Keppel - Secures 3 orders worth S$300m

Keppel Corp’s Offshore & Marine (O&M) division has announced three contracts worth a total of about S$300m. The first two projects from, repeat customers, are for the construction of a derrick lay barge and the modification of a Floating Production Storage and Offloading (FPSO) vessel. The third project is awarded by a new customer, for the completion of a semisubmersible.

Built for repeat customer Bumi Armada, the derrick lay barge will have the capability for operations in waters of up to 100m in depth, for deployment in the Caspian Sea. Keppel will build two separate hull strips which will be joined at a shipyard in the Caspian Sea. The parts are expected to be delivered by November 2009.

The second project is from Single Buoy Moorings for the modification of FPSO Capixaba, which was originally a conversion carried out by Keppel in 2006. The new work scope includes the installation of four new modules and the integration plus modification of the existing topsides and turret, before being re-deployed in Brazil in early 2010.

Finally, its Brazil yard, has secured a contract from Noble Drilling for the completion of an ultra-deepwater semi drilling rig. The rig is a dynamically-positioned (DP2) unit designed to operate in water depths up to 10,000 feet, with a drilling depth of up to 35,000 feet. The scope of work to be performed is mainly for mechanical completion. The rig will be chartered to Petrobras after completion in 4Q09.

No significant contribution is expected from these jobs in the current financial year, and the quantum of the contracts is within our scope of order win expectations in FY10. The contracts also do not signify any recovery in the offshore market, as two of the three jobs are refurbishments and fitting, while the third is a very specialized vessel. Our outlook for Keppel therefore remains unchanged, with O&M earnings expected to taper off from 2011 onwards, in lieu of a recovery in the oil rig market. We maintain our Sell recommendation to a SOTP target price of S$3.75.

Sponsored Links

Wilmar International - Maximising Profit from Information and Economic of Scale

Wilmar is an integrated plantation company with a 50% market share of China 's branded cooking oil market, a quarter of global palm oil refining capacity, about 40% of the global palm oil traded market, and 20-25% of China's oilseed industry.

Stable CPO price outlook. Management opined that CPO price will stable at current level for 2009, even if the price correction to come the downside would be mitigated by the resilient demand from China. CPO price was closed at RM1,990/tonne for 3-month future contract and spot price on 26 Mar 09 was at RM2,101.50/tonne. This is in line with our house view on CPO price trading band of RM1,750-RM2,100/tonne for 2009 with an average of RM1,800/tonne.

Sales in China still good. Management indicated that the sales of the consumer packs do not show any sign of slowdown on cooking oil consumption. Wilmar has a 50% market share of China's branded cooking oil market. This would be the key factor to support CPO price. China consumed about 5.6m tonnes of palm oil in Oct-Sep 07/08 or 13.1% of global palm oil production.

Growth still with emerging markets. Management reiterates the growth for Wilmar still coming from China and India, i.e. the two largest edible oils markets in the world. The bottom line contribution to come from two key areas:

a) Volume growth supported by capacity expansion and gain in market share.

b) Margin improvement from better efficiency. The efficiency improvement come from internal control and also the improvement of China and India public infrastructure, i.e. better highways and rail connectivity.

Trading profit in the range of 5-20%. With regards to fund managers' concern on Wilmar's trading profit, management highlighted that at least 80% of Wilmar's net profit is deriving from its day to day operation. The trading profit make up by 5-20% and this is contributed by (1) timing of buying and selling, (2) extra profit deriving from maximizing shipping load from each shipment, and (3) taking an arbitrage position for locked in contracts.

The stock is now trading at FY09F and FY10F PE of 12x and 11x, respectively, below other major plantation players of 15x and 12x.

City Developments : Still a gem among peers

Strong balance sheet to withstand turmoil. At the end of 4Q08, City Developments (CDL) has a cash holding of S$775.9m and total borrowings of S$4,146.7m, which translates to a net gearing ratio of 0.48x. If fair value accounting is used, the adjusted net gearing ratio of CDL would ease to 0.32x and this is comparable to the net gearing of CapitaLand after its rights issue and subscription of CapitaMall Trust's rights issue.

Potential beneficiary from the upgraders' market. In comparison with other property developers, CDL is better-positioned to benefit from the demand from HDB upgraders as it has exposure of ~52.5% of its attributable GFA of its landbank to the mass market segment. Some of these sites had been acquired at low prices and the low breakeven cost would give CDL the much-needed flexibility in pricing its new launches under current weak market condition.

Default risk under control. Only about 30% of their units sold by CDL were under the Deferred Payment Scheme (DPS) and CDL has a policy of collecting 20% as down payment from buyers under this scheme; DPS is not extended to sub-sales. We also think that it is unlikely for buyers to just walk away from their purchases as buyers would face legal action for breach of breach of their contractual obligations.

M&C remains financially self-sufficient. Subsidiary M&C's financial position remains strong, with net gearing ratio of 0.16x. With undrawn committed bank facilities of £188.6m and cash-generative operations, we believe that M&C can remain self-sufficient on its own without tapping on its parent, CDL, for additional resources.

Building up war-chest for acquisition. CDL had been active in building up its acquisition war-chest recently, having increased the limit of its Medium Term Note (MTN) Programme from S$700m to S$1,500m in December 08 and raised S$100m from its S$1,000m Islamic Trust Certificate (ITC) Programme in January. CDL is currently in the process of issuing the second tranche of the ITC and expects to raise another S$300m-400m from the programme.

Reinitiate coverage on CDL with HOLD. We ascribe a 30% discount to our valuation of CDL's development profits and investment properties. For its investments in M&C and City e-Solutions, we peg their valuations to their current market capitalizations without any discount. As such, our fair value of CDL is pegged at S$5.43. We believe that CDL is well-positioned to ride through this downturn but for now, upside to share price looks limited and we reinitiate coverage on CDL with a HOLD rating.

Sembcorp Industries – Target price raised to S$2.70, with upside potential

We are raising Sembcorp Industries (SCI) to a Buy. The stock primarily offers a good earnings mix that is underpinned by the defensive Singapore infrastructure businesses, which represents a third of overall earnings. We also believe there is significant upside to SCI’s prospects with an easing in the credit markets. Our revised SOTP valuation at S$2.70 also looks compelling.

We anticipate an imminent easing in the credit markets as the US and other government’s efforts to clean up bank’s books gather momentum. We believe that state-sponsored infrastructure projects put in limbo by the current credit crunch will be the first line of borrowers that can tap into this, due to a lower default risk and pump priming. SCI can benefit from this, particularly from utilities projects in the Middle East and China.

Recent media reports suggest that SCI is on the cusp of securing its second independent water and power project (IWPP) in the Middle East, after securing financing from China Exim Bank forthe US$1bn Salalah project in Oman. This could also pave the way for other mega-projects in Saudi Arabia, and another project in Fujairah, UAE.

However, we believe that it is too early for a recovery in Sembcorp Marine’s (SMM) offshore business, despite oil currently trading above offshore production breakeven of about US$50 per barrel. Energy demand is expected to remain weak, and financing will still not be so freely available for these riskier projects in the near term.

With a recovery in SMM’s share price, our SOTP fair value is raised to S$2.70, implying 19% upside to SCI’s share price, with a potential further revaluation of its utilities earnings multiples (currently at just 7x FY09 PER). Our net profit forecast remains unchanged, where we project a 10% rise in earnings in the current year, driven by its ongoing projects in Singapore, China and Fujairah ramp up.

Singapore Telecom - Staying Underweight on Aussie NBN Risk

Investment Conclusion: As the decision on the Australian NBN approaches, we stay Underweight on SingTel and Overweight on Telstra. Our Underweight rating on SingTel is premised on our view that its valuation premium to NAV is unsustainable in an environment of slowing growth at affiliates. The group’s un-hedged exposure to Asian currencies also puts to question the stock’s defensive nature, in our view.

What’s New? While market commentary has mostly focused on the likely implications for Telstra if it loses NBN initiative; we believe the implications for SingTel, if Optus were to win the bid, have not been well analyzed. We attempt to address this question in our report.

1) Given SingTel’s historical discipline with capex and management’s focus on ROIC, we believe the likelihood of Optus going for an aggressive nationwide NBN rollout without ensuring regulatory protection is low.

2) Based on our analysis, we believe an Optus’ rollout of NBN will struggle to generate positive NPV, even if the government spends A$4.5-5.0 bn without any return.

3) We have done a sensitivity of our key assumptions to understand the likely scenario when such a business becomes viable. The new network would need to garner 60-70% of fixed line revenue or generate margins of 45% to drive positive NPV. Both of these scenarios, while possible, would invoke a much more fierce competitive response from Telstra.

4) Telstra’s recent announcement to upgrade its HFC network in Melbourne shows its leverage in the NBN process. This takes away a substantial wholesale revenue opportunity from the NBN network builder and further reduces its viability.

Golden Agri - Hit by slipping CPO prices

Golden Agri will suffer a 63% yoy drop in core EPS in 2009 from our weak CPO price expectations. We expect CPO prices to drop a further 14% to US$500/tonne (down 42% yoy) as a result of palm oil supply outgrowing demand. At 13x FY10CL and EV/ha of US$6,200, Golden Agri is expensive relative to its peers. Based on its historical correlation with CPO prices, GGR is trading at a slight discount, which is where we expect it to stay in the near-term with less speculative money in the market. SELL.

An unfavourable supply-demand balance is likely to bring average selling prices of CPO down another 14% to US$500/tonne (down 42% yoy). We expect palm-oil supply to increase 4-5% in 2009-10 driven by the aggressive planting programmes that took place over the past 2-3 years. Demand for palm oil is only expected to grow 3-4% due to slowing global GDP growth and a significant drop in biodiesel demand. After the recent decoupling between palm and crude oil, we see little that will drive CPO prices in the near term.

As the second largest global palm oil plantation with more than 90% of its profits coming from its palm oil plantations, Golden Agri is one of the most highly sensitive companies to CPO price changes. Based on our US$500/tonne CPO estimate, Golden Agri’s core profits will drop by 63% in 2009 as it deals with high production costs. If CPO prices are 10% higher than our estimate, our net profits expectations would be rise by 26%.

At 13x FY10CL PE and EV/ha of US$6,200, Golden Agri is trading at a premium relative to its Indonesian peers. This is not justified given the corporate governance risks from the company’s connection to the Widjaja’s family. Our DCF-derived target price of S$0.21/share implies 28% downside.

We did a detailed regression analysis of GGR’s stock price to CPO prices after numerous questions from investors. The 6 year correlation between Golden Agri’s stock price and CPO prices is very high with an R-Square of 0.92. During boom years, the stock has historically traded at a premium to where it should be based on the regression whereas it has traded at a discount in bear markets. With less speculative money in the market, Golden Agri deserves to trade at the current discount it is at and will remain there for a while.

