in FY11. EPS is diluted by the recent rights and warrant issue: Golden Agri completed a 17 for 100 shares rights issue in July. Investors also received two warrants for every rights share. Therefore, we increase our invested capital growth and operating margin forecasts in phase 2 of our DCF valuation. Our target price rises to 60 cents, implying 25% upside potential and a Buy rating. The stock looks inexpensive at 17x FY09F earnings and a PEG ratio of 0.44x.

ComfortDelGro - Playing the recovery theme

We remain BUYers of CDG for its strong earnings recovery momentum on lower fuel costs in 2009 and improvement of business conditions and margins in 2010. We maintain our BUY call and raise our target price to S$1.85.

We met with management and received insights into its management of fuel cost, after record high oil prices last year sent margins packing, and plans to reach its self-imposed target of growing overseas contribution to revenue from the near-50% at present to 70% by 2015. We also delved into the impact of foreign currency on its financials and prospects for overseas businesses into 2010.

Playing the recovery theme. We like ComfortDelGro Corporation (CDG) for the two opportunities it offers for playing the recovery theme. The earnings recovery momentum derived from lower fuel expenses is set to continue for the rest of 2009. In 2010, we expect to see improved business conditions on the back of a sturdier global recovery to augment the effect of normalised margins and give earnings a second, and more meaningful, boost.

2009: Margin recovery on lower energy-related costs. Margins are already on the road to recovery on the back of significantly lower oil prices, and the company’s fuel hedging programme that was put in place end-08. In 2Q09, EBIT margin recovered to 12.5% (+5.9ppt yoy), and net margin recovered to 7.6% (+3.8ppt yoy). By our estimation, the bulk of the savings in energy-related costs over 2Q08 flowed directly down to net profit.

2010: Turnover improvements augment effects of normalised margins. CDG is set to enter 2010 with margin levels that no longer reflect distressed business conditions. In addition, we expect some of the circumstances (weak UK earnings, fare reduction in Singapore) that gave rise to weaker turnover to reverse, so that improvements to the top-line augment the effects of normalised margins.

We have changed our valuation methodology from SOTP (DCF for SBST and blended PE for the other businesses) to DCF, as PE valuation is no longer useful for key segments (eg the UK, where transport operators are trading at distressed valuations). Our discounted FCFE places CDG’s value at S$1.85/share (6.4% cost of equity, 2% terminal growth). Our revised target price (up from S$1.76) gives a return of 15.6% over the last closing price of S$1.60.

City Developments - 1H09: Residential sales momentum going strong

City Developments is well positioned to capitalise on the sales recovery in the residential segment. We continue to see good value in the company and maintain our BUY call with a target price of S$12.70. Maintain BUY.

City Developments (CDL) reported 2Q09 PATMI of S$140.0m (-15.3% yoy), bringing 1H09 PATMI to S$223.1m, in line with our expectations and representing 50.1% of our full-year forecast. The Group reported a higher revenue of S$787m (+0.8% yoy) primarily due to a higher contribution from the property development segment which continues to be the largest contributor, accounting for 60% of pre-tax profit of S$197.9m. However, this segment’s pre-tax profit declined 19.4% yoy due to the weaker margins for recently-launched projects. Hotel operations, notably in Singapore and Australia, continued to suffer due to the economic slowdown, which resulted in a decline in the Group’s overall RevPAR. Revenue from rental properties increased 12.5% yoy to S$69.2m, mainly due to the locking in of higher rental rates for long-term office rental leases.

Residential property sales to remain key growth driver. CDL continues to benefit from the strong momentum set in developer sales volume in 2Q09. The Arte @ Thomson is nearly sold out at an average selling price (ASP) of S$950psf and Volari, which was launched in early- July, is more than 96% sold at an ASP of S$2,000psf. In the mass market segment, the Group received a good response for its Gale @ Pasir Ris with over 90% sold at an ASP of S$650psf, and for its 724-unit Livia at Pasir Ris. In 2H09, the Group is planning to launch 396 residential units at the former Hong Leong Garden site at West Coast, a 160-unit project at the former Albany site, and 100 units at The Quayside Isle @ Sentosa Cove. We expect strong demand for these projects as well, considering their good locations and the recent upswing in sales momentum, which should help boost CDL’s bottom line in the coming quarters.

Hotel occupancy rates to stabilise with opening of IRs. The hotel segment suffered the most in 1H09 due to the economic downturn with occupancy rates touching 66.7% (-8.7% yoy) in Asia and 59.8% (-6.7% yoy) in the US. Going forward, we expect occupancy rates to improve in Singapore in 2H09 with the expected increase in tourist arrivals due to major events like the APEC conference, F1 Grand Prix and the opening of the integrated resort at Sentosa. Overall, these factors should contribute to revenue in 2H09.

We continue to see good value in CDL and maintain our BUY recommendation with a target price of S$12.70 pegged at a 15% premium to 2009 RNAV of S$11.04.

Parkway Holdings: Results boosted by exceptionals

Parkway recorded 2Q09 revenue of S$258.6m (+10% YoY), on the back of strong performance from its International Hospitals and its Singapore Healthcare segments. Operating profit came in at S$39.4m (+14% YoY) for the quarter, which was in line with our estimates. Net profit rose 42% YoY to S$40.3m, boosted by the S$17.2m reversal of allowance on impairment of receivables, which Parkway had booked in 4Q08. Factoring in this exceptional gain, we would be raising our earnings estimate for Parkway accordingly. We are likely to maintain our SELL recommendation for Parkway, as we feel that current valuation is rich and net gearing of 0.46x is relatively high, compared with peers. However, we are likely to raise our P/E valuation (from 13x), as its peers are trading at an average of 14x forward P/E. No dividends were declared for this quarter.

International hospitals remain the growth driver. Revenue from International Hospitals climbed 33% YoY, due to increased patient volume and revenue intensity at its Pantai Hospitals and its Brunei cardiac centre. The improved performance was also attributed to the additional contribution from Gleneagles Hospital KL (GHKL), as Parkway had raised its stake in GHKL from 30% to 58% in 4Q08.

Singapore hospital revenue declined, but healthcare segment grew. Foreign patient numbers continued to decline in 2Q09, attributed to the global economic slowdown and the H1N1 outbreak. This was mitigated by Parkway's introduction of 40 medical packages to see treatment at its hospitals. These packages were introduced in 2Q09, and saw strong local demand. Hence, revenue from its Singapore hospitals dipped 3% YoY during the quarter.

Its Parkway Shenton group of clinics secured several major new corporate contracts during the quarter. It was also awarded a contract from the Ministry of Health, to conduct temperature screenings at all entry points into Singapore. This new contract and as more patients sought flu vaccinations at its clinics, helped to boost the performance of its Healthcare segment.

Exceptional item. Parkway made a provision for impairment loss on receivables amounting to S$34.4m in 4Q08. As at end 2Q09, it had reached a settlement for these receivables and hence, wrote back excess allowance of S$17.2m.

Valuation and recommendation. Its peers are currently trading at an average of 14x forward P/E. We will be raising our earnings estimates for Parkway, taking into account the write back of the receivables that it had provided for in 4Q08. We are also likely to raise our P/E valuation and hence, our target price will be adjusted accordingly.

CapitaCommercial Trust - Office rentals still declining

Management expects office rents to be on a declining trend till the end of the year. Write-down in asset values expected to increase gearing from 30.6% to 37.0%. Maintain HOLD.

Office rentals still declining. CapitaCommercial Trust (CCT) has received more enquiries from financial institutions (fund management), oil & gas companies (HQ functions) and professional services (legal and accounting) recently. However, these enquiries have not translated into take-up for office space. Management expects office rents to be on a declining trend till the end of the year, although the magnitude of decline has moderated. According to Colliers, average rents for Grade A office space within Raffles Place has dropped by a severe 29.0% qoq to S$7.45psf. We continue to expect rents for Grade A office space within Raffles Place to slide further to S$6.00psf by end-10, representing a two-third correction from the last peak.

Further write-down on revaluation. Based on transactions for strata office space at Suntec City Office Towers, capital values rebounded 38% in 1H09 from the bottom in Feb 09 and remained stable in Jul and Aug 09. The huge correction in office rents could once again put pressure on capital values. We estimate NAV/share will be reduced from S$1.50 to S$1.14, assuming 6 Battery Road and One George Street are valued at S$1,680psf (current: about S$2,320psf) while HSBC Building, Robinson Point and Capital Tower are valued at S$1,200psf (current: about S$1,520psf). Gearing will correspondingly increase from 30.6% to 37.0%.

Redevelopment of Market Street Car Park postponed indefinitely. New anchor tenant Koufu, a food court operator, has opened for business at Market Street Car Park after completing renovations. Net lettable area has increased as Koufu occupies the whole atrium/courtyard. Planned redevelopment for Market Street Car Park has been postponed indefinitely as the new lease with Koufu will expire at least three years later. The Outline Planning Permission (OPP) for the redevelopment of Market Street Car Park has lapsed. CCT will have to reapply to Urban Redevelopment Authority if it intends to redevelop the property at a later stage.

