Parkway - Sell: Profit Let Down by Exceptional Losses

Maintain Sell — 4Q08 revenue of $241m (+4% yoy) is in line with our ests but several exceptional items resulted in $19.6m loss. However, recurring profit reached $31m and beat our below consensus S$26m est, thanks to a sharp 19% yoy reduction in staff costs which boosted margins. Dividend of 3.2cts for 2008 is much lower than 17.7cts for 2007, reflecting need to preserve capital.

Novena launch — Mgmt reiterated that completion schedule of the Novena suites remains unchanged and targets 80 units for sale for the first tranche. Indicative pricing has not been finalized and banks are financing at 65% LTV.

Hospital segment — Singapore Hospital 4Q08 sales fell 3% yoy but EBITDAR was up 20% to S$33m. However, foreign patient admission started to decline from Nov/Dec 08 onwards and will hurt prospects in 2009. International Hospital revenue rose 16% yoy, driven by Pantai, Cardiac Centre in Brunei and Apollo Gleneagles. A 28% equity interest increase in GHKL in 4Q08 also helped drive Int'l Hospital revenue and profits, with EBITDAR growing by 58%.

Healthcare — Increased patient volume and laboratory usage underpinned Singapore Healthcare 11% yoy sales growth, while International Healthcare was flat (+3%). Overall, Healthcare EBITDAR grew 17% yoy to S$18.4m.

New target price — We raise our earnings ests by 9% over 2009-10E to reflect impact of cost savings (eg. Jobs Credit Scheme); but, recommendation remains unchanged. Our TP is slightly raised to S$1.27, based on 15x 12-mths forward P/E. Our risk rating is changed to High Risk per our Quant Risk rating system.

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City Development - SELL: Challenging Operating Environment

Results lower than expected due to write-downs at M&C — For 4Q08, CityDev reported a net profit of S$100m, down 33% qoq and 57% yoy. The steep decline was due largely to net impairment losses, amounting to S$90.8m, on some assets held by M&C, and a loan to a joint venture in Bangkok. Excluding all one-offs, pre-tax profit was closer to S$182m, flat from 3Q and down 22% yoy. No provisions were made for its residential landbank.

Slower than expected recognition on residential — Residential property continues to account for about 60% of its pre-tax profit, registering a pre-tax profit of S$82.2m in 4Q08, down 9.8% qoq and 32% yoy, due to the lower contributions from several key projects (The Sail and St Regis) as they complete. M&C and investment properties recorded lower contributions due to impairment losses.

Strong balance sheet — If CDL were to mark-to-market its investment properties, instead of holding them at cost less depreciation, its gearing would be 32% instead of the reported 48%.

Earnings upgrade — We have upgraded our earnings for FY09E (16%) and FY10E (33%) to reflect the lower-than-expected recognition in FY08 and the lower-than-expected minority interest.

Maintain SELL — Although we like CityDev’s astute management and strong track record, we maintain our SELL on the stock given the weak operating environment. Continued negative newsflow is likely to cap any upside potential in the short term.

Sembcorp Marine - Disappointing dividend payout ratio

SMM recorded a FY08 profit of S$429.9m, which was below our and market expectations of around S$440m. While headline earnings indicate a 78.4% jump, stripping out a charge of S$44m and FY07’s S$303m charge, (both related to the forex transaction losses), earnings was still up an impressive 31%.

SMM’s turnover grew 21%, with rig building up 14%, and conversion up 20%. Gross margins reached a record of 16.2% in 4Q, and 12.9% for the full year, resulting in gross profit growth of 59.2%. However, in addition to the expense mentioned above, SMM also took a mark-down its Cosco shares and adjustments on foreign currency forward contracts, totalling over S$50m. Associate earnings also posted a loss of S$42.5m in 4Q, due to the weak performance CoscoShipyard Group.

The most disappointing aspect of these results is SMM’s decision to limit its final dividend to 6 cts per share (11cts for the year), despite the rise in earnings, thereby reducing its payout ratio to just 50%, versus 75% in FY07. SMM explained this as prudence in current economic conditions, and conserving cash for potential acquisitions, without being specific. SMM’s current net cash position stands at S$1.8bn, of which we estimate S$1.4bn is customer deposits.