OCBC: accumulate on weakness

In the wake of undershooting 4Q08 earnings and a worse-than-expected GDP growth trajectory, as underpinned by our recent Singapore FY09F GDP growth downgrade, from -1% to -5%, we have cut FY09F-10F earnings by 16-23%. This reflects the net effect of the following revisions: increase in the group net interest margin (NIM) estimate for FY09F, from 2.15% to 2.37% (FY08: 2.27%), reflecting the positive combination of broadly rising average loan spreads, steeper yield curve and more favourable deposit mix; ii) a sharp increase in net asset (loan and securities) loss provisioning for FY09F, from 60bps to 100bps, as asset quality deterioration reflects reduced GDP growth forecasts; iii) reduction in loan growth expectations, from +6% to +2%, primarily reflecting the weaker GDP environment and reduced working capital requirements, particularly for export-related industries; and iv) a reduction in growth expectations for reported non-interest income (NII) over FY09F, from -3% to -12% (core NII flat y-y, helped by stabilising insurance contributions), as capital market-related weakness extends even as commercial banking fee-related volumes come off.

Supported by ample capital and sustained profitability, management has guided that the absolute dividend payment (FY08: 28 cents net) is unlikely to decline by the same pace as earnings. We are conservatively forecasting that dividend payouts will decline to 20 cents net in FY09, equivalent to an earnings payout of 50%, which is similar to the payout for FY08 – should the dividend for FY09 be maintained at 28 cents a share, the effective earnings payout would be closer to 70% of forecast earnings.

In line with the reduction in forecast book value formation over FY09F and a cut in our sustainable ROE input for the Gordon growth-based valuation model, from 10% to 9%, to reflect the relatively cautious forecast deployment of an overflowing capital base, our Gordon growth-based target price (methodology unchanged: assumptions being 9% sustainable ROE, 9% cost of capital (from 10% previously to reflect the interim decline in risk-free rates as derived from the five-year government bond yield), 5% long-term growth) is adjusted lower, from S$5.60 to S$5.30, or 1.0x stated book value, or 13x FY09F earnings (see Exhibit 6 for the regional valuation comparison).

OCBC fits the bill as a quality low-beta exposure to the Singapore banks sector, underpinned by a tight operational footprint and ample capital reserves. While larger-than-peer property sector exposure is a concern, risk management appears robust and, unlike the Asian Financial Crisis, credit assessment has had substantial lead time to adjust to expectations of declining property prices. The life insurance operation via GE, notwithstanding a volatile 2008, is fundamentally a low-beta business and with capital markets stabilising, investment returns should flatten out in parallel and reaffirm this reality – a move to privatise GE should be positively received given attractive valuations. With high-conviction yields exceeding 4% and well-supported, investors seeking a relatively low-risk exposure to the sector should look to accumulate on weakness.

Straits Asia Resources - Lacklustre takeover offer

PTT International (PTT), one of Thailand's largest energy companies, has made a mandatory takeover offer for Straits Asia Resources Ltd (SAR) at S$0.807/share. The offer is a result of it purchasing Straits Resources Ltd's 47.1% stake in SAR as part of a strategic alliance.

The offer price was derived from SAR's 20-day volume-weighted average price (VWAP) prior to 20 Mar 09, but falls 4.5% below SAR's last transacted price and 7.9% short of its six-month VWAP. In addition, it values SAR at a modest 2.2x FY09F PER and 1.2x FY09F NAV - far lower than the 11x PER price tag that Chinalco and Alcoa forked out for their stake in mining company Rio Tinto just a year ago. We are of the view that the takeover offer undervalues SAR, and do not expect investors to accept the offer. SAR will be appointing an independent financial adviser to provide a recommendation in connection with the offer.

No intention to privatise SAR. PTT's takeover offer for SAR appears to be a procedural obligation as a result of it crossing the 30% ownership level. It has articulated its intention to retain SAR's listing status on the SGX-ST, and added that it currently has no plans to introduce any major changes to SAR's business, redeploy its fixed assets, or discontinue the employment of its employees. As such, the takeover offer will probably result in a change of SAR's effective ownership with no major changes to the group's strategy or management.

Good dividends and earnings prospects provide little incentive to accept offer. SAR's shareholders may reap better returns in the long term by holding on to their shares, given the group's generous dividends and robust outlook. SAR's dividends yielded a generous 11.5% return in FY08, and we expect FY09 yield to increase to 17.8% on the back of higher earnings. Earnings are expected to more than double in FY09 thanks to higher coal prices secured during the commodity boom in 2008.

Sound fundamentals, maintain BUY. PTT's takeover offer puts an end to months of speculation over SAR's privatisation. It also rules out any acquisition by Noble Group Ltd (previously reported to be one of the interested bidders) or other strategic investors in the near term. We maintain our BUY rating and S$1.15 fair value estimate for SAR and do not expect PPT to raise its offer price. As for Noble, our BUY rating and S$1.33 fair value estimate remains intact.

CapitaLand - Cold realities present opportunities; upgrade to Buy,

We upgrade CapitaLand to Buy (from Neutral) and add it to our Conviction List as we see its wide discount to NAV of 38% vs. City Dev of 21% (Sell) as attractive given its diversified business model and strong balance sheet (better positioned today than during the 1998 down-cycle when its gearing was 0.95X vs. 0.27X currently). Moreover, its decision to step up efforts to dispose investment assets (S$7bn in two yrs) to raise cash has positioned it well to reinvest for the next cycle. We believe CapitaLand could look at potential acquisitions once macro conditions improve, enabling it to generate above-sector NAV growth in the next 3 years.

Our stress tested valuation (further 10ppt below 1998 prices) shows that the stock has moderate downside, at 7% below current prices. Also, stressed tangible BVPS post write downs and provisions is S$2.36 (-16% erosion). While we expect news flow on the sector to be dominated by DPS risk, this should be offset by CapitaLand's defensive mix. We identify the following share price drivers: 1) a war chest of S$6bn, and allocation of cash would be a catalyst when markets stabilize; 2) provisions on its residential land bank, as early as 1H09 results. Any kitchen sinking would accelerate the earnings adjustment process, leading to potential share price recovery (similar to 2001); 3) good take up of CapitaMall’s (Neutral) rights issue would free up capital commitments; 4) China’s property market stabilizing by late 2009E, before Singapore in mid ‘10.

38% disc to NAV is at the low end of its historical range. We cut our 09E-NAV 5% to S$3.35 and write down Ascott. We cut our 12-m TP to S$2.68 from S$2.81; we maintain our 20% disc to RNAV. We cut ‘09-10E core EPS by 5-25% on weaker prices and raise ‘11E by 12% on a pick up in residential contribution. Residential cycle bottoms out earlier than our expectations (of mid 2010).

UOB or DBS?

UOB has underperformed the index YTD from mark-down concerns on investment securities. These are balance sheet charges, while we believe the more critical issue for the sector is NPLs and P&L credit charges. With unseasoned loans nearly half that of peers and the slowest loan growth during the bull years, the potential for a negative surprise on asset quality is lower for UOB relative to peers. With strong capital and a liquid balance sheet, UOB remains our top-pick. For traders, we recommend a switch from DBS to UOB as the PB differential here is reverting to mean.

Amidst emerging market style credit expansion in Singapore where system loans grew 40% between FY06-08, UOB saw a more modest 29% increase. Of the loans during this period 23% of credit was for mortgages in UOB. Compare this with ~40% for construction at OCBC or 12% for manufacturing at DBS. Indeed, unseasoned loans as a percentage of total loans make up just 7% for UOB vs. a sector average of 11%. While NPLs saw the largest QoQ expansion for UOB in 4Q08 this was mostly driven off higher substandard NPLs whereas peers saw higher doubtful NPL classifications.

UOB’s tier-1 ratio of 10.9% is amongst the highest regionally. Management claims there are no plans to raise additional capital. We estimate that NPLs will need to reach 24% before MAS tier-1 minimums are reached. Separately, UOB has one of the most liquid balance sheets regionally (11% cash).

60% of UOB’s available-for-sale securities are corporate bonds and equities (<45% for others). With ~68% of this biased towards financial institutions further mark-to-market charges on equity is a significant concern (FY08 equity contracted by 19% YoY). Another risk is goodwill at nearly one-third of equity for all three banks. We believe the risk here is higher for DBS who bought Dao Heng for 3x PB vs. UOB who purchased OUB for 1.1x PB in 2001.

UOB has been a consistent relative outperformer during past US recessions. With a strong balance sheet and conservative management this should be no different in this cycle, we believe. Separately, the PB premium between UOB and DBS is rapidly approaching historical mean and as a result we expect the short term LONG DBS, SHORT UOB trade to reverse.

Singtel - Winning Aussie NBN could be negative for shareholders

Before the end of this month, the IDA is expected to announce the OpCo award while the Australian government may also announce the NBN winner. An OpCo win will be positive but we believe it is unlikely that SingTel will get the award unless its proposal is superior to the rest in all aspects, while an NBN win for Optus could be negative for shareholders as it may mean a cut in dividends.

We reckon StarHub has a slight edge over M1 as its triple-play model makes it the best implementor, in our view. We would have considered M1 to be the leading contender if not for its lack of a CEO as it needs the OpCo more than the rest (hence should offer the best wholesale ICO rates ~ 45% of selection weighting) and would have needed the least duplication of resources to fulfil the operational separation requirement. There is still a possibility that SingTel could win (we do not rule out multiple OpCos) but unless its proposal is far better than the rest, the probability is lower as it is already the NetCo.

The Aussie government is also aspiring to award the NBN by end-Mar. The project cost is expected to be A$15b, with government aid of A$4.7b. With Telstra out of the picture, Optus is a leading contender. Even though it will be a minority partner, even a 20-30% stake means A$2-3b is needed. As most of SingTel’s cashflow already goes to paying dividends, it may have to raise debt but this could push net debt to EBITDA from 1x now to 1.5x, the highest in the sector. Cutting dividend payout of 45-60% would reduce the debt needed.

The merger between Vodafone and Hutchison (to form VHA) is expected to be completed by mid-2009. Currently with only 4m and 2m mobile subscribers respectively, a merger will create a close rival to Optus (7.6m) and Telstra (9.4m). Given that mobile services are a commodity product, a larger scale will lower unit costs and enable VHA to be more competitive. Optus, whose margins are already below SingTel’s Singapore average, could suffer a further squeeze.

On balance, we are maintaining our Sell call on the back of (1) possible lower dividends if Optus wins the Australian NBN due to the hefty capex commitment involved, and (2) the growing threat of a squeeze on Optus’s mobile business after Hutchison and Vodafone complete their merger (to form VHA) by mid-2009. It is also not a forgone conclusion that IDA will award the OpCo to SingTel. No change to our forecasts and target price of $2.11.

Hyflux - Crystal Clear Choice

Leading environmental company in Asia. Hyflux Ltd (Hyflux) is one of Asia's leading environmental companies, offering integrated waste-water treatment solutions and services using its proprietary membrane technology. Hyflux has its operations and projects mainly in Singapore, China, the Middle East and North Africa (MENA) and India. Based on its FY08 results, Hyflux derived 54% of its revenue from China, 40% from MENA and 6% from Singapore and other regions. Flagship projects in Singapore include the nation's first S$200m desalination plant; in China, they include a 100k m3/day desalination plant in Tianjin; in Algeria, the company is involved in building a S$632m 500k m3/day desalination plant.