We believe office rents will continue to be under pressure due to large new supply coming on stream in 2010 and 2011 and competition from business parks outside the Central Business District (CBD).

We have assumed portfolio occupancy tapering off from 94.9% in 2Q09 to 90% by 2Q11 (previous: 88%). Maintain HOLD. Our fair price of S$1.09 is based on the Dividend Discount Model (required rate of return: 7.7%, terminal growth: 2.5%).

Genting Spore: Raise TP $1.40 (pre rights) $1.30 (post rights)

1-for-5 renounceable rights at 80cent (33% discount to 8-Sep-2009 closing price of S$1.19), fully underwritten. 40% of S$1.63b proceeds would be used to pare down borrowings (reducing 2009F net gearing to 2.5x from 4.0x) and 60% for future investments (could include Resorts World at Sentosa's S$600m Western Zone which was supposed to be funded by operating cashflows). We believe GENS' immediate focus would be to complete RWS (still on-track and within budget), while keeping the option to look at potential opportunities.

Marginal dilutive impact, although share base would increase by up to 2m shares or 21% to 11.7b. If 40% of proceeds is used for reducing borrowings, we estimate a 9-11% dilution to 2010-11F EPS (potentially less if future acquisitions are accretive), supported by S$29m of interest savings. If the entire amount is used instead, we expect 2-7% dilutive impact. More importantly, the rights issue would reduce financial risk and interest cost pressure on earnings/cashflow.

Remain positive on RWS' prospects. We have revised our 2009-11F earnings to factor in a 12-month contribution in the first year of operations (vs 11 months) and a lower depreciation rate (assuming capex would be equally spread over 30 years vs 7% based on Genting Malaysia's used previously). Maintain BUY, and raise sum-of-parts TP to S$1.30 (assuming 7% WACC, 1.5% long-term growth). GENS remains the cheapest gaming stock on PEG basis (0.41x vs sector average 0.65x).

Neptune Orient Lines - is expected to be a beneficiary of the recovery

NOL reported a smaller loss of US$146m in 2Q09 from US$244m in 1Q09. It mentioned that the performance for 3Q09 would be better than 2Q09 due to seasonal demand. Manufacturers would start shipping and manufacturing goods in 3Q09 in preparation for the Christmas season. We forecast the loss to narrow further to US$123m in 3Q09. Despite the improvement, NOL is expected to report a full year loss of US$633m in FY2009F. As the global economy continues to recover, it is likely to report a lower loss of US$131m in FY2010F and return to profit of US$208m in FY2011F.

From the list, we note that the median P/E and P/B for the industry are 8.63 and 0.91 respectively. NOL is currently valued at 19.20 times P/E and 0.65 time P/B. Our recommendation. NOL is expected to be a beneficiary of the recovery of the global economy. Although it is currently reporting a loss, it is financially strong as it has the resources to emerge stronger from the crisis. In fact, its net debt to equity ratio is 0.0 for FY2009F. We have a buy recommendation and fair value is S$2.12, which is 1.2 times book value for FY2009F.

Kuok Group subscribes to Wilmar China

Several members of the Kuok Group (KG) has subscribed for 1.61% of the enlarged capital base of Wilmar China (the proposed IPO entity in HK) for HK$1.933bn.

This sets the valuation ball rolling. This implies a valuation of US$15.5bn for Wilmar China. KG will, within three days of being notified, top up the difference with the IPO price should the IPO valuation be higher than its subscription price.

Our assumptions are close! Assuming that Wilmar China contributes to half of Wilmar International’s earnings, this would lead to a valuation for Wilmar International that is about 6% higher than our valuation target. We had assumed a 25x earnings multiple for Wilmar China and 15x for the rest of its business, leading to a 20x blended multiple for Wilmar International and thus a target price of S$6.50 for the stock. Wilmar International plans to add ‘domestic ownership’ to its Chinese unit through the IPO – this should help the company outpace foreign competitors constrained by rules introduced last year that limits capacity expansion.

Sustainability of earning base or rapid growth? The key for us as more details of its IPO come through is an evaluation of Wilmar International’s earnings growth profile. The stock’s rerating since May (when news of its proposed IPO was released) implies that the IPO event will quickly transform Wilmar International into a fast-growth firm.

12-month price target: S$6.50 based on a PER methodology. We believe Wilmar has rerated since 4Q08 because the company has proven that not only is it capable of circumventing some of the harshest conditions in credit and commodity markets, but it is able to do so while maintaining strong profitability levels.

We downgraded the stock to Neutral on valuation grounds in our 20 August note, Pricing in the IPO option. Our target price of S$6.50 for Wilmar International implies 20x FY09E earnings.

MobileOne: Hitting the right buttons

A concrete step in the corporate data segment. M1 has acquired Singapore-based Internet Service Provider “Qala Singapore” for about S$17.9m in cash. Out of S$17.9m, S$3m would be paid only if Qala meets its annual targets in June 09. Qala has 9-year experience in providing data centre and broadband solutions to Singapore corporates.

Corporate data segment is worth over S$1 bn annually. Corporate data market is estimated to be worth over S$1 bn annually in Singapore, where SingTel is the dominant player. Despite NBN providing level playing opportunity in 2010, our earlier impression was that M1 could hardly make an impact in the corporate segment due to the lack of expertise and track record. However, by acquiring corporate data capability through Qala, M1 should be able to secure decent market share among SMEs and corporate customers. M1 can take care of consumer broadband segment on its own through its extensive island wide distribution network.

How much can M1 benefit from broadband? The household fixed broadband penetration is around 74% in Singapore, implying the market is not completely saturated yet. M1 is keen to gain 20% market share in the broadband market in the next five years. Overall, we estimate, M1’s top line could grow by about 20-25% in the next five years from consumer and corporate broadband. While broadband margins are difficult to estimate, M1’s bottomline should grow by at least 10% in a similar time frame. We would model NBN benefits into our model, once we have more clarity on broadband margins.

Important Relevant Dates for Renounceable Rights By Genting

Ratio : 1 : 5
Rights Issue Offer Price : S$0.80
Theoretical ex-rights price : S$1.017 (based on share
price of S$1.06)

Important dates
Shares trade ex-Rights : 18 Sep 09, from 9.00 a.m.
Book Closure date : 23 Sep 09 at 5.00 p.m.
Commencement of trading of "nil-paid" rights : 28 Sep 09, from 9.00 a.m.
Cessation of trading of "nil-paid" rights : 6 Oct 09 at 5.00 p.m.
Listing date of the Rights Securities : 21 Oct 09 from 9.00 a.m.

Last date and time for
Acceptance and payment : 12 Oct. 09 at 5.00 p.m.
Excess share application and payment : 12 Oct. 09 at 5.00
p.m. (9:30 p.m. for Electronic Applications)

Genting Singapore - Get set for Casino Royale

A flurry of activity at the construction site; working 24/7 – We visited RWS’ construction site last week. Testing of some of the Universal Studio (USS) rides have already begun while 4 hotels scheduled for opening in phase 1 have been topped up. In our view, RWS should be able to open on time, if not earlier. Note that a charity concert, to be held at the Festive Hotel, has already been scheduled for December 19th.

High quality project, in our view: The project site is sizeable – 49 ha in total with USS occupying 20 ha. USS, when opened fully will have 24 attractions of which 18 are unique to Singapore. USS will open with 20 attractions next year. A variety of rides will be present - with some appealing to younger crowd while others appealing to older crowd. A few public attractions such as the Crane Dance, a pyrotechnic show will further enhance the resort site and landscape. The project is led by experienced management team - CEO Tan Hee Teck joined the Genting Group in 1982 and has been significantly involved in management of Genting Highlands in the past.

Infrastructure being put in place to cater for IR traffic: Completion of the 3rd lane (per direction) on the vehicle bridge linking mainland to Sentosa (from 2 lanes to 3). Vehicles from mainland can also enter car park of RWS from the bridge without having to drive into Sentosa. A 620m pedestrian bridge with travellators (capacity of 8,000 guests / hour / direction) will also be constructed.

Management’s visitor arrival guidance closer to our bullish case: Management is guiding for 13MM visitors in 1st year of operations (vs. their initial guidance of 12-13MM, our estimates of 10MM). USS will be a major draw - casino business is a volume business and USS should draw the crowd. Of the 13MM visitors, 40% is expected to be locals and 60% foreigners. Our current June-10 PT of S$1.20 is based on our base case assumptions. However, if numbers come in closer to our bullish case assumptions, share price could rerate closer to the S$2 level.

Wilmar International - Selling Wilmar China to Kuok Group at est. 20x FY10 PE

Wilmar International (WIL) has completed the restructuring to transfer all its China operation into Wilmar China Limited. The total number of issued and paid-up shares of Wilmar China Limited is 35,034m of HK$1.00 each, all of which are held by WCL Holdings Limited (100% owned by Wilmar International).

Yesterday WIL announced an issuance of 1.61% of the enlarged issued share capital of Wilmar China for a total consideration of HK$1,933.4m (or HK$3.43/share) to Kuok Group.

