Mapletree Logistics Trust: A flat, but better than expected, 1Q09

Fairly flat QoQ. Mapletree Logistics Trust (MLT) posted S$53.3m in 1Q09 revenue, up 24.9% YoY, thanks to acquisitions. Revenue was fairly flat on a sequential basis, up only 1.7% QoQ. NPI margin stood at 86.7% for the quarter, slipping from the 87.6% margin achieved a year ago but slightly better than the 86.1% recorded in 4Q08. Distributable income rose 0.7% QoQ and 36.1% YoY to S$28.6m. MLT will pay out 1.47 S cents/unit, down 22.6% YoY (because of an enlarged units base post last year's rights issue) and up 0.7% QoQ. This translates to an annualized yield of 13.1%. The manager reaffirmed its commitment to pay out 100% of distributable income.

But better than expected. 1Q results outperformed our expectations by 5-8% due to our conservative occupancy assumptions for FY09. Our estimates incorporate a fairly bearish 90% portfolio-wide occupancy assumption over FY09-10. MLT's overall occupancy as at 31st March is 98.5%, versus 99.6% as at 31 December. Some pockets of weakness have emerged: Hong Kong occupancy has fallen from 98.2% as at December to 95.8% at March, while China occupancy has fallen from 99.2% to 91.7%.

Note that the China fall is because of problems with one tenant (contributes less than 1% of total revenue). At the same time, other markets like South Korea, Japan and Malaysia are holding at 100% occupancy. This variety in performance explains the small size of the overall dip, and validates the portfolio's advantages of geographical diversification and balance between multi-tenanted and sale-and-leaseback properties.

Refinancing underway. MLT is geared at about 38.3% debt-to-assets. During the quarter, MLT raised some S$105m in new loans to refinance existing debt. As of 31 March, about S$151m in loans will mature this year, and the manager announced significant progress in arranging refinancing. While a US$20m term loan is still being negotiated, MLT has enough committed lines and cash on hand to refinance all 2009 loans.

Valuation achieved. We believe our investment thesis still stands: occupancy will be the key performance driver in the industrial space; but MLT's diversified and high quality portfolio will allow it to deliver reasonably stable income to unitholders over the next two years. MLT has had a good run, up 15.4% since our re-initiation in February. However, we have not seen enough corresponding positive signals for the industrial market. As our fair value estimate of S$0.45 has been achieved, we are downgrading the stock to a HOLD.

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Venture: maintain Buy and introduce VCAM

We believe Venture’s high mix/low volume business model combined with its broad client portfolio has helped improve its gross margins to 20% in 2008 from 16.8% in 2004. Supported by dependable management, diversified customer base and its focus on providing high value-added design services, instead of competing on pricing with other EMS peers, we expect Venture to maintain its operating margin at 6-8% in coming years.

We tracked earnings of Venture’s key customer IBM, which reported lower than expected hardware revenues, while reiterating its 2009 EPS outlook of US$9.20. However, we expect hardware demand to remain challenging throughout the year, given the constrained IT budgets with greater focus on reducing expenses rather than building IT infrastructures.

We maintain our 25% q/q sales decline estimate for Q109, while raising net income estimate to S$33m after downwardly adjusting CDO-related write-offs for 2009. We forecast Q209 revenue/earnings to be stable at S$705m / S$34m.

We revise our 2009E/2010E EPS estimates from S$0.51/0.73 to S$0.61/0.72 factoring the CDO related adjustments and introduce 2011 EPS of S$0.76. We continue to derive our price target using DCF-based methodology but now explicitly forecast long-term valuation drivers with UBS’s VCAM tool.

Keppel Corp - Buy: 1Q09 Net Profit Beat Expectations

1Q09 PATMI 28% of CIRA FY estimate — Keppel reported 1Q09 PATMI of S$285mn, beating our and street expectations of ~S$240mn, on the back of healthy O&M margin expansion YoY and higher contribution from Infrastructure division but offset by weaker results from KepLand and SPC. Net cash of S$174mn and ROE of 22.4% are comforting, but FCF turned negative due to higher working capital and capex. Mgmt is “hopeful” of EPS growth for FY09.

O&M updates — Execution remains solid with 1Q09 EBIT margin improving to 10.4% – the highest since 1Q06 and above mgmt's guided range of 8-10%. However, mgmt concedes order enquiries have declined with no new rig orders since 3Q08, as potential customers face financing challenges. We identify Skeie Drilling (~12% of KEP’s order book) as one of its higher risk customers, but this could be mitigated by Skeie’s recent restructuring plans and KEP’s policy of remaining +FCF for its projects.