Focus on municipal business. Increasingly, Hyflux has also turned its attention to the municipal sector for growth. This comes as no surprise as most major environmental projects are initiated by the public sector. In addition, governments typically use these major projects as means to pump prime their economies during recessions; China has already launched a massive RMB4t aid package to stimulate its economy where a large portion will be spent on environmental protection. However, due to the lower risk associated with these projects, gross margins are typically much lower (as much as 10 percent points less).

Growing order book but lumpy revenue stream. Currently, Hyflux is sitting on an impressive order book of S$1.5b (end 2008), up from the S$1.1b as of end 2007. Going forward, management remains confident that it can continue to grow its order book by some 20% this year. It is also cognizant of the fact that its EPC business, which contributes some S$1.1b to that order book, can be lumpy in terms of revenue recognition, and is thus working to increase its O&M business, which is more stable as it provides recurring revenue over the projects. However, funding for these projects could remain a concern, given the tight credit situation. Fortunately, management is able to alleviate this by adopting an "asset light" strategy where it constantly monetizes its completed projects to finance future projects.

Initiate with BUY and S$2.03 fair value. While the outlook for the water treatment industry has improved, we believe that not all companies will benefit equally - only those with superior technology, proven track record and strong financial position would emerge victorious. We see Hyflux as one of these victors. We initiate coverage on Hyflux with BUY and a DCF-based fair value of S$2.03.

Straits Asia: Stick to fundamental BUY

The long awaited speculation of Straits Asia Resources (SAR) share divestment by its parent has finally concluded but falls below market expectation. Straits Resources (SRL) has agreed to sell 60% of its stake in Straits Bulk (SBI) (which owned 47.1% stake in SAR) to PTT Int’l Coy Ltd (PTT) for US$335mn. Furthermore, PTT will tender the remaining outstanding SAR share for S$0.807/share. Despite lower than expected offer price, we still view that SAR’s fundamental remains firm. As such, we maintain our TP of S$1 and recommend shareholders not to accept the tender offer.

Structure changes. After the acquisition, PTT and SRL will have a 60% and 40% stake in SBI respectively, thus engages in a so-called co-investment. Other than SAR, SBI also owns coal assets in Brunei and Madagascar. Based on the initial agreement, most of the management in SBI will be retained although PTT will put several representatives in both SBI and SAR. Thus, there might be some changes in SAR’s management, but are unlikely to be drastic, in our view.

Operations remain firm. Aside from the structural changes, operational wise, we believe SAR is still on solid ground. The company is eyeing a production volume of 9-10mn tons for FY09 and will expand its total capacity to 19mn tons p.a. Exploration is still ongoing to further strengthen its coal reserves and resources, which currently stands at 112mn tons and 638mn tons respectively.

Remains a BUY. We retained our forecasts for SAR as we view that changes in parent-level structure will not impact the operational activity. We maintain our target price of S$1.00 and recommend shareholders not to accept the tender offer, as the offer price is too low while the outlook for the company remains firm.

SembCorp - Unwarranted cash call jittery

SembCorp Industries (SCI) has officially clarified (in response to a Dow Jones report this morning) that the Company’s request for rights issue at its upcoming Annual General Meeting (AGM) should not be seen as a disclosure that it is currently embarking on a rights issue.

1) A standard request at AGM was misconstrued as immediate fund raising request. SCI clarified that its request to seek mandate from shareholders at its AGM on 20 April 2009 is part of its annual exercise to gain flexibility on fund raising should the needs arise. This is a standard request that is present in all SCI’s AGMs since listing, and is in line with market practice. Indeed, this mandate has been adopted and approved by SCI’s shareholders at all previous AGMs.

2) SCI has room to gear up for its utilities business' acquisitions. We believe that SCI's need for an immediate cash call is low, given that SCI's biggest purchase to-date for its utilities business is UK-based subsidiary, Wilton International. The purchase price for Wilton was 100m British pound, or about S$300m at the point of purchase a few years back.

SCI's net debt (ex-SMM's net cash of S$1.8b) is S$0.2b. SCI's total equity (ex-SMM) is S$1.9b, and assuming that it gears up to a comfortable net gearing of 1x, SCI can theoretically make 5-6 acquisitions equivalent in size to Wilton International. While we can never rule out a pre-emptive cash call entirely in the future should a mammoth acquisition target appears, the chances are low for now.

3) SembCorp Marine's (SMM) now faces lower cash payment re-negotiation risk. The risk of a cash call by SCI's listed marine subsidiary, SMM, is also now lower vs. earlier in the year. As shown in our last two reports on SMM, we have argued for lower cash payment re- negotiation risk on the group’s existing order book, vs. our initial expectation. As the possibility of SMM needing external funds to bolster its already strong balance sheet gets lower, this implies that SCI’s need to raise cash to protect its 61% stake in SMM has also reduced.

SMM updates that its work progress for all rigs is on-schedule, with high cash payment collected to date. The two jackup rigs payment rescheduling with Seadrill should be seen as a one-off event, due to unusually lower cash payment collected, vs. corresponding work-in-progress.

While we believe that immediate cash call risk is lower than earlier in the year, and the price has corrected 4% this morning to S$2.14 (before trading halt), it is still higher than our unchanged fair value of S$2.00 for SCI. Maintain HOLD.

SIA - Demand headwinds increase; load factors weaken across the board

Singapore Airlines (SIA) announced a 7.1ppt yoy decline in passenger load factor to 62% in February 2009 as the 8.5% yoy cut in capacity failed to offset a 17% yoy drop in passenger traffic. All regions recorded declines in passenger load factors, with particular weakness in Europe and the Americas which recorded 10.2ppt and 8.3ppt yoy drops last month. On the cargo front, load factor remained weak at 57%, down 5.5ppt yoy on the back of a 15.2% yoy traffic drop vs. a 7.0% yoy cut in capacity.

Weak traffic stats year-to-date (fiscal March year-end) of 0.5% yoy growth are broadly on track to meet our estimate of a 1.5% yoy decline. However, with only one month remaining in the fiscal year, there may be downside risk to FY09E’s load factors estimated at 78%, given higher capacity growth reported at 4.6% yoy (first eleven months) vs. our estimate of 1.0% yoy growth for FY09E. In our view, downside risk to load factors will put pressure on pricing power going forward, an area which has been relatively resilient for SIA vs. its regional peers. Based on our channelchecks, other regional carriers, including Cathay Pacific, have offeredmajor promotional offers on their key long-haul routes, cutting airfares by as much as 50% from peak levels since mid-Dec. In addition, significant trading down observed in the latest IATA data suggests further pressure on pricing for SIA which derives approximately 40% of its business from premium travel. December statistics show premium traffic down 13.3% yoy, down precipitously from -11.5% yoy in Nov vs. economy traffic down 5.3% in Dec, recovering slightly from a 6.0% decline in Nov.

We maintain our Neutral rating and target price as the traffic decline is largely in line with our expectations. However, pricing pressure going forward suggests potential downside risk to SIA’s earnings. This presents a short-term relative opportunity for carriers such as CX where markets are decidedly bearish and may have already priced in substantial airfare cuts.

Olam - Cashew slowdown offset by market share gains

According to a recent article from Vietnam Business Finance , Vietnam, the world's largest cashew nut exporter, expects a 10% decline in overseas shipments this year because of lower demand amid the global recession. The article cited the president of the Vietnam Cashew Association who indicated that export of the nut, which accounted for 11% of total agricultural exports last year, may reach 150,000 tons in 2009. Orders in February have slid about 50% from a year earlier, and export prices may fall 30% this year. While low-quality cashews account for a large part of the country's crops, customers have ordered mostly high-quality nuts in the first two months of 2009, further damaging sales.

Cashews are one of the 17 primary food raw materials (out of 20 products in its portfolio) and Olam highlights demand for these products are reasonably resilient to recessionary conditions. Cashews are a major product for Olam and is categoried within the Edible Nuts, Spices & Beans segment of their business (13.6% of group sales; 18% of net contribution for 1HFY09A). Cashews account for about 30% of volumes within this segment. Our checks with Olam indicate that Vietnam is experiencing a short crop this year and they think the volume drop could be due to this. In 1H09 (ending Dec 08), Olam's Edible Nuts, Spices and Beans business saw volumes increase 28.8% yoy, revenues up 23% yoy and net contribution up 39.4% yoy. Olam has a global market share of 17% for Cashews and is not affected as they are still gaining market share and volume growth in Vietnam given their diversified sourcing in 15 origins, their own processing operations in key origins and marketing presence across Asia, Oceania, Middle-East, Europe and Americas.

SMRT - Inside track for incessant growth

Key beneficiary of Singapore's LT Master Plan. We believe SMRT, as one of the key public transport operators in Singapore, is well primed for the opportunities created by the Land Transport (LT) Master Plan. Under this new road map, Singapore will see sweeping changes to its entire spectrum of transportation services in the coming years. As it is part of the Land Transport Authority's (LTA) main strategic thrusts to make public transport a choice mode of transport for its population, and rail network the backbone of Singapore's public transport system, we believe SMRT is likely to benefit from the better connectivity and stronger ridership.

Likely to maintain 60% dividend payout ratio. We also see a strong case in SMRT's ability to uphold its profitability and dividend payout going forward. By looking at the time-series trend analysis of its operating costs breakdown, we observe that the electricity and diesel costs have been growing at an accelerated pace over the years, thereby contributing to a larger percentage of the costs. However, with the US real GDP projected to decline by 2.8% in 2009 and the global real GDP to fall by 0.8%, according to EIA, this is likely to keep the domestic consumption for all major fuels and their accompanying prices at low levels. Therefore, while we acknowledge that SMRT is likely to be burdened by higher labour costs following the commencement of the Circle Line, a higher expected ridership, coupled with lower percentage electricity and diesel costs, are likely to enable the group to uphold its profitability and dividend payout.

Initiating with BUY. We like SMRT for its defensive nature, consistently strong dividend payouts and strong operating cash flows. While the group is currently trading at a 18.8% premium to its Singapore-listed land transport peers' current PER, we feel that it is undemanding given its superior earnings margin of 18.7%, ROE of 22.8% and dividend yield of 5.0%. For FY08-12, we expect the group to register an EPS CAGR of 6.6%, thanks to a continued increase in ridership, higher rental and advertising revenue and expanded engineering services. We initiate coverage on SMRT with a BUY rating and S$1.83 fair value, based on two-stage Dividend Discount Model (DDM) valuation methodology. Our fair value implies a 17.3% upside potential and at 16.9x FY10F EPS, which is still slightly lower than 17.4x average PER seen in 2008. Key risks include exposure to volatile energy costs and compliance to performance standards set in its License & Operating Agreement.

S'pore adex still falling but SPH estimates appear in-line

The Nielsen Company ("Nielsen") have released their estimates for Feb 09 Singapore advertising expenditures (adex).