Based on the two announcements and our earnings estimate for its China operation (FY10 EPS: 2.23 US cents or HK$0.173), the new shares sold to Kuok Group translated into a FY10 PE of 20x.

If the listing is at FY10 PE of 19.8x or a P/BV of 3.9x (HK$0.91), based on our sum-of-the-parts valuation, WIL's fair value would be at S$8.05 or a potential upside of 25%.

Golden Agri-Resources Limited - world’s second largest oil palm plantation

Golden Agri-Resources Limited (“GAR”) is the world’s second largest oil palm plantation company with a total planted area of over 400,000 hectares located in Indonesia. Initiate coverage with a BUY at fair value estimate of S$0.53.

One of the purest upstream play. Approximately 98% of GAR’s profits are derived from its plantation division. We are bullish on palm oil prices given the positive industry dynamics and believe that GAR is well-positioned to benefit from the high CPO prices.

Above industry FFB yield. GAR’s current FFB yield of 22.4 tons per hectare is above the industry average. This is done through optimal fertilizer application, field management techniques, oil palm breeding and selection, as well as research to cultivate seedlings with superior characteristics.

Sizeable market shares in Indonesia for branded edible oil products. Filma and Kunci Mas, GAR’s two leading brands of cooking oil in Indonesia have captured a significant market share of over 16% in the branded edible oil category.

We are bullish on the palm oil industry on the back of 1) strong consumption demand from emerging countries; 2) tight soybean supply; 3) falling CPO production and inventory level and 4) likely occurrence of El Nino. We believe GAR is a beneficiary of high crude palm oil prices and it is a good proxy to CPO. We initiate coverage with a BUY at a fair value estimate of S$0.53, which represents a 15% upside from its last traded price of S$0.465.

Yangzijiang - Staying on course

Yangzijiang Shipbuilding (YZJ) delivered record high NPAT of Rmb1.1bn (up 53.7%YoY) in H109 on revenue of Rmb4.6bn, up 32.4%YoY. Gross margin improved sequentially from 20.3% in Q1 to 24.4%% in Q2 due to falling raw material costs. Also, tight cost control yielded low operational expense at 2.1% of sales (6.9% in 2008).

The absence of new order inflow in H1 did not come as a surprise, and YZJ is focusing instead on securing the orderbook at hand. Its orderbook of 139 vessels worth US$6.1bn as at end-June will fill the production schedule till mid-2012, based on the current delivery schedule. Meanwhile, YZJ is also accommodating customers’ requests for late delivery of completed vessels and/or change in the vessel type.

As overcapacity for the shipping and shipbuilding industries is likely to worsen, we believe risks such as few new orders, order cancellation, and late payment etc will likely increase. Only established yards such as YZJ, with a track record in operation and financial strength, will survive the downturn, in our view.

We raise our 2009/10/11 EPS estimates by 11%/22%/27% from Rmb0.54/0.48/0.33 to Rmb0.59/0.57/0.46 on higher margin assumptions. We raise our target P/BV from 1.3x to 2.4x by applying a 30% premium (0% previously) over the regional peer average of 1.8x P/BV to reflect YZJ’s industry leading ROE. Our new price target of S$1.03 suggests 8.4x 2010E PE and 6.3x EV/EBITDA versus the peer average of 8.6x and 6.7x, respectively.

Wilmar International - Share price will continue to do well

Despite its ytd strong performance, Wilmar will continue to outperform peers, driven by its strong financial performance and listing on HKEX in 4Q09 or 1Q10. Maintain BUY with a target price of S$7.50 based of SOTP valuation.

CPO price to stay resilient in 2H09 as demand dynamics still hold. Production for Malaysia in 2H09 would be lower than in 2008. Although we had expected lower production from Malaysia, current CPO price is ahead of this expectation and we still think the low demand in 4Q09 would push Malaysia’s palm oil inventory back to 1.6m-1.7m tonnes.

Good foresight to deliver better-than-sector CPO ASP. Due to its forward selling back in 2008, Wilmar delivered better-than-sector average selling prices (ASP). This likely to be the case for 2H09.

HKEX listing likely to be within next six months. During the briefing, noupdate was given on the application to Hong Kong Stock Exchange (HKEX). Base on the listing timeline, we expect the listing to take place in Dec 09-Jan 10. Based on HKEX’s regulation, for an initial public offering (IPO) of above HK$10b, the free float can be reduce to 15% (vs 25%). In our earlier note, we highlighted that the free float is likely to be at 20% for a potential listing market capitalisation of US$13.3b.

Catalyst to share price: a) earnings upgrade due to better sales volume as the economic situation improves, b) margin expansion - Wilmar raised cooking oil selling price again in Jul 09, and c) strongest catalyst will be its HKEX listing. In our sum-of-the-parts (SOTP) target price, we assume a listing PE of 17x 2010 earnings. A higher listing PE would drive the valuation higher.

Reiterate BUY. With the potential HKEX listing, we derive our target price based on SOTP valuation. Wilmar’s target price will be S$7.50 based on 17x 2010 PE to its China’s operation and retain 15x 2010 PE for its palm oil business. There is potential upside to our target price if the listing PE is higher than our expectation of 17x.

Genting - Another buying opportunity

In a surprise announcement, Singapore-listed GENS is proposing a S$1.63bn 1-for-5 rights issue at S$0.80 each. In a statement, GENS said the rights issue was being undertaken to pro-actively strengthen its balance sheet, enhance its financial flexibility and competitive position, and facilitate future business expansion. We think otherwise. Given the anticipated strong cash flow from the IR project, GENS is not in urgent need of cash, in our view.

The rights issue is the second for GENS in the past two years and comes after the controlling shareholder, the Lim family, completely divested its direct stake in the company at around S$0.71/share.

It is a different story for Genting. It will get to raise its investment in GENS at a 33% discount to the market price by subscribing to its portion of the rights shares at S$0.80/share.

We maintain our view that GENS’s IR will be a great success. At the S$0.80/share rights issue price, GENS’s EV is roughly about S$17bn. Strong cash flow from the IR project could easily help Genting raise funding for its portion of the rights issue at around S$0.88bn. As of December 2008, Genting’s own cash reserves, excluding those held by subsidiaries, are estimated at less than S$400mn.

Genting shares have reacted negatively to the rights issue. However, we view this as another opportunity to buy the stock.

SembCorp Marine - High expectations

We have revised up our FY10 and FY11 net-profit forecasts by 11.4% and 7.6%, respectively. We believe our new FY10 and FY11 non-rig-building revenue assumptions now better reflect that business’s relatively steady order-flow nature.

We maintain our 4 (Underperform) rating on the stock, and DCF-based six-month target price of S$2.06, as we believe that expectations in the market are too high and the stock is vulnerable to an FY11 earnings disappointment. We think the first catalysts would be two Petrobras orders: one for an eighthull winner-takes-all FPSO order and the other for six-to-eight semi-submersibles, both expected to be placed by the end of 4Q09. This catalyst may be a significant positive or negative, depending on if SembMarine wins any of these contracts.

SembMarine’s share price is up by 127.4% since 9 March 2009, compared with a 78.3% rise in the FSSTI and a 44.6% increase in crude-oil prices over the same period. While economic and market conditions have improved since 9 March 2009, we think that expectations in the market are too high for continued record-level earnings at SembMarine, and that the stock is vulnerable to an earnings disappointment.

Our key thesis is that we believe new rig orders will not come in fast enough and in large enough numbers to prevent idle capacity from having a significant negative effect on earnings in 2011. So how did we come to the conclusion that SembMarine’s revenue and earnings would be much worse than the market expects?

We continue to use a DCF analysis to derive our six-month target price, which is unchanged, at S$2.06. We use a WACC of 11.9% and a terminal growth rate of 1.2%.

Hyflux: Clearer visibility, stronger funding

We have upgraded our price target to S$3.50, as we raised FY09/10 earnings forecast to account for higher margin. The recent hike in water tariffs in China's main cities, and an improving investment climate, has also resulted in a higher valuation for Hyflux's BOT portfolio. We maintain our BUY call on Hyflux with 22% upside to TP. We believe recent developments have raised the company to a whole new level, as outlined below.

Firstly, earnings visibility is clearer than ever. This is underpinned by a firm orderbook of S$952m to be realized over the next 18 months. This is excluding the potential S$1.1bn worth of projects from Libya pending finalization and financial close. When these are officially awarded by early 2010, earnings visibility will extend to 2013. In the meantime, Hyflux is actively bidding for jobs in new markets such as India and more countries in the Middle East including Tunisia and Morocco. As such, we expect Hyflux to impress the market with yet more contracts from new locations.

Secondly, Hyflux's financial backing has grown stronger especially after its collaboration with the Japan Bank for International Co-operation (※JBIC§). Funding is not only critical for project executions; the ability to monetize completed projects is imperative for further growth. As more plants are being completed in China, we believe Hyflux would have a critical mass of water plants by next year, ready for divestment. It also helps that HWT with a lower cost of capital following the market recovery is in a better position to acquire yield accretive projects. Divestments will provide an instant lift to earnings in 2010.