Going forward, SMM will continue to convert on its current orderbook of S$9.0bn stretching to 2012, with good margins. While earnings 2-yr CAGR is a healthy 11% p.a., we expect turnover to taper off from 2011 onwards, with order momentum slowing, and the risk of some orders on hand being delayed or cancelled. SMM has attributed the lack of new orders to the tight credit market, with offshore’s fundamentals being intact. However, we are less sanguine on the health in demand.

We are cutting our price target to S$1.74 from S$2.40 due to the lower dividend payout, which effectively cuts FY09 yield from 13% to 9%. With a cyclical downturn expected to impact growth past 2011, the reduced payout means that shareholders are not able to at least fully benefit from SMM’s current earnings strength. We maintain our Hold recommendation.

Noble - Resilient performance

Proved its resilience in 4Q08. Noble Group Ltd (Noble) delivered a 19% YoY rise in 4Q08 revenue to US$6.8b accompanied by a 24% growth in net profit to US$138.9m. For FY08, the group reported a 54% gain in revenue to US$36.1b and a 124% surge in net profit to US$577.3m, which was a shade lower than our expectations but above the street's US$544.7m estimate. Excluding one-off items, we estimate that net profit would have risen 83.4% to US$473.4m. A 4.4 US cent dividend has been declared, translating to a yield of 5.8%.

Gross profits robust. All its key segments except for Metals, Minerals & Ores (MMO) posted higher gross profits in FY08. Agriculture was the strongest segment with a 117.5% growth. In contrast, MMO weakened by 28.5% due to sluggish demand for metals following the global economic crisis. Much of the year's growth was concentrated in 1H08. Growth momentum tapered off in 2H08 as the economic crisis struck, painting a less rosy outlook for 2009.

Balance sheet remains healthy. Noble's financial standing remains strong. The group has emerged to a net cash position (after adjusting for readily marketable inventories). Its financial strength is good (net cash) vs. its peer Olam with an adjusted gearing ratio of 0.74x. Noble's cash position improved to US$1.3b in Dec 08 (vs. US$0.7b a year ago), more than sufficient to cover its short term debt of US$0.5b. We expect low commodity prices to ease working capital requirements in FY09. Debt profile is also healthy with 80% of debt possessing maturities in excess of 18 months.

In good shape to ride out the storm. Noble has proven its resilience by performing well against a volatile backdrop in 2008, but it is not immune to the global economic downturn. Tonnage eased in 2H08 as the credit crunch led to a drought of Letters of Credit (LC) and counterparty risk grew more pronounced. This situation is likely to persist in 2009, and in the absence of counterparty credit insurance, we expect business activity to remain suppressed. We have trimmed our FY09 earnings estimate by 18% and expect core earnings to contract by 20%. Noble has announced an offer to acquire Australia listed Gloucester Coal for US$201.5m. It has the financial muscle to carry out an all-cash purchase given its robust US$1.3b cash position. We maintain our BUY rating, but ease our fair value estimate to S$1.33 (from S$1.58) on lower earnings forecast.

Olam International Ltd - Convertible bond exchange details

On 16 Feb, Olam had announced a convertible bond exchange offer at 78cts to the dollar. While the bond returns are not significantly different, the share conversion price for the new bonds are significantly lower, signalling management's keenness to place out new shares at S$1.656. The exchange would result in lower debt and higher interest expense. About 77% of the existing convertible bond holders have accepted the exchange offer. We view the exercise as non-core and maintain our core EPS estimates. Our FY09-11 reported EPS estimates, however, have been adjusted by +19% to -9%. We believe that the conversion price will serve as a price ceiling in the near term. Our target price remains S$0.97, based on 6.4x CY10 P/E. Maintain Underperform.

Singtel - Optus rebound not in the price

Investor sentiment towards Optus remains poor so far, which is perhaps not surprising considering that mobile margins have plummeted from 40% in FY3/05 to around 27% YTD. Even so, we view ongoing market consolidation as a watershed event that should lead to a rebound in Optus’s margins to 30% by FY3/10, and this should drive a re-rating of SingTel, in our view. We raise our target price to S$3.10 (from S$2.95 previously) and reiterate Outperform rating on the stock. SingTel continues to be a top pick in both our regional telecom and regional strategy model portfolios.