Total estimated February market adex fell 16.2% YoY to S$128m, the fastest YoY rate of decline in five years and the lowest total adex level since Feb 06. However, the newspaper sector performed better than in recent months with the S$55m February newspaper adex just 1% less than in 2008. However, this YoY comparison is slightly distorted by the fact that whereas the 2009 Lunar New Year was in January, in 2008 it was in February (so Feb 08 adex was significantly less than the preceding or succeeding months). Nevertheless, the long-term adex trend is clearly downwards reflecting recent economic trends. For example, cumulative estimated print adex over the last three months was approx S$205m, 13% less than the same 2008 period.

Nielsen estimates imply SPH's advertising revs trending as expected Based on this data, we estimate SPH booked approx S$150m advertising revenues during the Dec 08 to Feb 09 quarter, an approx 16% decline YoY. We therefore expect SPH to have achieved approx S$340m in 1H09 advertising revenues, 11% lower than in 1H08 and representing 49% DB09e. We maintain our forecast that SPH's FY09e advertising revenues will fall 12% YoY especially as these Nielsen estimates suggest that SPH's advertising performance is trending generally as projected.

Clearly advertising revenues are correlated with economic activity and a further deterioration in Singapore's economy could be punitive - an issue to watch closely. But at this stage, advertising appears to be trending in-line with our forecasts and we maintain our estimates and Hold rating.

Singapore Petroleum Company Ltd: Holds promise for the longer term

Established home-grown refiner. Formed in 1969, Singapore Petroleum Company Ltd (SPC) is the only independent oil refiner in Singapore. The group has grown over the years to become an international oil refiner and trader and engages in oil and gas exploration, refining, terminalling and distribution, marketing and trading of crude and refined petroleum products. In FY08, SPC achieved a 26.9% YoY rise in revenue to S$11.1b but incurred a 55.5% fall in net profit to S$229.2m, mainly due to volatile refining margins and inventory write-down due to lower oil prices in 2H08.

At the mercy of volatile refining margins. Being an oil refiner, SPC is greatly affected by swings in refining margins which arise from the interplay of demand and supply for crude oil and refined products. Margins can go into negative territory, as 4Q08 and previous oil shocks have shown. It is beyond SPC's control when that happens, and inventory write-downs have to be taken when crude oil prices fall drastically. However, assuming that oil prices will not fall much further given last year's dramatic drop, the likelihood of another extensive inventory write-down is low. Finally, with Singapore being a swing centre, refineries in Singapore may feel the effects of low product demand even more.

Upstream growth as a form of diversification. SPC ventured into upstream operations in 2000 and has three producing assets out of its portfolio of nine assets. Upstream production is a natural hedge against its exposure to downstream refining and marketing, and assuming that crude oil prices maintain above breakeven levels in this current dismal environment, this would ensure more steady and sustainable earnings for the group.

Initiate with HOLD. We initiate coverage on SPC with a HOLD recommendation and fair value estimate of S$2.45 using sum of the parts valuation. The refining business is valued using 8x FY09F PER, lower than the regional average considering the refinery's lower complexity rating and taking into account that earnings may be relatively more affected in swing-centre Singapore. The E&P business is valued using 7X FY09F PER, similar to the regional average. We will turn buyers of the stock around S$2.20, barring a sudden deterioration in economic environment. Any oil discoveries may be a potential share price catalyst, but the general outlook for the group and the industry is muted for now.

Golden Agri-Resources Ltd: Still no near-term catalyst

Muted CPO outlook. Golden Agri-Resources (GAR), after the recent correction from a high of S$0.34 in early Feb, has been languishing around current levels, mainly due to the lack of short-term catalysts. Being one of the largest palm oil plantation owners around, GAR is more susceptible to fluctuations in crude palm oil (CPO) prices (Exhibit 1). And in the near to medium term, there is likely limited upside for CPO prices, as industry experts expect CPO to trade within a narrow range of MYR1500-2100/ton in 2H09. At the recently concluded 20th Palm and Lauric Oils Conference/ Exhibition 2009 in Kuala Lumpur, these industry experts believe the pressure on CPO prices will come from an increase in output, weaker soybean oil prices and declining demand from countries such as China and India due to the global economic slowdown.

No boost from crude oil. Meanwhile, we also do not expect CPO prices to get any boost from crude oil prices, which are not expected to show any strong recovery due to the still weakening global economy. Although crude oil prices appear to have stabilised around US$40-50/barrel, we note it was mainly due to a cut in supply, rather than a pick up in demand. In any case, CPO prices have actually risen back above crude oil on a per barrel comparison (Exhibit 2). While this shows that there is still underlying support for CPO prices, due to demand as cooking oil, the flip side is that CPO is not cost viable as a fuel replacement without hefty subsidies.

Worst may be over. But we believe that the worst may be over. For one, GAR should benefit from the easing fertiliser prices, although we expect the bulk of the impact to come in 2Q09. And even if CPO prices stagnate (our assumption is US$500/ton), GAR's revenue should still get a boost from the expected 7-10% increase in production. Finally, GAR has also put in measures - both operationally and fiscally - to prepare for what it sees as a challenging year. Key among these will be more prudent spending - GAR expects to cap its capex to US$200m.

Maintain HOLD. Although we do not see any near-term catalysts, we believe that most, if not all, of the negatives have been priced in. Hence we maintain our HOLD rating and S$0.30 fair value (based on an undemanding 6x FY09 PER). We would still be buyers closer to S$0.25.

SMRT limited downside

SMRT, one of new inclusions into the STI basket from 23 March 2009, is also one of the more defensive stocks, and should remain resilient in the medium term even if the overall market continues to underperform. In the short-term, we are still looking for opportunities to buy in on any dips that may occur.

SMRT has shown itself to be a very defensive stock in this current economic crisis – the stock has only suffered a 20% erosion in value as compared to the near-60% loss suffered by the Straits Times Index (STI) since its all time high in Oct ‘07.

In addition, we note that SMRT has managed to maintain its 5-year uptrend line since its all-time low in 2003, despite the general market’s dismal performance over the same period.

Near Term Outlook; Range trading likely

- As the overall market is currently undergoing a technical rebound (which we expect to persist for a while more), more defensive stocks like SMRT may be discarded in favour of more speculative counters.

- Both the price action (candlesticks) and short-term indicators point to more downside bias as well.

- But the inclusion of SMRT as an STI component stock is likely to limit the downside risk.

- As such, we expect the counter to find strong support level at $1.55 (6.5-month downtrend-turned-support line and also recent troughs) before rebounding to test the 100-day MA and upper Bollinger band again at around $1.63.

Medium Term Outlook; Well supported levels with limited downside

- The recent rebounds off the $1.55 level seem to illustrate that it is a strong medium-term support as well.

- Meanwhile, the technical indicators also underline the positive medium-term view.

- The OBV indicator is still on a 5-month uptrend; the MACD indicator tends to cut back up just below the centre line; the RSI also tends to turn up soon after it reaches the oversold level.

- Although SMRT has failed to recapture the 4.5-month uptrend-turned-resistance line recently, we believe that the medium-term downside remains limited as long as the general market continues to underperform.

Support / Resistance Levels

- Should the immediate support at $1.55 (recent lows) be breached, we expect the medium-term support level to hold at $1.42 (Oct ’08 low).

- Any further upside from the $1.63 level will likely meet heavier resistance at $1.67 (Feb ’09 high and 6-month downtrend line), followed by $1.79 (Dec ’08 high).

- The strongest topside cap is likely at S$2.00.

SIA - Collapse in Feb 2009 Traffic Suggests Ugly March Quarter Earnings

SIA at risk of only its second quarterly loss in history — With Feb 2009 passenger traffic falling 17% yoy, and a 7ppt fall in load factor to 70% (vs. Dec 2008 breakeven 73%), SIA will do well to avoid making losses in its key passenger business. Cargo is likely to face further losses, Feb 2009 traffic fell 15% yoy with a load factor of 57% (vs. Dec 2008 breakeven 63%). Yield pressure should mount as fuel surcharges fall and premium traffic weakens, SIA is fuel-hedged at US$131/bbl vs. spot of US$48 suggesting mounting hedging losses (Dec qtr: S$340m). We view that SIA's prior year DPS of S$1 could be under threat. We retain our Sell (3L) rating and S$8.50 target price.

Operating margins may collapse in line with load factor-to-breakeven spread — Historic data shows a close relationship between actual passenger or cargo load factor spreads over breakeven and operating margins (Figures 1- 6). Assuming an improved March passenger load factor of 72-73%, the March quarter spread could plunge to zero, and further cargo losses would mean SIA will have to rely on its subsidiaries to lift group operating profits into the black.

Cutting fleet capacity — SIA recently announced plans to decommission 17 aircraft (total fleet 101) for FY10, reducing capacity by 11%. This is the first such action since SARS in 2003. With c.70% of its operating costs variable, we view this is a necessary cut for SIA to remain viable. Based on 3QFY09 expenses, wages (17%) are the second largest cost component after fuel (43%).

Feb 2009 operating data — Passenger load factor fell 7.1ppt yoy to 69.7% as traffic fell 17% yoy vs. capacity down 8.5% yoy. PLF declined across all regions by 6-10ppts. Cargo load factors fell 5.5ppt to 56.7% as traffic fell 15.2% yoy vs. capacity -7% yoy. The sharpest fall was in Europe (-9.3ppt) as shown on page 8.

NOL - Sell: Valuations Approaching Trough, but No Positive Catalysts

Lay-ups at inflexion – According to AXS-Alphaliner, 1.41mn TEU, or 11.4% of current global containership capacity, stood idle as at 16-Mar-09, +4.4% from 2 weeks ago, suggesting that the rate at which ships are left idle may be at inflexionError! Reference source not found.. More ships in 1,000-3,000 TEU range were idle in the last 2 weeks because their short-term charters expired and were replaced by fewer numbers of larger vessels as liners consolidate and merge services.

But still more lay-ups ahead – Maersk announced on 9-Mar it may lay-up up to 25 mid-sized ships in 2009, on top of 8 idled in Dec-08. Industry-wide, more merged services and route cutbacks, coinciding with progressive deliveries of newbuilds (current orderbook is at 47% of existing fleet; suggest lay-ups will continue, but base effects mean that rate of lay-ups will slow down.

Singapore YTD container throughput -19.7% – Decline is consistent with that in Chinese ports (-18% and -21% YTD at SH and SZ ports respectively). Excluding CNY effects, SG’s Feb-09 yoy decline could have been worse than the reported -19.8%. Poor volume prospects may encourage cold lay-ups and earlier demolitions; downturn should worsen before signs of recovery emerge.

No re-rating catalysts despite trough valuations – NOL shares reached an intra-day low of S$0.85 on 12-Mar-09 but rebounded after NOL quashed speculation of an impending rights issue. Current valuations at 0.46x forward PB is near historical troughs (0.3x in ’98 crisis, 0.4x in ’02 crisis), but we caution against being tempted by cheap valuations – stock is likely to remain range-bound due to lack of positive catalysts. Current stock price is cum-div of 4¢. Maintain Sell.