Wilmar - Earnings upgrade due to better sales volume

CPO price outlook ? stable 2H09 due to the demand dynamic still holding, disappointment production for Malaysia in 2H09 would be the key support to CPO price. Although we concur the view of the production from Malaysia could come lower than 2008, the current price is running ahead of this expectation given the uncertain demand in 4Q09.

Delivering better than sector ASP. Due to its forward selling back in 2008, Wilmar delivered better than sector ASP. This likely to be the case for 2H09.

HKEX listing ? no further info. But base on the listing timeframe, the management team is likely to be call for meeting with HKEX within two months after the submission of application (31 Jul 09). Given its strong branding and good track record, we foresee the application will be a smooth process. Thus, we are expecting the listing of Wilmar's China Operation likely to be in Dec 09 or Jan 10.

We reiterate our BUY on Wilmar International. With the potential HKEX listing, we derived our target price based on sum-of-the-parts (SOTP) valuation. Wilmar's target price will be at S$7.50 based on 17x 2010 PE to its China's operation and retain 15x 2010 PE for its palm oil business. Potential upsides to our price target if the listing PE is higher than our expectation of 17x.

Genting Proposes 1-for-5 rights issue - BUY $1.28 TP

Maintain BUY with higher DCF-based fair value of S$1.28/ share versus S$0.90/share previously. Our DCF valuation for Genting Singapore plc (GenS) has been raised to account for higher revenue coming from an increase in visitor arrivals at Resorts World at Sentosa (RWS).

We have also revised GenS’s FY11F earnings projection upwards by 33% for this reason. Our FY09F-FY10F earning forecast for GenS remains unchanged. Due to our higher fair value for GenS, our RNAV-based fair value for Genting Bhd has been raised from RM7.46/share to RM8.95/ share.

Previously, we had assumed that visitor arrivals would only expand 5% to 11.4 million in FY11F and 4% to 11.9 million in FY12F driven by traffic to RWS’ non-casino attractions. We had assumed that the number of casino patrons would remain constant throughout the 10 years from FY10F.

We are, now, assuming that the number of visitors would expand 18% to 12.9 million in FY11F and 15% to 14.8 million in FY12F. We are keeping our assumption of 10.9 million visitor arrivals for FY10F versus management’s guidance of 12-13 million.

GenS yesterday proposed a 1-for-5 rights issue at S$0.80/ share. This is at a 33% discount to GenS’s closing price of S$1.19/share. Total proceeds from the rights issue would amount to S$1.63bil. The theoretical ex-rights price is estimated at S$1.13/share and GenS is expected to trade exrights on Friday, 18 September.

About 60% of the rights proceeds would be used to fund investments/acquisitions while the balance 40% would be used for working capital (including repayment of bank borrowings).

Interest income from the rights issue of an estimated S$41mil could turn GenS into a profitable position in FY10F based on our estimated net loss of S$10mil for the group.

However, looking ahead to FY11F, then GenS’s fully diluted EPS would shrink 7% to 3.14 cents Singapore due to the increase in number of shares from its rights issue.

Genting Bhd would have to fork out about RM2bil or S$839mil to subscribe for its portion of GenS’s rights issue. We estimate Genting Bhd’s FY10F net profit to decline by 7% if the group were to borrow fully to finance its subscription of the rights issue.

Olam - Armed and ready

We believe the key areas where Olam will deploy S$2bn of new funds will be in upstream plantations and midstream processing assets. Although last week’s CB issue is dilutive, together with the syndicated debt, Olam needs to generate only a 2.4% ROI to offset the impact, whereas their past acquisitions generate 6.4%. While our forecasts are unchanged pending deployment, in a blue-sky scenario assuming these investments will contribute at least as much as the past, we believe Olam’s fair value should be closer S$4.60 implying 92% upside. BUY.

The S$720m of CBs issued by Olam last week will result in a 12% equity dilution upon conversion. But together with the S$778m of syndicated debt in place, the Group needs only a 2.4% ROI to offset this impact. Compare this with the 6.4% ROI being generated by their past acquisitions in FY09; a year characterised by macro pressure. The Group’s new businesses generate a net contribution per tonne that is 90% higher than its legacy businesses, pointing to the success of Management’s strategy of exploiting sectors that can generate excess returns. Indeed, we expect a similar play as Olam deploys its new funds as part of its 3-year strategy.

A key part of Olam’s new strategy is to be fully integrated across the value chain for coffee, African palm and nuts. Expect the first wave of acquisitions to come through here in upstream plantations and midstream/ downstream facilities. Indeed, upstream players generate PAT margins of ~15% and downstream players 8%, compared to Olam’s 2%; so these acquisitions will be key in realizing Olam’s own goal of doubling PAT margins by 2015.

We are less sanguine on Olam’s foray in to financial services, particularly funds management, where there is no track record. Indeed, even the fee businesses may result in higher earnings beta. Noble who offers similar services has seen their GP margins vacillate from 30% in FY04 to 7% in FY08.

We conservatively assume funds deployment will come through in FY11 and we expect the Group to generate at least similar ROI to its past investments. While we keep our base forecasts unchanged pending deployment, such a blue-sky scenario will increase FY11-12 earnings by 44-47% and our DCF and peers based fair value to S$ S$4.60 – 92% upside on a fully diluted basis.

Genting - Another rights issue, looking to raise up to S$1.6bn; retain Sell

Genting Singapore announced today a fully underwritten 1-for-5 rights issue at S$0.80 per share, a 33% discount to the closing price as of Sept 8. The rights issue will result in c.1.9bn new shares, potentially reaching as many as 2bn new shares assuming full conversion of its existing in-themoney convertible bonds. Gross proceeds could amount to S$1.63bn, of which the group plans to use 40% of proceeds for working capital and pay down debt, remainder of cash is to be deployed for future investments.

Shares will trade ex-rights on 18 Sept. The rights issue will be its second post its Singapore Integrated Resort win; the first was back in 2007, when S$2bn was raised to partly finance the project. Major shareholder Genting (54.3%) has agreed to subscribe to its pro rata share in full.

On a pro forma basis, our net debt to equity estimate for 2010E (first year of operation of its Singapore Integrated Resort) would be reduced from 144% to 83%, more comparable to our GS gaming coverage universe’s 2010E industry median 74% net gearing levels. There would likely be someEPS dilution assuming interest savings (1.2%/5% in 2010E/2011E), partly mitigated by the pretty comparable cost of equity vs. debt, in our view. We see the rights issue as pre-emptive move to strengthen its balance sheet, especially the planned 40% rights proceeds deployment: c.S$650m would be very useful to help bridge the funding gap for the Integrated Resort. Recall Genting Singapore secured only S$6bn funding vs. a project cost S$6.59bn, and management had earlier planned for a strong first year cash flow generation to help meet the funding gap, assuming no cost overrun. We think the market may be too optimistic on Singapore gaming demand and the competitive outlook.

Shares having risen substantially, much inflated by undue investor optimism on the Singapore Integrated Resort, and we think the rights issue is likely to weigh on Genting Singapore shares. Retain Sell rating and target price.

SPH - results preview: Improving Advertising Revenue

Improving advertising spending. Singapore Press Holdings (SPH) will be releasing its 4QFY09 (June ? August) results on 12 October. Our pagecounts of The Straits Times point to an 11% yoy contraction in SPH's advertising revenue (AR) in 4QFY09 (3QFY09 page-counts: -18% yoy). SPH earlier reported newspaper AR contraction of 23% in 3QFY09 (2QFY09: - 20.1% yoy; 1QFY09: -9.3%), higher than the 18% indicated by our pagecount monitor and ACNielsen's -14%. We are expecting a newspaper AR contraction of 15% for 4QFY09. While AR is still below the level a year ago, it has been making a comeback since April. Monthly page-counts suggest AR contraction is narrowing with only 8% yoy contraction, much smaller than 20+% yoy contraction six months ago.

Investment income could surprise on the upside, in view of better financial market conditions. Investment gain in 3QFY09 was S$17.6m (- 31.4% yoy) compared with a loss of S$0.1m in 2QFY09. As of end-May 09, SPH had a S$0.9b investible fund of which 44.4% was cash, 28.7% in equities, 14.2% in bonds and 12.7% in investment funds.

We estimate final DPS of 13-16 cents. DPS of 13 cents being our worst-case scenario premised on a full-year payout ratio of 86% of earnings and 16 cents is our best-case scenario premised on a payout ratio of 98%. Including the interim DPS of 7 cents that has already been paid, full-year DPS would be 20 cents and 23 cents respectively (FY08 DPS: 27 cents). Historically, SPH's net DPS ranges from 80% to 100% of EPS. We have adjusted our FY09 DPS estimate to 21.5 cents, the average of our worst- and best-case scenarios.

SPH is a proxy to an improving domestic economy as well as a yield play. We believe Singapore's integrated resorts ? Marina Bay Sands and Resorts World@Sentosa, scheduled for phased opening in 1Q10 ? will have a multiplier impact on consumer spending and hence, advertising spending. This should benefit SPH. At current share price, the stock offers attractive FY10 and FY11 annual dividend yields of 6.5%.