Optus to benefit from Voda-Hutch merger: We view the opportunities for Optus from the Vodafone-Hutch merger as material in the short to medium term, and this is occurring at a time when Optus has positive momentum in the industry. We are raising our fair enterprise value estimate for Optus by 12% based on 8–13% upgrades in FY3/10–11 EBITDA.

Singapore – lower tax drives minor upgrade: The lowering of the corporate tax rate from 18% to 17%, together with the consolidation of the recently acquired IT services unit, could drive minor valuation and FY3/10–11 revenue (~12%) and EBITDA (~0–2%). Recessionary conditions, the effect of the government’s broadband project (NBN) and potential pay-TV price competition are key issues for the Singapore market. We think new-entrant risks through the NBN process are low because only an estimated 13% of retail broadband users are on high-end plans (>10Mbps).

Indonesian recovery thesis on track: Results from Indonesia’s No. 3 player Excelcomindo (EXCL IJ, Rp1,000, OP, TP: Rp1900) confirm our analyst Ken Yap’s thesis that smaller players are getting increasingly marginalized in the market as access to capital is curtailed. Telkomsel’s (unlisted) recovery appears to be back on track as reflected in 12% sequential QoQ growth in service revenues (vs -11% QoQ for EXCL).

We are raising our FY3/10–11 EPS estimates by 1.2–2.4%. 12-month price target: S$3.10 based on a Sum-of-Parts methodology. Catalyst: Optus's margin recovering to 30% in FY3/10.

The key elements of our bullish thesis – an inexpensive core business, value accretion for investment holdings as late entrants face financing issues and safety in the strong balance sheet and cash-backed 4–5% yield – remain firmly intact, and we reaffirm our Outperform rating. Our sum-of-the-parts derived target price translates to a FY3/10 PER of 13.5x. SingTel’s valuation appears to be attractive based on our forecast of a 10% FY3/09–12 EPS CAGR.

Yangzijiang: Hardships building up

Yangzijiang’s FY08 earnings grew 82% yoy to RMB1.6bn on topline growth of 91% yoy. The bottomline fell short of our estimate by 5% due to provision of RMB200m. Although the Chinese government’s stimulus policy to support the shipbuilding sector should bring some light to the industry, the risks of order cancellation/delays and default risk amidst depressed freight rates and credit crunch remain high. We trim our estimates by 5% and 10% for FY09 and FY10 respectively, on account of higher order cancellation / delay and potential provisions. Maintain Fully Valued. TP reduced to S$0.32.

4Q08 gross margin shrunk by 10ppt qoq to 13% due to provisions of Rmb200m. In view of the deteriorating conditions for shipping industry, Yangzijiang increased its provision for potential cost variation to 8% of contract prices, from 0.5% previously. The cost variation is to account forunexpected additional cost such as doubtful debt, price discount to shipowners and cost over-run for projects under construction. The provision may be reverted upon completion of the projects if the actual total cost incurred is less than budgeted cost.

Cancellations/delays underway. Despite the Chinese government’s efforts to stimulate the shiipbuilding sector, the challenges of cancellation / delay and default risk amidst depressed freight rates and credit crunch will cap share price performance. Yangzijiang now expects to stretch its orderbook delivery over a longer period of 4.0 years, vs 3.5 years previously, as requests for order rescheduling are flowing in.

Maintain Fully Valued; TP reduced to S$0.32. We trim our estimates by 5% and 10% for FY09 and FY10 respectively, as we now expect order cancellation / delay of 25% vs 15% previously, as well as raise the provision levels in FY09-FY10. Our TP is reduced to S$0.32 based on 3x revised FY09 earnings. Although we like YZJ’s proven execution track record, we see downside risk to current share price in anticipation of negative newsflow hitting the industry. Maintain fully valued.

Cosco - Outlook still murky

No surprises. Cosco’s full year results did not present with any surprises, as management had earlier guided in December 2008 that profit for the year would be lower than FY07. Revenue for the year increased 53.7% yoy to S$3,476m. Full year earnings fell 12.3% yoy to S$302.6m. The profit guidance announcement issued earlier had also stated that lower profits would have been due to provisions made for doubtful debts and higher costs relating to shipbuilding and offshore marine contracts. Provisions for doubtful debts and expected losses, and inventory write downs amounted to S$171.2m, in aggregate. First and final dividend of S$0.04/sh, and special dividend of S$0.03/sh was proposed, bringing total dividend to S$0.07/sh.