CapitaCommercial Trust – Attractive yields to prevail, against all odds

CCT’s shareprice has underperformed the market since the beginning of the year, declining by about 25% YTD, versus the STI’s 13% decline and the FSTREI Index’s 23% decline. We believe that the concerns of DPU sustainability and a rights issue in the near future still weigh on the investor’s psyche.

We reiterate that having already locked in 79% of the forecast in gross rental income, CCT’s management is confident of delivering its forecast DPU of 12.34 cents in FY09. This represents a 12.2% growth in the DPU, due largely to the greater contributions from One George Street, Wilkie Edge, as well as positive rental reversions.

Given the severity of the global recession and the new supply of Grade A office space coming onstream from 2010, spot rents and the average occupancy rate for CCT’s portfolio of properties may be affected. We now factor a 20% decline in spot rents in FY10, and office portfolio occupancy rates of 92.5% and 90% respectively for FY10 and FY11. Even so, we still expect FY10 and FY11 DPUs of 12.4 and 12.5 cents respectively.

Unlike CapitaMall Trust, CCT does not have significant CAPEX requirements, having aborted its plans to redevelop Market Street Car Park. As for the $885m-debt maturing in 2010, we reckon that it can be secured against One George Street and 6 Battery Road (combined value of $2.5b) at a 50% LTV, even if their valuations decline by 30% from Dec 08. Hence, we do not foresee the need for CCT to undertake any rights issue in 2009 and 2010.

Despite adopting more stringent assumptions, we think that CCT can still provide attractive DPU yields of 18.0% and above, a hefty 1500 bps spread over the average 10-year government bond yield. We reiterate our BUY recommendation, with a DDM-derived target price of $1.40, assuming a 0% terminal growth rate.

Singapore Airlines - Boeing 777 vulnerable

According to an article in the Business Times, SIA has responded to reports from the British aviation authorities regarding the British Airways B777-200 crash landing at Heathrow in January 2008. British investigators had concluded that there was a “high probability” that the crash was caused by a loss of power on approach to Heathrow after prolonged exposure to abnormally cold conditions affected its fuel delivery system for the Rolls Royce Trent engines.

As the world’s largest operator of 777s, SIA’s fleet could be similarly vulnerable. However, SIA says that its 777s which are powered by the Trent are used on regional flights, where exposure to prolonged cold is rare. Furthermore, 777-300ERs that SIA uses on its longer-haul colder routes were powered by GE engines, which use different fuel flow systems.

SIA’s safety and maintenance track record has been impeccable, and continues to monitor the situation, it says. It also complies with all US Federal Aviation Administration air-worthiness directives. While there have been calls for a component redesign to prevent future incidents, these have not been implemented. If implemented, this could cause some down time for its 58 Trent-powered 777s. We will keep tabs on this development.

SIA releases its February load factors this evening. We expect to see continued softening of passenger demand, in line with January’s statistics of a sharp 6.3 percentage point decline in passenger load factors to 74.1, while cargo loads seemed to have bottomed out at a dismal 54.2. Singapore Airport Terminal Services (SATS) own reporting of February operating data also indicate a slowdown of operations in Changi airport, which is in line with statistics released by Changi Airport. This is also in broadly in line with our expectations.

Venture still fundamentally strong

1Q09 will be a very tough quarter. We recently caught up with Venture Corp (VMS) for a quick update. As with most, if not all, manufacturing companies, 1Q09 is turning out to be a very tough quarter for VMS, given the drastic slowdown in global economy. As a recap, Singapore's NODX (non-oil domestic exports) fell 34.8% YoY in Jan - the most in 22 years - weighed by a sharp 38.4% plunge in electronic exports. And the picture for Feb is not much better - Bloomberg's survey expects NODX to slide 27.5% and electronic exports by 32.0%. Things are also unlikely to improve much in March either, says management, as the end market continues to be very weak.

Uncertainty about HP orders. In any case, we are not too surprised, given that one of its biggest customers - HP - has recently guided for current quarter earnings to come in below estimates. Venture derives as much as 28% of its revenue from Printing and Imaging. And speaking of HP, market has also been swirling with talks that it is looking to revamp its printer supply chain; this follows the PC giant's recent venture with Hon Hai (Foxconn) to set up a PC factory in Turkey. Those said to be affected by the shake up include Cal-Comp, Jabil and VMS. But we understand that the reallocation change likely involves HP's consumer products like inkjet printers - while this would affect VMS' OEM business, its ODM business (mainly industrial printers) should remain largely intact.

Working to contain costs. In light of greater uncertainty and the slower orders, VMS has put several measures to contain costs and improve efficiency. Key among them include reducing non-essential staff by letting contract workers go; stopping over-time and reducing shift schedules; negotiating all contracts like utilities to bring cost down. VMS will also manage its inventory more actively and reduce holding cost. And we believe that its experienced and proven management team will be the differentiating factor in making everything work.

Paring our estimates further. Following the recent developments, we have pared our FY09 estimates for revenue by 1.4% and earnings by 7.0% (assuming a further S$12m MTM loss); FY10 revenue estimate pared by 5.8% and earnings by 6.6%. Based on an unchanged valuation of 8x FY09F PER, our fair value eases from S$6.06 to S$5.64. As we also expect VMS to maintain its generous dividend payout (S$0.50/share this year 11% yield), we retain our BUY rating.

Starhub - Stable free cash flow; potential near-term catalyst if wins OpCo bid

StarHub’s recent 4Q results were better than expected and management guided for “low single digit” revenue growth for 2009 despite the sharp slowdown in Singapore’s economy. We have raised our 09/10/11 earnings forecasts by 4%/4%/2% on the back of higher revenue expectations and increase our 12-m SOTP based TP to S$2.51 (from S$2.45). Although we think that there is risk to StarHub’s revenue growth guidance given macro uncertainties, we are more confident that it will be able to maintain its free cash flow (FCF) to support its S$0.18 (9% curr yield) minimum dividend guidance, due to its low capex and stable margins.

A potential upside risk to StarHub’s FCF would be if it wins the right to build the “OpCo” portion of the National Broadband Network (NBN). The winner should be announced this month. Although building OpCo would increase StarHub’s capex over the next several years, we nevertheless believe it could be a positive catalyst for the stock, as we think the project will be value accretive. Importantly, StarHub’s management has said that it is confident it could still meet the S$0.18 annual dividend even if it is building the OpCo. In the event that StarHub does not win the bid, we do not believe there is meaningful downside risk to the stock, as the market does not appear to have priced in any potential OpCo upside.

StarHub trades at 2009E FCF/equity and FCF/EV yields of 11.7% and 9.6%, respectively, which we view as attractive relative to its regional peers’ yields of 8.7% and 8.5%. Furthermore, we think that downside risk to the share price is limited, as it should be supported by its high dividend yield of 9%. We derive our TP by capitalizing our estimate of StarHub’s 2009E normalized FCF at 13.4x. We maintain our Buy rating (on Conviction list).

CapitaLand – Market leader at a bargain. Maintain BUY

Ahead of the potential plethora of upcoming rights issues, CapitaLand’s is substantially completed, with yesterday being the last day of acceptance or renunciation for the rights shares. The rights shares are expected to start trading from 23 Mar, and we think that the share price should stabilise soon.

During China’s 2009 National People’s Congress Annual Sessions, the government pledged to stabilize the property market and promote a steady and orderly development. Other than building low-rent houses for poor families, few details were given on how the government would reform the broader urban housing system, which would impact on CapitaLand’s exposure in China. We expect more details and initiatives to be announced in the coming months.

CapitaLand has not made any provisions for its residential landbank. We think that its landbank is largely profitable, owing to the relatively low costs of acquisition and declining construction costs. However, we estimate that Urban Suites (former Char Yong Gardens), may have to be written down by about $44m, assuming an ASP of $2,000 psf.

Following the rights issue, CapitaLand is well ahead of its peers in terms of its cash horde of $6bn ($5.3bn if it takes up 60% of CMT rights). It also has access to another $3bn via undrawn short-term debt facilities and the unused portion of its Medium Term Note Programme. We believe that the management would be looking for distressed assets mainly in China.

We are lowering our ASP assumptions by up to 20%, thereby reducing our FY09 and FY10 forecasts by 4.1% and 10.5% respectively. We think that valuations are very attractive for this market leader and we reiterate our BUY recommendation with a target price of $2.70, pegged to a 15%-discount to RNAV.

Keppel - Reduce to Sell; there is even more downward bias

We have revised our SOTP fair value target for Keppel Corp down to S$3.75, from S$4.50. This is to take into account the drop in share prices of the listed companies in its stable, as well as assume a reduced valuation for its Offshore & Marine business. We are also cutting forecasts by about 15-20% across the board, and downgrading to a Sell.

Among listed entities, Keppel Land has seen the sharpest price decline of 14% in the last two weeks for this latest market de-rating. The key concern for Keppel Land is its exposure to the Singapore office property sector, where rental rates are expected to come off. Keppel Land will see some 3.8m square feet of GFA coming onstream from 2010 onwards from the Marina Bay Financial Centre and Ocean Financial Centre.

SPC saw its share price decline by 11% on concerns of the effect of lower crude oil prices, currently at US$44 per barrel. Along with thinner to possibly negative refining margins, SPC is likely to suffer from lower throughput of refined product due to weak end-demand. Depressed crude prices will also eat into its upstream business’ profitability. We are therefore further reducing Keppel’s associate earnings from SPC by 50%.

Regional shipyard valuations are currently at 5.1x forward earnings, versus 8x at the start of the year. We are pegging O&M’s valuations to Sembcorp Marine’s 5.7x FY09 PER, due to the similar nature of its businesses. While O&M’s earnings look secure for the next 2 years on its current orderbook, the outlook from 2011 is less rosy, with an expected cyclical downturn in offshore, underpinned by weak crude oil prices.

We are cutting FY09 forecasts by 15% to S$977.9m, for an 11% YoY contraction, and FY10 by 20% to S$977.1m. We are assuming no sales at Reflections for the next 2 years, and lower earnings at SPC. O&M will also taper off from 2011 onwards. Despite already cutting our target price, there is further downside bias – trough Price to Book ratios applied to all of Keppel’s entities will yield a valuation of just S$3.00.

SPH: Time to buy the daily

Upgrade to Buy. P/B at 1.8x is at lowest point in the last 20 years. Previous lowest P/B was 1.95x, in 1998. Wage cuts savings will mitigate fall in ad revenues. We believe SPH’s share price (-30% since Jan’09) has already factored in the weaker economic outlook. Dividend yield is attractive at >8%. TP: S$2.93 reflects a potential c.34% total returns upside.

Wage cuts savings... SPH will be cutting wages by 2%-10% for 3,000 staff from 1 Apr. The savings from this and profit-related bonuses is an estimated 20% in wage bill for its core operations. Wages account for c.25% of revenue and c.40% of the Group’s costs. We view this as positive for the Group, to help mitigate fall in ad revenues.