City Development - Perfect Timing, What’s Next?

We maintain our Underweight on CDL, given the 37% downside risk to our base case price target of S$6.20 (end-09 NAV of S$5.61, fully diluted). Taking into consideration the upside risk of an asset bubble due to the excess liquidity, we recently stretched our bull case further to a super bull case scenario. The latter not only assumes a V-shaped residential price recovery back to the 2008 peak levels, but also assumes higher sales take-up rates as residential launches are brought forward. Despite the difficulty in seeing an improvement in the non-residential segments, in this scenario, we have optimistically assumed that their valuations will fall no further from current levels. From this analysis, our super bull case suggests amongst the big cap developers that we prefer the 22% upside offered by CapitaLand vs. CDL’s and KepLand’s 16% and 30% upside, respectively, given the less favored office exposure.

CDL reported 1H09 results that were 10% below our operating and net profit estimates, the difference being due to the timing of its residential recognition. We applaud management’s perfect timing on its residential launches. Having sold 142 units in 1Q09, CDL sold 370 units in 2Q09 alone, and since July has sold a further 506 units. CDL is looking to launch three more residential projects (total units: 786) for the remainder of 2009. While this is all positive, we believe it has been well reflected in its share price performance since the end of March, outperforming the STI Index by 41%. We struggle to find further upside catalysts for CDL, as even our super bull case NAV of S$11.38 only presents 16% upside at best. We continue to believe that risk on its non-residential exposure, particularly office, presents further downside risk.

Our base case thesis is that previous premiums to NAV and BV valuations experienced in 2006-07 are difficult to justify in this cycle, as, at present, the only bright spot appears to be the residential segment.

Genting - S$1.63b rights issue.

S$1.63b rights issue. Genting Singapore (Genting) has proposed a renounceable 1-for-5 rights issue at S$0.80 each to raise S$1.63b. According to management, the issue is undertaken to pro-actively strengthen its balance sheet, enhance its financial flexibility and competitive position, and facilitate future business expansion. Based on the last traded price of S$1.19, the rights discount is about 33%; it is also at a 29% discount to the theoretical ex-rights price of S$1.125. Genting also said it intends to use 60% of the net proceeds for funding of future acquisitions/investments, or JVs/strategic collaborations, and 40% for working capital (which includes repayment of bank borrowings).

Why now? Given the recent run-up in its share price, we believe it may be an opportune time to raise some cash from the market to add to its kitty. While there have been some concerns about the cost over-runs at RWS (Resorts World @ Sentosa) as well as its payment of its syndicated loan obligations of S$4b in 2011 and its S$450m convertible bonds (CB) in 2012, we think that these concerns may be overwrought. Instead, we see the move as more of a insurance, should there be any hiccups in the global financial system again. Genting has also previously said that it will fund the extra S$590m of over-runs with its internal operating cashflows once the casino opens its door; we do not see any issues with this as we understand that some of its attractions would only be completed in 2011/2012.

Potential acquisitions and strategic collaborations. Going forward, industry watchers expect the Asian gaming market to be the most promising- growing at 15.7% CAGR for the next five years. As such, we believe that Genting would focus on making acquisitions or forming JVs in this region. We note that possible targets could be in the Philippines (Subic Bay), Macau (not related to Stanley Ho), or even potential new markets such as Japan and Taiwan where Genting can step in to provide the technical expertise.

Adjusting our fair value to S$1.05. In view of the possibility of RWS opening before end 2009 and also the more upbeat regional economic outlook, we have further refined our estimates, raising our FY10 revenue by 11.4% and reducing our loss forecast by 66.7%. We have also bumped up our fair value from S$0.85 to S$1.05 (S$1.01 adjusted). But given the limited upside, we maintain our HOLD rating.

Ezra - Catalysts in hand? Maintain BUY.

Stable/improving rates. Our discussions with offshore support vessel players are turning to "encouraging" vs. "challenging". Despite negotiations, charter rates seem to be holding up relatively well in most cases. For longterm charters signed in 2005-2006 that have lapsing contracts, we believe that rates could even improve.

Fleet management business. Ezra Holdings Ltd has officially launched its vessel operating agreement (VOA), enabling it to drive future returns and growth without any major capital outlay. Under the VOA, Ezra will manage and operate four new anchor handling, towing & supply (AHTS) vessels for an offshore specialist fund in return for a half-share of the profit earned. The vessels are still under construction, with the first AHTS slated for delivery in the 1QCY10. We think US$3.2m in gross profit could be accreted annually when all four AHTS are up and running.

Arunothai FPSO. We understand that the progress to reach its specified gas output has still not hit the mark. As such, the Floating, Production, Supply and Offloading (FPSO) is still off-hire (thus not charging). We have pushed the accretion back to 1Q10, resulting in a small dip in our bottomline estimates.

Chim sao FPSO update. Premier Oil alluded in its 2Q09 results brief that it has narrowed down its negotiations for a FPSO vessel to two parties. Both parties have secured financing for the project. Upstream Online updated that the two sources are Bluewater and EOC. Bluewater turned front runner as EOC could not secure financing. Now with financing in place, EOC has returned as a contender. We expect the decision to be made within 1-2 months as first oil is expected from the field in mid 2011. With the tight timeline, we think the conversion job of a hull could potentially be done in one of the Singapore yards with their on-time, on-budget reputation.

Maintain BUY. We have bumped up our peg for its core offshore division (includes Marine and Subsea division) to 12x (prev. 10x) FY10F PER while maintaining valuation metrics for EOC (6x FY10F PER) and Ezion (market cap). Our fair value heads up to S$2.00 (prev. S$1.75). The delivery of its 12,000bhp AHTS and DP3 construction vessel (in tandem with contract award) in the next 6 months should provide positive newsflow. Maintain BUY.

Genting - A $3 stock?

We are very bullish on Singapore’s forthcoming casino market and our estimates are well above consensus. However, we have erred on the side of caution for each individual assumption. Discussing our bottom-up estimates with investors, we have concluded that there exists significant further upside. As an example we have assumed an ebitda margin of 40% vs. management guidance of 50%. We have run a number of blue sky scenarios which implies the stock could be worth as much as S$3.

We currently forecast Singapore gaming revenues of US$3.2bn. This suggests that Macau will be four times the size. We believe this implies our estimates are conservative if we consider the large potential of the South East Asian including the local Singaporean market. If we assumed Macau to be 3x or 2x the size of Singapore, then our new price targets would be S$1.61 and S$2.45 respectively.

In our recent report titled Handful of aces, we provide a bottom-up framework for estimating the size of the market – looking at number of casino visitors and average spend by customer group including locals; foreign visitors, VIPs and Malaysian day-trippers. In each case, we have erred on the side of caution. Should we take slightly less conservative assumptions for a number of these parameters we end up with a range of new price targets from S$1.32 to S$1.80.

Should we boost our Ebitda margin assumptions to management guidance of 50% (from 40%) then our price target would be S$1.40. Market share of 50% vs. 46% would boost our price target to S$1.20.

Should we add up a number of our more aggressive revenues assumptions and apply higher margins, we arrive at a price target of $2.37. We have assumed 12x ebitda. Applying 15x to existing estimates results in a price target of S$2.37. Then applying this multiple to our sum of our bottom-up blue sky assumptions we arrive at a target S$3.

SPH - Newspaper ad demand rising sequentially

Newspaper ad demand bottomed in 3Q FY09 and picked up in 4Q FY09. Estimated total classified volume fell 17% YoY in 4Q – a big improvement from -33% in 3Q.

Also, our estimates indicate that display ad volume fell 9% YoY in 4Q, marginally better than 3Q’s -11% and 2Q’s -10%.

More importantly, we continue to see a sequential pick-up in ad demand. 4Q classified ad volume is estimated to have jumped 11% QoQ (as job ad volume grew 16% sequentially), versus 3Q’s -3% QoQ and 2Q’s -13% QoQ. Further, despite a seasonally stronger 3Q display ad demand, 4Q display ad volume is estimated to be flat QoQ.

While SPH has started to outperform, the stock continues to trade at a discount to the market. We maintain an OUTPERFORM rating with a target price of S$4.41.

SPH is scheduled to report its FY09 results on 12 October. CS is hosting the company’s post results investor meeting on 14 October.

Genting Singapore - Request for trading halt - Right Issues??

Genting Singapore (GENS) has requested a trading halt pending for further announcement. Market speculation is that the company will be announcing a rights issue exercise to raise funds, to pare debt (GENS' total debt stood at S$2.4b as at 30 Jun 09), or even perhaps to beef up its war chest for future business expansion in the region. In the short term, we foresee share price weakness for both GENS and parent company Genting Berhad (GENT) should a rights issue materialize at GENS, although downside could be limited by the excitement over the listing of Wynn's and Las Vegas Sand's planned listing of their Macau casinos, as well as a potential early opening of the Resorts World Singapore.