Margins hit by higher operating costs and large provisions. The impact of steel prices on profitability was stark in FY08, as it was reflected in the severe margin deterioration. Gross margin fell from 27.0% in FY07 to 18.1% in FY08. EBIT margin took an even larger hit, falling from 22.5% in FY07 to 13.2% in FY08, due largely to the aforesaid provisions and write-downs. As the Company had previously amassed steel on the expectation of further escalating prices, it has, in the last quarter, written down its stockpile to calendar-year-end prices. As such, we believe that FY09 should see an improvement in margins.

Dry bulk shipping contracts will expire in 2009. Of its fleet of 12 bulk carriers, three are currently on spot charter, while the rest will see contracts expire in 2009 – four in 1H09 and five in 2H09. Renegotiations and contract terms for the nine will be dependent on prevailing rates, and vessels will be put on spot charter if prevailing rates are unfavorable.

Outlook for FY09 still murky. Though we believe that Cosco is improving on its execution, the supply of new vessels to come into the market and rapidity of demand deterioration, coupled with a continuing lackluster macro outlook augments an already challenging operating environment for Cosco. Lack of clarity in information dissemination is also a point of concern for us, as we are unable to decipher the viability and profitability of existing contracts. We keep our HOLD call and target price of S$0.67.

ST Engineering - A gentleman will walk but never run

Following ST Engineering’s FY08 results, we lower our target price from S$3.00 to S$2.60 and retain our Outperform rating.

FY08 results lacklustre: Net profit of S$474m (-5.9% YoY) was below consensus (S$496m) and above our forecast (S$462m). Operating income was down 7.5% YoY, as was the margin (9.5% vs 10.9% in FY07). Aerospace contributed less than 50% of profit for the first time since 2002 (post 9/11).

Net cash or net debt? The discussion on the company’s net cash/debt position hinges on the treatment of customer advances, which are sizeable. In a ‘growth organically only’ scenario, we believe that customer advances should be treated as part of the cash balance, placing the company in a net cash position (10% net cash/equity).

Assuming acquisitions, which we believe to be a strong likelihood over the next 12 months, we prefer to back out customer advances from the cash balance in analysing the balance sheet. In this scenario, the company enters a net gearing position (21%). We believe a reduction in the dividend payout is therefore highly likely in 2009.

In either scenario, it is worth noting that the company has been whittling down its cash balance to pay out 100% of earnings in dividends since 2002.

Guidance for lower earnings? Prima facie, the guidance for comparable earnings in 2009 is upbeat. However, we estimate this implies a 5.7% shrinkage in core earnings after backing out ~S$20m in benefits from the Budget announcements as a 5% strengthening in the US$/S$ rate. We also believe provisions will feature again in the FY09 results, given the challenging operating environment for airlines.

We have lowered FY09 and FY10 EPS forecasts by 9.6% and 10.7%, respectively.

12-month price target: S$2.60 based on a DCF methodology. Catalyst: Contract wins will be positive, offsetting negative newsflow on the airline industry.

We expect STE will outperform the index owing to its ‘safe haven’ status, due to its large exposure to defence sales. On an absolute basis, we expect the share price to track sideways for most of 2009, perhaps rallying late in the year. We maintain our Outperform rating.

Indo Agri - Biological asset writedown has no operational impac

Ahead of its FY08 results on 27th February, IFAR recently disclosed that it will be taking a non-cash writedown of Rp663 billion, or around S$85.6m, arising from the changes in fair values of biological assets. The reporting of gain or loss arising from the changes in fair values of biological assets is in accordance with SFRS 41 of the Singapore tax code.

Indo Agri has booked almost Rp. 800bn in gains to biological assets in the last 3 years, in tandem with rising CPO prices. With CPO prices having halved over the past year, it is only expected that IndoAgri’s plantations values should be reversed accordingly. We had adjusted our reported net profit forecast downward to Rp.1,239.3bn for FY08, from Rp. 1,900.3bn previously. There is no change to core net profit forecast (i.e. ex-biological adjustments). This remains at Rp.1,551.3bn for FY08, which is in line with consensus of Rp. 1,561.5bn.