Offsets drop in ad revenues. According to data from Nelsen Media Research, advertising revenues (AdEx) for the period from Sep’08 to Jan’09 fell by 10% y-o-y. In Jan, it fell by 25% y-o-y, deteriorating from a 14% y-o-y drop in Dec. We trimmed our ad revenue assumption and assumed a -20% yoy drop, from -15% previously. This offsets our estimated savings from the wage cuts.

Expect a weak 2Q. We expect SPH’s 2Q09 results to be weak on a c.20% fall in ad revenues, coupled with a high newsprint costs. However, we have taken this into account in our estimates. Current newsprint spot price is at c.US$680/mt versus our assumption of US$800 for FY09F.

Outlook priced in, lowest P/B in 20 years. We believe the current shareprice (-30% since Jan’09) has already priced in the weak economic outlook. Valuations are very attractive at 1.8x P/B with a dividend yield of >8%, based on our 20cents DPS assumption.

Upgrade to Buy. Our sum-of-parts derived target price is lowered to $2.93 (from $3.25) as we factor in lower RNAV for Paragon at S$1.69bn (based on a cap rate of 6%). We pegged our newspaper operations at 12x FY09F earnings, a premium to peers’ average, given SPH’s dominant position in Singapore. But, this is still lower than Star Publications’ PER of c.15x.

Olam International Ltd: Gravity-defying growth

Resilient to recession. Olam International Ltd (Olam) has been delivering consistent revenue and earnings growth since its listing in 2005, and growth momentum is expected to sustain despite the global recession. Management has guided for 16% to 20% topline CAGR and 25% to 30% earnings CAGR over the next three years. These goals are achievable, given that demand for food is relatively inelastic and earnings are therefore less vulnerable to the global economic downturn. Olam has already proven its resilience by delivering a 32.9% growth in 1H09 core earnings despite the recent collapse of commodity prices, demonstrating its ability to perform under difficult conditions.

Growth opportunities abound. The global economic turmoil has presented Olam with organic and inorganic growth opportunities. The group has been expanding its market share at the expense of weaker competitors who have been ousted as a result of the credit crunch and economic downturn. At the same time, distressed assets have emerged following the financial meltdown, presenting the group with M&A opportunities. Management has articulated its interest to pursue bite-sized acquisitions, but remains cautious to contain its gearing levels.

But gearing is relatively high. Olam's key weakness, in our view, is its high gearing ratio. It is more heavily geared than its peers, with total debt to equity ratio of 4.67x, substantially higher than its peers, whose gearing ratios range from 0.48x to 1.38x. Even after adjusting for its hedged inventories and receivables, gearing remains above that of its peers'. The group's reliance on debt could pose refinancing risks in the event of a protracted credit crunch. Rising interest costs could also erode profit margins should the group find itself unable to pass on these higher costs to its customers.

Valuations near historical trough; initiate with BUY. The equity market meltdown has brought Olam down to its trough valuations. We see value is emerging at current levels although the volatility could persist in the near term. Olam's key investment merit lies in its resilient earnings growth profile against a climate of earnings contraction. We initiate coverage on the stock with a BUY rating and S$1.37 fair value estimate based on 10x FY10 PER. Key risks include high gearing, counter-party risk, and dilution risk from its convertible bonds.

ST Engineering - Majority of orderbook still very secure

We are turning more cautious on STE’s earnings outlook, in the face of the most challenging economic conditions seen in over two decades. We are therefore tempering our earnings growth forecasts, due to a higher assumption of provisioning for bad debts on some of its contracts.

We have assumed higher risk mainly on contracts with 1) non-sovereign customers, 2) riskier country profiles and 3) non-defence related contracts. We are also factoring in lower earnings from non-orderbook business in the aerospace division, where conditions are still challenging.

We see increased risk is to geographies such as Greater China and the Middle East. Shakier business segments include low-cost airlines and aviation in general. However, these contracts still represent less than 5% of STE’s overall orderbook, and are tempered by STE’s own risk controls.

FY09 earnings are therefore trimmed by 7% to S$480.7m, which implies modest 1.5% growth YoY. FY10 earnings are similarly cut by 7% to S$508.0m. STE’s orderbook stands at S$10.6bn, of which it expects to deliver S$3.6bn for FY09, or about 66% of our turnover projection.

STE continues to trade at some of the highest valuations in the Singapore market. Price to book ratio stands at 4.6x versus the STI’s 2.4x, and FY09 PER stands at 14.0x versus 7.3x for the index. While we believe that premium valuations are justified due to STE’s outstanding track record, any disappointment or underperformance from the company will negatively impact the share price more severely.

STE has re-affirmed it will still pay out 100% of earnings as dividends. However, along with our earnings cut, we are raising our risk-reward threshold by pegging a minimum 6% yield from FY09 projected dividends. This generates a target price of S$2.70, from $3.60 previously. With an upside of 20% and dividend yield of 7.7%, we maintain our Buy call.

Singtel - Trades at a premium to its mark to market valuation

We have refreshed our SingTel earnings estimates, which has led to increases in our EPS for FY09E, FY10E and FY11E of 10.0%, 9.5% and 4.3%. Largely, these increases came from lower estimates of Optus’ depreciation expenses following the decline in the AUD/SGD. We also adjusted our 12- month SOTP price target down from S$2.67 to S$2.43. The biggest contributor to this decline was Bharti, of which we have suspended coverage. Previously, we valued it at our 15-Jan Bharti DCF valuation of Rs847/sh, but we are now valuing it at the 6-Mar closing price of Rs602.15/sh. This contributed S$0.22/sh of the S$0.24/sh fall in our price target. Our Neutral rating on SingTel remains unchanged.

We note that the SingTel share price appears to reflect what we believe is a liquidity premium. If we were to sum the market value of SingTel’s individual businesses, including applying a 6.6x EBITDA multiple to the Singapore operations in-line with StarHub’s (STAR.SI, on Conviction Buy list) current trading multiple, we would get only S$2.42/sh. At S$2.54, the market appears to be pricing in a 5% premium against what might be a reasonable expectation of a holding company discount.

Our 12-month SOTP price target capitalizes our estimates of the Singapore and Australian normalized FCF at a 13.4x multiple. We also use a mixture of market prices and target prices (where available) of SingTel’s associates before applying a 20% holding company discount to these assets.

The biggest risk to our valuation of SingTel would be a further decline in the value of its stake in Bharti. We believe that the resumption of strong growth leading to the perception of increasing value of SingTel’s stake in Telkomsel represents the biggest upside risk. Currency volatility, especially of the INR, AUD and IDR, could have either positive or negative effects.

Singapore Bank - too early, not cheap enough

Large system reliance on foreign banks: As with most aspects of the Singapore economy the provision and availability of foreign capital is critical. The banking system is no different. Foreign banks now provide ~42% or ~S$115bn of system credit. In our opinion, this is not an ideal position in the current global macro setting. The Singapore economy could confront a credit shortage, which could further exacerbate the macro stresses, should the foreign banks retreat/exit and/or scale back commitments due to capital constraints, pro-cyclicality and intensifying risk aversion. The local banks do not have enough capital to fill any credit void, in our opinion.

Complete exit is a S$9bn capital hole: In the unlikely event the foreign banks made a complete exit tomorrow, but for illustrative purposes, the local banking system would need to find ~S$9bn or ~27% of their current market capitalisation to provide the same level of system credit in support of the economy. We believe a large reduction in foreign bank balance sheets is foreseeable.

Depressed organic capital generation … dividend cuts look like a certainty: We forecast a 50% reduction in the capital generating capacity of the Singapore banks … i.e. RoRWAs falling from ~150bps to ~75bps. This means, cet par, maintaining current dollar dividends leaves capacity for only 1% RWA growth. A loss position (LLP charges > 240bps loans) would likely trigger capital action depending on the severity of the loss, the degree of pro-cyclicality (hard to forecast) and the extent of buffer erosion. Sector core tier one is 10%.

Retain Underweights, despite the Singapore banks being at or just below our target prices (DBS S$7.50, OCBC S$4.00, UOB S$9.00). While we may see a technical bounce, downside to our bear case scenarios (0.7x NTA with losses in FY10e) is still ~30%. We are only in the first of generally three phases to a credit cycle … visibility is poor and the economy appears some way from a bottom in our view. Add the heavy reliance on foreign capital and hence further domestic capital strain. Current valuations – P/NTA of DBS 0.9x, OCBC 1.1x and UOB 1.3x may appear reasonable … but they were 0.7x in the Asian Crisis … too early, not cheap enough.

NOL - Media reports of potential rights issuance weigh on stock price

On March 10, NOL’s share price fell 8% to close at S$0.94 on media reports that the carrier may be planning to raise capital. Reuters suggested that Temasek is considering issuing rights for NOL and other government-linked companies, but stated that no mandate has been issued. After the market closed, NOL announced that it has not entered into any agreements that would require disclosure with the Singapore Stock Exchange. The company also stated that it does not comment on such reports.

Based on our discussions with the company, NOL has over US$1.0bn in undrawn credit facilities at its disposal to fund working capital and its fleet expansion plans, which have been pushed back given the more challenging operating environment. Thus, we assume that the company may not need to raise equity to meet its cash requirements. However, should market conditions deteriorate further, we would not rule out the possibility of equity raising initiatives down the road. Given the uncertainty surrounding the containership market, we would avoid NOL stock until we begin to see further indicators of inflection.

Our 12-month SOTP-based target price of S$0.80 is based on a target fleet multiple of 0.47X, underpinned by an estimated average return on fleet of 7.4% (2009E-10E) and WACC of 11.3%. Maintain Sell.

An unexpected recovery in US would potentially derail our thesis. We also note that the industry is trying to exercise greater capital discipline by plying at slower speeds and anchoring idle containerships. Admittedly, undemanding valuations could limit downside, as well.

Indofood Agri Resources - Take advantage of mispricing

We initiate coverage of integrated palm oil producer Indofood Agri Resources (IndoAgri) with a Buy rating and target price of S$0.75. Following its 2007 acquisition of London Sumatra (Lonsum), the group is now self-sufficient in its CPO requirements, hence benefiting from high upstream margin, while still enjoying major downstream market share in Indonesia. Growth should be fueled by plantation earnings from its young age profile.

Mispriced. IndoAgri is now trading at forward PE of 5.1x, FY09F PBV of 0.6x, and 62% discount to DCF. We believe concerns surrounding the group’s 58% gearing ratio (FY09F) and lack of dividends have been overblown. We see no reason for 25-50% discount in the group’s EV/planted compared to its Indonesian-listed peers.

Size matters. As one of the leading plantation groups in Indonesia, IndoAgri’s current scale and market share are tough to replicate, if not impossible. Its CPO production is forecast to reach 0.8m MT next year –second only to Astra Agro’s 1m MT and higher than Wilmar’s own production of 0.7m MT. The group has a commanding 45% market share in Indonesia’s branded cooking oil market.

Still growing. IndoAgri’s organic expansion in planted area (having expanded by c.40% of planted area in the last 2 years alone) is expected to continue through 2012. This will contribute to double-digit volume growth well through 2015F.