Reuters reports that Casino operator Genting Singapore is planning to raise more than $1 billion through a rights issue, sources familiar with the matter said on Wednesday. "It's a big issue. Over $1 billion," one source with direct knowledge of the deal told Reuters. Genting shares were suspended earlier on Wednesday. Genting Singapore, a unit of Malaysia Genting, is building one of the city-state's two integrated casino resorts and is also the largest casino operator in the United Kingdom.

Genting Singapore (Genting International): Notable recent fund raising exercises

------------------------------------------------------+--------+--------
2005 2007 S$m S$m
------------------------------------------------------+--------+--------
Convertible bonds
------------------------------------------------------+--------+--------
2007: Issuance of S$425m Convertible Bonds due 2012
425.0
------------------------------------------------------+--------+--------
2007: Issuance of S$450m Convertible Bonds due 2012
450.0
------------------------------------------------------+--------+--------

------------------------------------------------------+--------+--------

------------------------------------------------------+--------+--------
Rights issue
------------------------------------------------------+--------+--------
2007:Renounceable rights issue of 3,611,360,700 new ordinary shares on the basis of 3 rights shares for every 5 exisitng ordinary shares, at an issue price of S$0.60
2,166.8
------------------------------------------------------+--------+--------
2005: Rights issue of 2,365,745,405 new ordinary shares on the basis of 5 rights shares for every 3 ordinary shares held at US$0.13/share
511.3
------------------------------------------------------+--------+--------

------------------------------------------------------+--------+--------
IPO
------------------------------------------------------+--------+--------
2005: IPO for 800m new shares via placement at S$0.35/share
280.0
------------------------------------------------------+--------+--------

Other sources also told us that it may be on a 1-for-5 basis at a price of S$0.80 (translates to 33% discount).

Market is also saying that the fund raising may be related to 1) cost over-runs at its casino and 2) accumulating cash ahead of the repayment of its S$4.2b syndicated loan in 2011 and S$450m CB due in 2012.

Earlier Genting had raised the budget for its RWS from S$6.0b to S$6.59b, with the increase of S$0.59b funded internally by operating cashflows - we believe the internal funding is possible as we understand that some of the attractions are only slated to be completed in 2011/2012.

Singtel - Higher Bharti-MTN Involvement?

Higher Bharti-MTN involvement likely? — We think the 30th September extension to the Bharti-MTN exclusivity negotiation window raises the deal probability. Perceptions like MTN shareholders (SH) wanting a higher price, and potential regulatory/technical on a Bharti GDR are rising, and SingTel’s direct and higher involvement could help.

How could SingTel get involved? — (1) Commit as buyer of Bharti GDR to be listed on JSE at a fixed price to those not wanting it, hence crystallising all cash offer – more attractive to MTN SH?; 2) Bharti makes preferential allotment of shares to SingTel first for cash and then improves offer to MTN SH to all-cash. Regulatory approvals/exemptions needed but not insurmountable.

How much could SingTel invest? — “Stock” portion of deal is US$5.7bn (S$8.2bn) per current terms, a ceiling to SingTel’s involvement, we think. A 1.8x net debt/EBITDA implies S$3.1bn of borrowing capacity, inadequate if SingTel goes all the way. Equity raising/value for price fears could then dominate in the short-term.

Longer term positive for SingTel though — Locking in longer term growth potential should enhance SingTel’s “growth and yield” attraction. Our analysis suggests accounting for Bharti-MTN cross-holdings (vs. headline workings) is deal EPS accretive to Bharti now, but EPS neutral to a 16% higher cash offer.

Our view on Bharti-MTN outcomes and probability — (1) Bharti walks away: 10% probability; (2) Deal announced with small changes to current terms: 30%; (3) Materially higher (all-cash?) offer with significant help from SingTel: 50%; (4) Bharti goes alone with significantly higher cash offer: 10%.

DBS: Appoints Piyush Gupta as CEO

DBS announced yesterday that it has appointed veteran banker Piyush Gupta as CEO. He has spent over two-thirds of his 27-year career in South East Asia and Hong Kong, including eight years in Singapore.

Gupta’s experience in the South East Asia-Pacific markets will be a major asset to DBS. Gupta is currently Citi’s CEO for South East Asia-Pacific, covering ASEAN (Singapore, Malaysia, Philippines, Indonesia, Thailand, Vietnam and Brunei), Australia, New Zealand and Guam. In this role, his responsibilities encompass all of Citi’s businesses including Financial Markets, Corporate and Investment Banking, Transaction Services, Credit Cards, Retail Banking and Wealth Management.

DBS valuation pegged to 1.1x 2010 book. The potential benefit from Gupta’s appointment will take time to flow through. In the meantime, we continue to be concerned with DBS’ asset quality, following its strong loan expansion over the past few years. DBS remains a SELL with a S$11.80 target price, which is pegged to 1.1x 2010 book. For investors who want to be exposed to Singapore banks, UOB (NEUTRAL) is our best pick.

Genting - Understanding The Trajectory

Bank of China is reported to have been forced to withdraw from the US$2.5 bln IPO of Macau Sands, due to political pressure. Other Chinese investment banks as well as state-owned corporations (eg the sovereign wealth fund CIC) are also said to be under similar pressure, either as underwriters or as cornerstone investors.

Sheldon Adelson’s firing of 11,000 construction workers when he suspended work on the Cotai project last November, was also cited as a reason. As we had earlier noted, Adelson’s focus on Marina Sands at the expense of Macau augured very well for Singapore. (Adelson is the founder of LA Sands, and Macau Sands and Marina Sands are part of it.)

China’s policy towards Macau has been rather whimsical. Just look at the flip-flop on the visa policy for the mainlanders.

It seems like what is negative for Macau may be good for Singapore’s IR ambitions, and Genting Singapore offers the only direct exposure. This is best reflected in how quickly the 1.18 bln shares or 12.3% sold by the late Lim Goh Tong’s family on May 27th were snapped up, with talk that some or a good part went into the hands of Stanley Ho and related parties. (There has however been no confirmation on this.)

Genting has 9,637,768,746 shares on issue as at end May ’09. KL-listed Genting Bhd remains the largest shareholder with a 54.4% stake.

A total of 3,895 mln shares were traded from May 20th to Jun 30th, during which more than 100 mln shares were traded a day on 8 trading days, totaling 2690 mln shares or 70%. (A whopping 1.73 bln shares were traded on May 27th.) Genting’s share price hit 92 cents on May 26th, just before the share transactions, then dropped to 63 cents on Jun 16th, and has not looked back since, almost doubling to $1.17 yesterday, in under 3 months.

CapitaLand Ltd: Gillman Heights development plan unveiled

Lowering our project profit estimation. While we previously assumed a project margin of 25% for this project, we have now lowered our margin assumption to 20% for this project and the average selling price could be around S$900 psf. On these new assumptions, we have now lowered CapLand's attributable share of profit contribution from this project by 32.8% from S$205.5m to S$138m.

Important step towards capital deployment but excitement dwindling. CapLand recently announced its plan to deploy the capital it raised during its Rights issue in Feb. Out of the proceeds of S$1.8b, S$1b will be deployed to 3 of its business units- CapitaLand China (S$500m), CapitaLand Vietnam (S$300m) and Ascott (S$200m). Although this is one step closer towards capital deployment, we think that the initial excitement over the potential value creation from the capital deployment is now dwindling as the strong recovery in the property markets in Singapore and China has now lowered hopes of distress acquisitions.

Maintain HOLD. Our RNAV estimate has been lowered marginally to S$3.72 (previously S$3.73) after lowering our estimated profit contribution from The Interlace. We continue to peg our fair value of CapLand at par to its RNAV and thus deriving a fair value of S$3.72 (previously S$3.73). Since our last report on 30th July, CapLand's share price had fallen closer to our fair value. Price looks fair but value has not yet emerged. We maintain our HOLD rating on CapLand. We continue to like CapLand's growth potential in developing countries like China and Vietnam but advise investors to wait to enter at more attractive valuation of at least 10% below our RNAV estimates for a better margin-of-safety. Investors may want to switch to other value property developers like UOL Group (BUY; FV: S$4.07) that is trading at 21.8% discount to our RNAV estimate.

MobileOne - Qala buy to boost strength in corporate broadband

M1 is acquiring Qala Singapore Pte Ltd, an Internet Service Provider focused on the corporate, enterprise and public sector markets in Singapore. Qala has a Service Based Operator (SBO) licence with a staff strength of less than 100.

M1 will be paying S$14.9mil when the deal is scheduled to be completed in a month’s time, and will pay another $3mil upon the satisfaction of certain financial targets for its financial years till 30 June 2011. While its profitability is not disclosed, Qala’a net book value of $2.8mil works out to price-to-book valuation of 5.3 to 6.4x, lower than M1’s 6.7x at 1H09.

More important to note, M1 is buying Qala’s ready base of corporate customers to gain a faster breakthrough in the fixed broadband market. This is in preparation for its entry as a Retail Service Provider (RSP) in the Next Generation National Broadband Network (NGNBN) when commercial services launch in 2Q2010. The bulk of Qala’s corporates are small and medium enterprises (SMEs) typically with employee count of less than 100.