IFAR also affirmed that it will not have to recognise any impairment of goodwill for its 2007 London Sumatra acquisition, after an independent evaluation. However, ahead of the results, we warn that IFAR may need to revalue further downwards its US$ denominated loans, as well as a decline in the value of inventory. In 3Q IFAR made such downward adjustments of Rp. 27bn and Rp.65bn respectively.

Looking further ahead, we have reduced our assumption of average CPO prices for FY09 at Rm. 1,800 per tonne versus Rp. 2,100 previously, and bringing it in line with our assumption for Malaysian palm oil companies. Prices have stabilised around this level since the beginning of the year, and we now expect it to persist, given the current economic climate. Correspondingly, we have cut our assumption for cooking oil prices by a further 20% - IFAR had already cut its prices by 15% earlier in the year.

FY09 forecast is therefore cut to Rp. 1,071.8bn, indicating a YoY 30% decline in core earnings. With share values across the sector remaining weak, we peg fair value at 10.5x, in line with peer valuations. This yields a fair value of S$0.99, representing 80% upside to its current price. We maintain our Buy recommendation.

Venture - CDOs marked to almost nothing but risk of non-recovery is rising

Venture reported 4Q08 net profit of $4.6m (-94% yoy), which included $57.6m in mark-to-market charges for its remaining CDOs and $6.3m in impairment charge for an associate company. Adjusted 4Q08 net profit was $68.5m, 18% lower yoy and 2% lower qoq, slightly below market expectations of $72m. However, revenue of $907m (-6% yoy) was in line with expectations.

The good news is that Venture ended the year with $192m in net cash, sharply turning around from the debt it took on to acquire GES in 2006. In 4Q08 alone, it generated $198m in free cashflow as inventory was cut from a peak of 64 days in 3Q08 to 54 days in 4Q08, in line with its historical norm. As such, its usual dividend of $0.50 a share was declared.

With the world economy in shambles, management optimistically expects that there could be a sharp drop-off in orders (perhaps 20-25% in magnitude) following which there would be a slow phase of inventory rebuilding, with 1Q09 likely to be the ugliest quarter. However, Venture believes it has a strong pipeline of ODM projects for 2009 that will stand it in good stead.

As at end-FY08, Venture is left with only $18.8m in CDO exposure (out of $167.8m) but the CDOs only expire in Dec 2009 and the risk of non-recovery could be rising. There has been defaults among some of the underlying companies but being a holder of senior debt, there is still enough subordination buffer to prevent the losses from affecting Venture.

With 1Q09 looking shaky for most tech companies, we believe a better time to consider the stock for investment would be after 1Q09, when we can better assess how the demand scenario is shaping up. As of now, we believe most companies are cutting inventory to clear their channels and that will have a negative impact on the supply chain.

F&N Malaysia to lose Coke franchise next year

Coca Cola has decided to let its bottling and distribution agreements with F&N Berhad, F&N’s 57.9% subsidiary, expire in Jan 2010. This will hit its results negatively as Coke accounted for 12% of F&NB’s FY08 revenue and an estimated 17% of operating profit. Our analyst for F&NB in Malaysia estimates a 10% reduction in FY10 earnings and 15% in FY11.

As F&N owns 57.9% of F&NB, we estimate that the impact on FY10 earnings will be 3.2% (from $447.4m to $433.3m) and 5.3% for FY11 (from $408.8m to $387.1m). As our RNAV model is based on F&NB’s fair value (to be determined), we estimate every 30 sen decline in F&N Berhad’s share price will lower our RNAV valuation by 1 cent.

Although the financial impact is not very large, the impact on sentiment will be more significant as F&N is increasingly reliant on F&B to drive growth. In addition, both companies may cut dividends, as cashflow may be affected. F&NB typically pays out more than its earnings to shareholders. Further, F&N’s balance sheet is already stretched by the need to refinance substantial borrowings this year.

F&NB may be able to recoup some one-off returns from Coca Cola, depending on Coke’s future bottling plans in Malaysia. If it decides to set up its own plant, it may buy equipment from F&N, which would trim the financial impact. Also, F&N will now be able to launch new products and expand into new geographical markets with Coke out of the picture. However, it is still unclear how this will work out.

We downgrade F&N to Hold in light of this development. For now, the stock will be affected by the damage to sentiment and the risk of dividends being affected. Historically, the stock has traded to a low of 9x earnings during the Asian crisis. Assuming the same trough valuation, we set our fair value at $2.15.