Down-cycle more than priced in. We set our price target based on 7.0x FY10F PE, as we believe plantation stock’s PE valuation remains in a low-cycle. This yields target price of S$0.75, which implies 50% upside from current level.

Dow Jones Says : NOL Considers Minimum US$250M Rights Issue In 1H

Neptune Orient Lines Ltd. is considering a rights issue of more than US$250 million to boost its capital base, two people familiar with the situation said Tuesday.

"It should take place in the first half of this year. They need the money in the current difficult environment," one of those people said.

The container shipper, the world's eighth biggest in terms of capacity, has been suffering from falling freight rates and a dramatic slump in world trade because of the global economic crisis.

According to its 2008 balance sheet, NOL had US$429 million in cash as of end-2008 compared with total liabilities of US$2.94 billion, of which US$467 million comprised short-term loans.

"The first consideration was for a minimum US$250 million rights issue, but it could be much more," a second person said.

NOL posted a fourth quarter net loss of US$149 million, the first loss in six years, compared with a net profit of US$196 million a year earlier. It has also said it will be in the red for all of 2009.

NOL couldn''t be immediately reached for comment.

Jardine Strategic - Hold: Clearly Surviving But Not Thriving

Cutting estimates and target price — Jardine Strategic (JS) reported 2008 underlying net profit up 19% yoy at US$859m, 7% above our estimate but 5% below the Street. Compared to the 40% growth seen in 1H08, the ravages of the downturn are obvious in Mandarin, Jardine Motors and HK Land. We lower our 2009-2010 estimates by 5%-10% and reduce our target price from HK$12 to HK$10 (still apply a 40% discount to NAV). We move our rating to 2M (from 2L), in line with our quant based risk system.

IFRS leads to ugly headline numbers — In what we believe will be a sign of things to come, both JS’s headline earnings (-66% yoy) and book value (- 36% yoy) were hit by negative revaluation of investment property. The revaluation at HK Land fell 13% from June 2008, but is down just 4% from the December 2007 level. Marked to market accounting is likely to hit this sector more significantly throughout 2009.

Stable balance sheet but no catalysts — With gearing across the group ranging from 1%-19%, debt is not an issue. In addition, almost all businesses increased DPS in line with EPS in 2008. However, with a lack of catalysts and falling earnings due to lower CPO prices, property rentals, hotel rates and other cyclical businesses, we struggle to see a more optimistic scenario at this point.

Buybacks to continue — With plenty of cash from the increased dividends, we expect modest group buybacks to continue in 2009. Management has indicated that it will acquire the usual additional 1% in HKL over 2009, which could lead to the group consolidating HKL in 2009, and would lead to a total overhaul of the balance sheet.

Jardine Matheson - Sell: Clearly Surviving But Not Thriving

Cutting estimates and target price — Jardine Matheson (JM) reported 2008 underlying net profit up 14% yoy at US$822m, 5% above our estimate but 15% below the Street. Compared to 40% growth seen in 1H08, the ravages of the downturn are obvious in Mandarin, Jardine Motors and HK Land. We lower our 2009-2010 estimates by 10-14% and reduce our target price, in line with our latest NAV, to HK$14.40 (from HK$18.50). We move our rating to 3H (from 3L), in line with our quant based risk system.

IFRS leads to ugly headline numbers — In what we believe will be a sign of things to come, both Jardines’ headline earnings (-64% yoy) and book value (-36% yoy) were hit by negative revaluation of investment property. Therevaluation at HK Land fell 13% from June 2008, but is down just 4% from the December 2007 level. Marked to market accounting is likely to hit this sector more significantly throughout 2009.

Stable balance sheet but no catalysts — With gearing across the group ranging from 1%-19%, debt is not an issue. In addition, almost all businesses increased DPS in line with EPS in 2008. However, with a lack of catalysts and falling earnings due to lower CPO prices, property rentals, hotel rates and other cyclical businesses, we struggle to see a more optimistic scenario at this point.

Buybacks to continue — With plenty of cash from the increased dividends, we expect modest group buybacks to continue in 2009. Management has indicated it will acquire the usual additional 1% in HKL over 2009, which could lead to the group consolidating HKL in 2009, and would lead to a total overhaul of the balance sheet. Consolidated gearing will soon have to incorporate HKL’s debt position and the gearing ratio could rise from 4% to 16%.

Venture - Forecasts slashed but $4.01 should be good support

Venture’s share price pulled back sharply from a results-induced rally last week on rumours that major customer Hewlett Packard could be shaking up its printer supply chain again, a move that could adversely affect the non-ODM side of Venture’s business with HP, as well as recent management feedback that HP’s orders in Jan-Feb to Venture have already fallen by 20-50% across product lines.

There is talk that Hon Hai is taking market share in HP’s printer business away from existingsuppliers such as Calcomp, Flextronics, Venture and Jabil. HP’s printer shipments plunged 33% in 1Q09. While Venture has increased ODM business (enterprise printers) with HP, its non-ODM business (consumer printers) could be hurt by allocation shifts. ODM accounted for 35% of sales in FY08, up from 25% in FY07.

Depending on the product line, HP’s orders have apparently fallen by 20-50% yoy in Jan-Feb in a knee-jerk reaction to disappearing demand that has caused channel inventory to jump. It is still too early to tell if Mar will stabilise. Further, management hinted that while its ODM business with HP is secure, the development cycle could extend longer than expected and there may be less volume benefits in FY09.

We have slashed FY10-11 forecasts by 25% and 19% on the back of HP, but as we do not expect Venture to go into the red, we believe a good support level will be its shareholders’ equity stripped of goodwill and CDO of $4.01.

The bad news still ahead in 1H09 should create volatility in the share price that will allow investors to build trading positions in the stock from time to time. However, we think it is too early to build long-term positions as Venture still trades at a premium to similarly cash-rich peers, even on a net cash-stripped PB basis - a method we believe is more conservative than price-to-earnings or even normal price-to-book.

NOL - Empty boxes make the most noise

We initiate coverage on Neptune Orient Lines (NOL), a Singapore-based shipping company with 74% of 2009E revenues from container shipping and 26% of 2009E revenues from logistics and terminals. Although management has been responsive in reducing capacity, we believe NOL’s container volumes will continue to fall as transpacific (26% of 2009E volumes) and Asia-Europe (15% of 2009E volumes) trading routes continue to decline. We are concerned about the repercussions of slowing Asian economies, which are likely to create weakness in the Intra-Asia/Middle-East (42% of 2009E volumes) routes.

NOL’s January 2009 monthly operating statistics indicate that its average revenue per forty-foot equivalent unit (FEU) was USD2,646, down 9.4% m-m and 11.5% y-y. Transpacific spot freight rates have fallen sharply in recent weeks, so we believe NOL’s freight rates face downward pressure as NOL’s transpacific trading route is due for annual contract negotiations in May. Freight rates for the Asia-Europe trade routes may have bottomed out but we do not expect a significant recovery until 2011, due to the oversupply of vessel tonnage. Similarly, we do not believe Intra-Asia freight rates will rebound sharply in the near term due to excess vessel tonnage from the Asia-Europe trade routes.

NOL has entered into charter agreements for 18 vessels with approximately 100,000 TEUs capacity (21.2% of existing fleet capacity), most of which will be delivered in 2009. These charter agreements were concluded in 2006-07, at the pinnacle of vessel charter rates. We are concerned about the timing of the deliveries and the high rates.

We initiate coverage on NOL with a REDUCE rating and a TP of SGD0.75 (implying 0.4x 2010 P/BV) with the SoTP methodology. We believe the stock price will underperform due to greater than expected losses in 2009 and 2010.

Noble Group - Changing tide - Sell

As a trader of industrial and agricultural raw materials, and a corporate and logistics services provider, Noble Group enjoys a formidable position in global commodity supply-chain management. However, most of its divisions are under pressure as volumes and margins succumb to global headwinds. The stock trades at 13x 09CL PE versus 10x for peers. Our S$0.70 target price is based on DCF and peer valuations, implying 32% downside. We initiate coverage on the stock with a SELL call.

Energy resources and metals make up more than 60% of Noble’s sales. Excess global metal inventories, peaking power demand and a policy shift away from coal towards greener energy sources means the long-term structural demand for these products is under pressure. While we see a silver lining in public pump-priming efforts, this would not be enough to offset weakness in private consumption. Together with weak prices, 2009 earnings should retreat 64% YoY. We believe the Street has yet to fully reflect this in its estimates, hence our below-consensus forecasts.

Biased towards staple commodities, Noble’s agribusiness volume will grow with global consumption in the long term. However, falling prices will squash margins. We expect agriculture gross-profit margins to return to levels seen before the 2008 commodity bubble (from 4.4% per tonne to 3.3% by 2010). Historically, Noble’s logistics profit does not gyrate in sympathy with the Baltic Dry Index (BDI). Hence, we argue that it is not a BDI play and we should not see the recent recovery of the index as a positive price catalyst.

Noble’s debt profile is biased towards long-term non-bank capital-market instruments, significantly reducing its refinancing risks. Also, falling commodity prices and hence lower working-capital requirements to fund inventories would translate into lower interest costs. Nevertheless, group EVA™ will turn negative in the medium term due to contracting earnings and limited capital-management initiatives.

At 13x 09CL PE, Noble is at a 62% premium to its long-term average. It is also trading at a large premium to the peer average of 10x and in line with higher-yielding Singapore mid caps. To reflect Noble’s transformation from a supplier to a producer, we base our target price on a blend of DCF using a 10% WACC and peer valuations, implying 32% downside.

SPH - Alarming dive in Job and classified ads

The average page count for weekend editions of The Straits Times classified ads plunged 22% yoy in 2Q09. According to salary surveys, the job ad volumes in Singapore declined 41% during Sep to Dec of 2008, representing the sharpest decline among the Asian countries. Classified ad revenues, accounting for 1/3 of ad revenues, will continue to be dragged down by the deepening recession.

Display ad volumes have also been observed to decline further in 2Q09, having fallen 4% in 1Q09. Display ad revenues account about 56% of ad revenues. We have entered an unprecedented period of recession, with GDP growth likely to be -5% in 2009. Print ad revenue decline could be more severe than during the previous crises as Internet advertising today has emerged as a cheaper alternative for businesses. Consequently, we cut our FY09F print ad revenue growth forecast to -25% from -20%.

Consequently, we cut our net profit estimates for FY09-10 by 3%, after factoring in lower newsprint charge-out price. Our DPS forecasts, based on a payout ratio of 90%, has been reduced to 21.9 cts and 21.3 cts for FY09-10F, representing yields of 8.7% and 8.5% respectively. However, following the TOP of Sky@Eleven expected in 2010, we see no catalysts to fill the earnings void, and expect DPS to fall back to 16cts (6.5% yield).

With its core business facing unprecedented challenges, including falling readership which may not recover in tandem with the economy, SPH may have to entice shareholders with higher dividend payout. We expect mounting pressure for management to return its hefty $1.2b investment portfolio to shareholders.