We view the deal to be positive for M1, immediately boosting its experience and knowledge base in the SME market with fixed broadband services. A year ago, M1 started to venture into the fixed broadband market as a reseller. In 1H09, M1 reaped a mere $0.8mil in revenues from this new segment - pittance, against total service revenues of 347.4mil.

At the same time, with a new pool of corporate names, M1 would also be able to cross-sell its mobile services into the enterprise arena. To-date, the corporate segment still accounts a small portion (we estimate less than 10%) of M1’s revenues. Typically, a corporate mobile user is less price-sensitive and commands higher ARPUs.

Apart from higher call volumes, usage of IDD, roaming as well as data, boosts ARPU. By comparison, M1’s postpaid monthly ARPU was $60.2 in 1H09, while StarHub’s was $68, and SingTel’s $83 across 1QFY10 and 4QFY09 (YE March).

As buying Qala improves M1’s market positioning and strength as an RSP in the NGNBN, we have upgraded our fair value by 8% to S$2.18, on revising terminal growth from -5% previously to -4%. M1 shares have risen 11% since our 17 July results note, and we maintain our BUY rating, as current price offers a 23% upside to revised fair value.

Olam: Acquiring dairy farm operations in Uruguay

Acquiring dairy farming operations. Olam announced the acquisition of a 14.35% stake in New Zealand Dairy Farming Systems Uruguay (NZFSU), an operator of large scale Kiwi-style dairy farming operations in Uruguay. Olam will purchase this stake for a cash consideration of NZ$14.37m (US$9.88m). We rate this acquisition positively. However, given the uncertain outlook for the industrial raw materials segment (27% of total net contribution), we maintain out NEUTRAL call on Olam. Our S$2.48 target price is derived from DCF valuation.

NZFSU is on the way to be a major milk producer in Uruguay. NZFSU applies NZ’s high performing pastoral-based farming systems to extensive areas of Uruguayan farm land for dairy farming. NZFSU currently owns 36,300 hectares of dairy farm land. NZFSU produced 44.6m litres of milk in the financial year ended 30 Jun 09 and expects to produce 80-85m litres in FY10. When all its farms are developed by Jun 2012, NZFSU will supply close to 20% of milk produced in Uruguay.

The acquisition is in line with Olam’s Dairy Products strategy, which includes participation in dairy farming in low cost origins.

SIA - Good July numbers indicate bottoming cycle and recovery signs

Operating environment remains difficult, and we have cut SIA’s earnings estimates on higher fuel price, cost and lower yields assumptions. That said, good July numbers (strong +12% passenger traffic MoM growth with load factor up to 80%) indicated that cycle has already bottomed and we are seeing some recovery in demand. SIA remains a quality play with attractive valuations.

We expect SIA to make a break-even FY10 profit of S$109 mn (from profit of S$250 mn) and cut FY11 and FY12 earnings by 12- 19%. SIA could still slip to a FY10 loss given the thin profit, and its sensitiveness towards yield/traffic/fuel price.

SIA is on 1.1x forward P/B and 5.9x EV/EBITDAR, almost one standard deviations below its related historical average. Our new ex-SATS target price of S$14.0 (S$15.64 previously) implies target P/B of 1.2x (unchanged), the mid-point between the historical average and one standard deviation below. We think positive news flow going forward – improving demand and yields – will be the key catalysts, and the stock can potentially overshoot our target price.

MobileOne - cost control still the key focus

Despite aggressive promotions in 2Q09, MobileOne (M1) was able to improve its service-EBITDA margin on the back of tight cost control. M1 expects to make further savings on operating expenditure from the rollout of its own backhaul infrastructure, and moving its call-centre operations offshore to Malaysia by the end of December 2009.

The ‘Take 3’ promotion, which targets high-end subscribers, had a small impact on 2Q09 earnings as the handset subsidies are capitalised and amortised over a 24-month service contract. We estimate the service-EBIT margin would have declined by two percentage points if the handset subsidies had been charged as they were incurred.

M1 disclosed that it aims to achieve over a 20% share of the corporate and residential broadband market by 2015, but remained tight-lipped about its transformation strategy.

We have revised up our net-profit forecasts for FY10-11 by 2-4% to take into account M1’s cost-control initiatives. As a result, we have raised our six-month target price to S$1.51 from S$1.47, based on a target PER of 9x on our revised FY10 EPS forecast. We maintain our 4 (Underperform) rating given what we see as M1’s uncertain transformation strategy, while cost control is unlikely to be a strong share-price catalyst.

Genting International - Sentosa’s blue skies

Raise forecasts. We have raised our earnings forecast for 2010 by 160% because we now assume a full year of earnings from Sentosa, as opposed to our old assumption of six months of earnings. We have also doubled our assumption of VIP revenue from S$300m pa to S$600m pa, following our recent visit and reassessment of the regional VIP market (see Regional Gaming, Two if by land, three if by sea dated 15 July 2009).

Raise target price. We have lifted our target price from S$0.70 to S$1.14 to take into account the earnings upgrades, and also because we have rolled our DCF valuation forward to 2010.

Blue skies ahead. There is still potential upside to our forecasts. We are still assuming a conservative mass market size of S$2.4bn (US$1.6bn) of which we assume Sentosa will conservatively capture 50%. There are no data points currently for the mass market, so we have refrained from making more aggressive assumptions.

However, in Malaysia, the mass market is worth some US$1.0-1.1bn (out of total gaming revenue of US$1.2bn). Singapore has double the addressable population, and three times the income level in Malaysia. Even if Singaporeans had half the Malaysia propensity to gamble, we would be looking at a mass market size of some US$3-3.3bn (S$4.5-4.9bn). If this turned out to be true, we would have to raise our EPS forecast for 2010 by more than double and our DCF valuation would rise to S$2.66. Earnings and target price revision

We have raised our 2010 earnings forecast by 160% and 2011 by 17%. 12-month price target: S$1.14 based on a DCF methodology. Outperform reiterated. We raise our DCF-based TP to S$1.14. We conservatively assume a 10% WACC and terminal growth rate of 2%. The implied target EV/EBITDA is 12x 2011E, in line with global peers. A cheaper entry is via parent Genting (GENT MK, RM6.68, Outperform, TP: RM7.50).

CDL - 2Q09 results: above expectations

2Q09 net profit of S$140 mn (-15% YoY, +68% QoQ) was above our expected S$135 mn and consensus’ S$120 mn. This brings 1H09 net profit to S$223.1 mn (+32% YoY).

2Q’s strong 68% sequential growth was due mainly to property development (60% of earnings) where pre-tax profit jumped 74% QoQ. The Arte, 98% sold in 2Q09, was at an advanced 30-55% completion stage. Hotel pre-tax profit also improved 41% QoQ while pre-tax of rental properties (mainly office) fell 17% QoQ.

Market has improved again over the past seven weeks, during which it sold almost as much as it did in 1H09 to bring YTD sales to 1,031 sold, amounting to about S$1.34 bn. In 2H09, it plans to launch 400 units in three projects, across low, mid and high end.

We raise our FY09-11 EPS forecasts by 33-50%, as we raise selling prices to reflect market conditions. We have also adjusted office and hotel values to reflect improving sentiments. Raise RNAV to S$9.82 (from S$8.13), and with strong momentum likely to continue, we peg a 10% premium to derive its target price of S$10.80.

On Olam will issue US$400mn in seven-year 6% convertible bonds

Olam will issue US$400mn in seven-year 6% convertible bonds (with an upsize of US$100mn) at a conversion price of S$3.08/share. We estimate share dilution of 7.9-9.7% or PV liability of S$0.24-0.30/share in the event of non-conversion. We maintain our NEUTRAL stance on Olam as we believe continued capital dilution to fund capex and inorganic growth will remain an overhang. Note that Olam significantly underperformed post its previous CB issuance in June 2008.
Olam plans to raise funds again following the recent S$437mn equity dilution and S$940mn credit facilities last week. As the company shifts from an asset-light to an asset-medium model, we expect the pace of capital dilution to pick up along with its growing capex and working capital needs. We estimate that Olam’s current war chest stands at around S$1.6bn, which will likely go towards further inorganic expansion.

The issuance of convertible bonds (Exhibit 1) could save around S$12-18mn pa in near-term interest expenses. However, we look for dilution in the range of 7.9-9.7% of the implied share base. Olam already has some US$141mn in CBs at a conversion price of S$1.65/share. In the case of non-conversion, the new CBs could represent PV liability of S$0.24-0.30/share.

A positive facet of the issuance for Olam is the long-term financing arrangement as well as the lack of a put option for the bondholders.

Olam also announced the acquisition of a 14.35% stake in New Zealand Farming Systems Uruguay (NZFSU) for US$9.9mn. NZFSU (listed, with a market cap of US$69mn) has upstream dairy operations in Uruguay. In FY09F, NZFSU reported a net loss of US$45mn. Olam’s management expects NZFSU to turn profitable in a couple of years.

We believe that investors may be concerned about the relatively small size and minority nature of acquisitions, since they seem to be financial investments rather than strategic ones. 􀁺 Our NEUTRAL call stands, as we believe valuation is stretched and the shares are already pricing in near- to medium-term earnings growth. Further, the constant issuance of paper to meet capital needs is likely to remain an overhang.

Sembcorp Marine: Cancellation of contract – Not a surprise

Cancellation of Petroprod’s contract. Sembcorp Marine (SMM) announced yesterday that its subsidiary, Jurong Shipyard has terminated its contract with Petroprod D&P I Ltd for the construction of a jack-up rig as a result of customer non-payment. We are not surprised over this cancellation. Our only concern is the amount that this jack-up would fetch in an impending sale, especially when the initial contract value of this jack-up is twice the cost of a typical jack-up at that time. Our ground checks indicated that the current value of a typical jack-up has fallen by at least 20% YoY. We are leaving our earnings unchanged as we have already factored in this cancellation in our earnings model. Our target price of S$3.74 based on SOTP valuation remains. Maintain BUY.

We are not overly surprised at this cancellation as SMM has previously hinted that it is not recognising the revenue of this jack-up even though work has commenced. In addition, SMM made an impairment charge of S$7.5m for its 3% stake in Petroprod in the recent 2Q09 results, implying signs of an amicable end to its contract with Petroprod. Our only concern is the amount that this jack-up would fetch in an impending sale. We recall that when this newbuild jack-up was first awarded in May 07, it was touted to be one of the world’s largest jack-up rigs to drill in harsh environment. The cost of this jack-up was a hefty US$442m, which was twice the cost of a typical jack-up then. Through our ground checks, we believe the current cost of a typical jack-up rig has fallen by at least 20% YoY. SMM stated in the press release that there are buyers who have shown interest and is confident that it will be able to receive all amounts it should have earned upon the sale of the jack-up.

Venture Corp: 2H09 will be inflexion point

2Q09 results just slightly short. Venture Corp (VMS) reported its 2Q09 results last Friday. Revenue came in at S$846.0m, down 13.0% YoY but up 16.6% QoQ, and was 8.5% above our forecast - showing the positive up-tick as we had expected - thanks to demand pick-up for several products and market share improvement. We had highlighted in our report about how some inventory restocking activities have extended well in May and even June. While net profit came in at S$60.9%, down 7.1% but up 119.8% QoQ, it was mainly due to a fair value write-back of S$25.0m for its CDO2 investment; stripping out the non-cash adjustments as well as forex losses/ gains, earnings actually fell 43.4% (but up 29.0%) at S$40.3m, though still 6.4% shy of our estimate. For the first half, revenue fell 17.8% to S$1571.6m, or 49.0% of our full-year estimate, while core earnings of S$71.5m met 37.0% of our FY09 forecast.

Unfavourable product mix behind margin shrink. According to management, the main reason behind the margin shrinkage (gross fell from 20.5% in 2Q08 and 17.7% in 1Q09 to 15.5% in 2Q09) was the sharp 32.9% YoY and 36.7% QoQ increase in its Printing & Imaging business; a major customer has switched several programs to consignment basis thus the lower margins. Its other businesses all saw YoY drops of between 2.8% and 38.5% although most were up between 7.2% and 9.0% QoQ except for Test & Measurement which fell 3.3% QoQ. While VMS has managed to add several new customers, their contributions were not significant yet; management expects the bulk of these contributions to come in towards end 2009 onwards. It also will be pushing for improvements in gross margins once it gains more traction with these customers.

Outlook cautiously optimistic. While management noted that most of its customers were still unwilling to commit to the pace and trajectory of recovery, the business environment has improved. VMS also expects its product mix to improve towards better margin products from 2H09 onwards (will be an inflexion point) as management continues to pursue its goal in being a technology-oriented company as opposed to a pure electronic manufacturing services provider. We have raised our FY09 revenue by 0.7% and cut our earnings by 13.2% to account for the margin squeeze; but raised FY10 revenue and earnings by 8.5% and 12.0% respectively. Our fair value remains at S$9.26 (based on 12.5x blended FY09/FY10 EPS); maintain BUY.

DBS: Better than expected 2Q

Better than expected 2Q09 results. DBS Group posted 2Q09 net earnings of S$552m, down 15% YoY but +27% QoQ, and were above the median estimate in a Bloomberg survey of S$425m. Net Interest Income improved 5.1% YoY or 3.3% QoQ to S$1112m in 2Q09. From the fee income side, the best performers were its Stockbroking (+28%YoY and +79% QoQ), Investment-related (+59% QoQ), Wealth Management (+31% QoQ) and Fund Management (+20%QoQ) units. Cost-to-income ratio also improved from 42.5% in 2Q08 to 38.4% in 1Q09 and then to a significantly lower 35.2% by 2Q09. Non Interest Income rose 22% YoY and 16% QoQ to S$680m.

As expected, impairment charges remained high. This surged from $90m in 2Q08 to $437m in 1Q09 and $466m by 2Q09 (OCBC of S$104m and UOB of S$465m for 2Q09). Net Interest Margin (NIM) was better QoQ, but down YoY. It improved from 1.99% in 1Q09 to 2.01% in 2Q09. The group has declared a dividend of 14 cents for this quarter. For 1H09, the group posted earnings of S$985m or 46% of our revised FY09 forecast.

Upping FY09 and FY10 estimates. With improving economic prospects, we have revised our earnings estimates. While we expect impairment charges to remain high, we believe that 1Q and 2Q were the peak quarters and impairment charges should come off in 3Q and 4Q. We are projecting lower charges of S$567m in 2H09 versus S$903m in 1H09. In addition, with the rally in the equity market, we expect capital market activities and feebased income to improve and we have raised our estimates for 2H09. Overall, we are increasing FY09 earnings from S$1572m to S$2128m. For FY10, we have also upped our estimates from S$1965m to S$2401m.

Maintain BUY, raised fair value estimates to S$14.65. Together with the improved economic outlook, although uncertainty still remains and unemployment is still high in the US, valuations for the three local banking stocks have also moved up higher. To reflect this trend, we are raising our valuation peg from 1.2x to 1.4x book and this in turn raises our fair value estimate from S$12.40 to S$14.65. At this price, valuation is 15.7x FY09 earnings and 13.9x FY10 earnings. Assuming that the group maintains its 14 cents per quarter dividend payout, annual yield is fairly decent at 4.4% based on current price. We are maintaining our BUY rating on DBS.

Ezra - Vessel operating agreement for 4 AHTS

To operate four new AHTS for an offshore specialist fund: Ezra has entered into a vessel operating agreement with an offshore specialist fund to manage and operate 4 AHTS for an offshore specialist fund. Ezra will receive half-share of the profit earned in return, after deducting direct operating expenses from the charter revenue. Ezra's involvement would be providing the operating crew and securing the charter contract.

First vessel to come on-stream 1Q 2010: All the 4 vessels are under construction at the moment and the first one is expected for delivery in 1Q 2010. The vessels have yet to be chartered out but we believe there should be no difficulty in securing charter contracts for the vessels.

Enhancing returns without capex: This agreement essentially allows Ezra to continue growing its chartering income stream without incurring significant capex. Each AHTS is estimated to cost around US$11- 15MM.

Not new news but could provide short term price catalyst: This announcement is actually not new news as the company briefly mentioned about these 4 potential vessels during its Subsea business plan briefing in July 2009. However, the firming up of the operating agreement now provides greater visibility as far as capacity expansion is concerned, which could provide some share price catalyst.

City Developments - stability for the developer with the track record

2Q09 core PATMI of S$140million in line: City Developments’ 2Q09 earnings were 15% lower versus corresponding period last year on higher 0.8% revenues as hotel contributions (via subsidiary M&C) fell 60% Y/Y. Progressive recognition of profit from Singapore residential developments sustained group earnings, with development PBT declining only 19% Y/Y whilst investment property income rose 25% Y/Y. Book value as at end Jun 09 was S$6.18/share (no revaluations as the group holds its investment properties on its books at depreciated cost), and net gearing on that basis is 46%.
Improvement in markets likely to buoy earnings: We have raised our earnings estimates for FY Dec 09E by removing our previous assumptions of inventory writedowns amounting to S$109million, and boosted our FY10E and FY11E estimates significantly (by over 100%) to take into account higher sales volumes and some stability in hotel contributions from FY10E onwards. With increased sales volumes our cashflow estimates increase and hence our FY10E RNAV estimate has been increased from S$11.23/share to S$11.51/share (+2.5%).

Successful launch of Quayside Isle could be the next thing to watch: The group is readying to launch 400 residential units in 2H09, 100 of which are at the Quayside Isle project in Sentosa Cove, which is pitched at the high-end segment. Over 26% of the group's gross asset value is in high-end segment, a re-rating of which would have the most impact on our RNAV estimates for the stock. A 10% increase in ASP assumptions for Singapore property alone would boost our RNAV estimate by 5%.

We raise our end Jun 10E target price to S$10.80/share (S$7.40 previously), based on a 6% average through-the-cycle discount to RNAV. Key risks to our view: a reversal in the momentum of housing demand, especially at the high and mid-end segment could reduce ASP growth expectations and widen the discount at which the stock trades to our RNAV estimates.