We cut our SOTP target price from $4.30 due to the lower DCF valuation of its core media business, and further assuming 20% declines in the value of Paragon and investments. Risks to core business and lack of catalysts after the completion of Sky@Eleven undermine the defensive quality of SPH. However, the implied valuation of its media business (8.2x PER) is at a steep discount to its ten-year trough of 11x. We maintain our Buy recommendation.

Singtel - Recent news flow points to lower risks; reiterate Buy

We reiterate our Buy rating on SingTel following series of positive news flow over the past week that point to improvement in SingTel’s risk profile on the following fronts: (1) Optus NBN risk; (2) Telkomsel earnings; (3) Forex. SingTel’s stub (S’pore + Optus) valuations seem undemanding vs developed peers. Pot’l upside from Bharti, and 5% div. yield vs <3% govt. bond yield adds to the stock’s allure.

Telstra CEO’s announced departure by Jun 30 opens the door for Telstra to re-engage with the govt. on NBN, albeit from a weaker position. Improved odds for Telstra’s re-entry into the NBN discussions augur well for Optus’ capex profile. We expect Optus to support Telstra’s re-entry in talks with the govt. so long as NBN is open access & features structural separation. Our worst-case scenario estimates ~10% hit to SingTel’s valuation if Optus takes on the NBN.

Post easing of the tariff war in Indonesia, there are signs that subscribers are flowing back to incumbents. Recently announced 4Q CY08 revenues point to outperformance from Telkomsel (+12% QoQ) and Indosat (+3%) versus Excelcomindo (-11% QoQ). We expect this trend to continue for next 2 qtrs as balance sheet constraints may keep a check on the competitive environment while upcoming elections may allow for stable regulations esp. on interconnection.

SingTel’s earnings have ~55% exposure to A$, Rupee & Rupiah. These currencies have declined by 6-30% vs S$ over past 2 qtrs. Looking ahead, BAS-ML sees scope for a weaker S$ vs US$. This could cushion the FX hit to SingTel earnings. Our FY10E FX assumptions for SingTel are up to 5% below spot.

Parkway - Healthy franchise at good value

We estimate a value loss of S$279mn from the Novena project. However, we believe this has been priced in. With financing for the project secured, we believe this project will add to Parkway’s franchise value in the longer term.

Parkway remains the dominant private healthcare provider in Singapore and is well-positioned to benefit from the growing demand for private healthcare in Singapore and the region. The group is well-positioned in Malaysia via its 40% interest in Pantai Holdings and has investments in China, India, Brunei and Vietnam. We believe Parkway’s franchise value is built on its track record and strong brand equity, with a scalable business model that allows it to grow its regional footprint via management contracts.

We estimate group gearing will rise to 0.7x by 2011, assuming there is no sale of medical suites. On this conservative scenario, Parkway generates an operating cashflow of S$140mn/year to support this level of gearing.

We derive our price target of S$1.85 based on a sum-of-the-parts valuation, which values the core Singapore operations at S$1.25bn (S$1.08/share). This implies a target P/BV of 1.5x and P/E of 21x, which is below its historical trading average.

DBS - Valuations close to trough levels

Weakness in banking stocks. Banking stocks have taken a severe beating this week. The market capitalisation of the three local banks fell 21%, where about S$11.2b was wiped off since the start of the year (or doubled the combined FY08 net profits of S$5.6b for the three local banks). As the unceasing spate of negative news continues to hit, the rapid deterioration in recent weeks, including dismal economic indicators and comments, are signals that provisions will go up. One key area of concern is the exposure to the SME segment, which could translate into more loan provisioning in the months ahead.

Higher impairment charges in 2009. DBS mentioned recently at the results briefing that it has about S$15b of SME loans in Hong Kong and about S$9b in Singapore. In terms of its loans breakdown, the manufacturing sector accounted for about 12% of total loan, and this could pose an issue in terms of loan defaults and bankruptcies. While some market watchers are expecting the NPL rate to go back to the Asian Financial Crisis high (which was around 8-9%, see Exhibit 1), we believe that it was due to the inclusion of DBS Thai Danu Bank (DTDB) then. DBS's NPLs stood at S$1958m as at end 2008 or a NPL ratio of 1.5%. If it were to reach 8%, this would mean an increase in NPLs of S$8.5b and we think this situation is unlikely although the market seems to have priced in a certain portion as DBS's market cap fell $2.7b YTD.

In 4Q08, the specific allowances for loans amounted to $224m or an annualised 70bp (more than double the 33bp for the full year). Taking into account DBS's core exposure to both the Singapore and Hong Kong markets, we have upped the provisions for FY09 and FY10, lowered other expenses, and fine-tuned some of the income estimates. We are now going for FY09 earnings of S$1328m, with a more than doubling in provisions to S$1386m (up from S$561m previously), as we expect another 2-3 quarters of high provisions to the same tune or higher than what was reported in 4Q08 of S$316m.

Upgrade to BUY. Since our last report, the stock has dropped 14% to S$7.24 (with yesterday's low at S$6.94). At current price level, we are raising our rating to a BUY with fair value estimate of S$8.20 (prev: $8.60) based on same 0.8x book.

Wilmar International - limited upside to target price

Stock has outperformed, downgrade to Neutral: We downgrade Wilmar to Neutral (previously Buy) as it has limited upside potential to our 12-month target price of S$3.15/share following the recent strength in share price, but would likely turn more positive if the stock retraces below S$2.50/share. Longer-term, investors may get more comfortable with Wilmar’s downstream earnings (83% of 2009E) and strong growth prospects, but in the short term investors may still be averse to paying premium multiples.

Dominant player in high-growth agri-segments: In our view, Wilmar should be a core holding for long-term investors as it offers high-quality, high-growth exposure to the palm oil sector given market leadership in its downstream businesses and strong organic growth potential. This is driven by:

1) plantations land bank, which is 4X its current mature area;
2) largest CPO refiner in the world with a 25% global market share;
3) China food and agriculture proxy – Wilmar is the largest oilseed and grain processor (20% market share) and the leading player in the branded cooking oil segment (>50% market share).

Increasing competitive advantage: Typically lower CPO and soybean prices would exert downward pressure on Wilmar’s US$/ton processing and merchandising margins, in our view, but with the credit crisis and commodity price volatility we see significantly reduced competition and this could improve the company’s incumbent competitive advantage.

We maintain our 12-month target price of S$3.15/share, using the same 12X CY2009E P/E multiple as before. This is at the mid-point of the stock’s historical 6X-19X trading range (since listing) and at a 20% premium to the Singapore market average of 10X, which we believe is deserved given its more resilient earnings profile. Longer-term “through-the-cycle” investors should note our DCF-driven SOTP valuation of S$4.80/share.

Upside risk - Sharp rebound in CPO or crude oil prices; earnings surprise from stronger-than-expected downstream margins. Downside risk - Refining/processing margins can be volatile from quarter to quarter. Controlling shareholder Wilmar Holdings Pte Ltd (WHPL) recently announced a share distribution scheme to be completed over the next 18 months which may raise Wilmar’s free float from 13.7% to 24.1% (potentially boosting its MSCI Singapore weighting from 2.1% to 3.7%) but could cause a market overhang (please see our Feb 4, 2009 report on Wilmar titled “Higher free float could boost MSCI weighting, but ST overhang” for more details).

City Developments: No Rights Needed To Ride It Out

CDL net profit of S$581m was slightly below expectations, due to stronger SGD impacting M&C’s contribution when translated to Group level. Balance sheet remains healthy, and a rights issue is not on the cards for now. Final dividend of 7.5 cts/shr. Maintain BUY.

FY08 Slightly Below Expectations. City Dev (CDL) reported FY08 net profit of S$581m on revenue of S$2,945m. This was a 20% and 5% drop yoy respectively. The fall in earnings came primarily from lower contribution from 53.5%-owned M&C, due to consolidation impact from the weaker GBP. This was slightly under our below-consensus expectations, but credible given current economic conditions. CDL declared a dividend of 7.5 cts/shr, same as FY07, though the latter did see 22.5 cts/shr of special dividends.

Balance Sheet Stays Strong. CDL’s balance sheet remains healthy, with gearing unchanged yoy at 48%. Interest cover is at 11x (FY07: 10.5x). As CDL states its investment properties, hotels and interest in CDL HT at cost, its earnings is spared the volatility associated with revaluation of investment properties. If CDL adopted a revaluation policy, gearing would be 32%. Management also said a rights issue is not on the cards for now.

Maintain Buy, TP S$5.62. Good earnings visibility, a proven track record and a healthy balance sheet continue to be the key investment themes for CDL. It remains our top big-cap pick, with its diverse landbank able to take advantage of launch opportunities in the mid/mass market should these present themselves. Our RNAV is S$7.51 (from S$7.94) and we take a steeper 25% discount to RNAV (prev 15%) to account for stronger headwinds facing M&C. BUY, TP S$5.62.

Golden Agri-Resources Ltd: Prudent strategy for 2009

FY08 results slightly disappointing. Golden Agri-Resources (GAR) saw its FY08 revenue rise 59.4% to US$2985.9m (8.6% > our estimate), and while core net profit (excluding bio-asset fair value gains) rose 32.0% to US$376.8m (11% < our full-year figure). GAR did not declare a final dividend (versus 0.5 S cent in 2007) in an effort to conserve cash in these uncertain times. Instead, it plans to reward shareholders with a bonus issue (1 bonus share for every 25 shares held), and it will capitalise US$10.0m to its share premium account. According to management, the bonus issue works out to an equivalent cash dividend of 1.0 S cents/share, assuming investors can sell the bonus shares at S$0.25 each.

Prudence rules in 2009. Going forward, GAR expects the operating environment to remain challenging in 2009, given the still uncertain economic outlook and volatile commodity prices. And on its part, GAR will strive to manage its costs as well as focus its growth on the sale of various palm- based products to selected key regions in China. Other prudent measures include maintaining a strong balance sheet (net gearing just 0.09x) and careful spending. For 2009, GAR expects to cap its capex to US$200m (versus US$244m in 2008), where it will cautiously expand its oil palm plantations (includes building new mills) and add to its downstream processing/refining capacity to support its plantation operations.

Worst may be over. Meanwhile, we believe that the worst may be over. For one, GAR should benefit from the easing fertiliser prices, although we expect the bulk of the impact to come in 2Q09. Secondly, management believes that its CPO production should increase by around 7-10%, aided by its recent new planting as well as easing tree stress (typically lasts about two years). We have correspondingly raised our FY09 revenue estimate by 4.3%. Although CPO prices have been pretty stable around the current levels for some time now and CPO demand has remained fairly stable, we note that the biggest price influence is actually weather and its impact on all the edible oil crops - is probably the hardest to predict.

Maintain HOLD. So barring a strong recovery in crude oil prices and the global economy, we see no pressing need to raise our conservative US$500/ ton CPO assumption yet. Hence we maintain our HOLD rating and S$0.30 fair value (based on an undemanding 6x FY09 PER). We would turn buyers closer to S$0.20.