Infrastructure boost? – 1Q09 revenue included maiden contribution from Doha North project and better performance by Keppel Merlimau cogen power plant, thereby accounting for larger share (10%) of group profits in 1Q09 vs. 5% in 1Q08. Recent new project wins and synergies in developing townships with KepLand should propel the division to be a more significant profit contributor.

Maintain Buy – We maintain our current estimates but acknowledge there are upside risks given 1Q09 results. Keppel is currently trading at 9.6x FY09E P/E, with FY09E ROE of 21.5%. At current levels, the market is valuing the O&M business at 8.5x FY09E P/E. Maintain Buy/Low Risk.

SembMar - Customer defaults on final payment for semisubmersible

Sembcorp Marine has announced that it has terminated the contract for the recently completed semi-submersible rig, PetroRig I, originally built for PetroMena, as final payment was not made under the construction agreement. In accordance to its rights under the contract, SMM will now proceed to sell the rig in the open market.

The rig is a 6th generation ultra-deepwater semi-submersible rig, capable of operating in 3,000 metres water depth and harsh environment drilling conditions. The contract was originally secured in October 2005 and was valued at US$423m. We understand that the final payment outstanding amounts to around US$200m.

SMM says it is confident that it will be able to sell the rig and to recover all outstanding amounts owed to the shipyard, and that the event will not have any material impact on SMM. We believe that SMM will be able to secure a good price for the rig, as demand for deepwater assets still remains relatively buoyant. We estimate that the rig would be worth around US$550m, in the current market.

We also clarified with SMM that if it is able to secure a better market price for the rig, it will not be entitled to an extraordinary gain – it is only allowed to recover its contract value as well as administrative and legal costs, with the surplus to be returned to bondholders who are financing the rig building.

In addition to this rig, SMM had subsequently undertaken another 2 semisubmersibles newbuild contracts from Petromena, with the same specifications as PetroRig I. These are due to be delivered in September 2009 and January 2010 respectively. The second contract was secured in March 2006, with a value of US$480m, and the third was secured in Jan 2007 for US$524m. However, despite the default on Petrorig I, SMM is obliged to continue construction work on these other 2 projects, as these contracts itself are not in default. Essentially, the non-payment on the first rig by the same customer has no legal bearing on these contracts, as they are considered separate. SMM has already secured a 50% payment for the two rigs, and will be entitled to dispose of these rigs in the same manner as the first rig, in the event of non-payment. We will keep tabs on the progress of these two other rigs.

While this incident demonstrates that SMM has protected itself against payment defaults, the situation still increases the risk burden on SMM, as it is now subject to market pricing of these assets in order to secure payment. This incident reinforces our cautious outlook on the offshore sector. We are maintaining our Hold recommendation on SMM, with a target price of S$2.07.

SMRT: As expected as train arrivals

4Q09 net profit $39m (+8% y-o-y). 4Q net profit of S$38.7m (+13% y-o-y, -6% q-o-q) was in line with expectations. Topline ended at $116.2m, up 4% y-o-y. For full year, revenue and net profit ended at $879m (+10%) and $163m (+9%), respectively. Its MRT, rental and advertising continued to be the main contributors to its operating profit. Bus division was affected by higher diesel costs and maintenance, while losses at Taxi division was due to lower hired out rate and losses on disposals.

Final dividend of 6.0 cents. A final dividend of 6.0 cents was proposed, bringing total dividends to 7.75 cents for the full year. This equates to a payout of 72% of PATMI. Book closure date is 30 Jul 09.

Outlook. Train ridership for FY09 was up 9% to 510.2m rides. We expect ridership to remain relatively firm, albeit growing at a slower pace. We are assuming a 3% and 1% growth for its train and bus ridership in FY10F respectively. Rental should continue to see growth, albeit slower, on higher lettable space. Advertising should be affected by the slower economy.

Maintain Hold, TP: S$1.65. We maintain our Hold recommendation, TP: S$1.65 still based on 14x FY10F PER (mid-trading range). Our forecasts are trimmed slightly by 3-4% largely on a lower ridership growth. We believe the stable operations, relatively resilient business model and a 5% yield should provide support to the share price.

NOL - Sell: March 2009 Operational Update – Volumes Rise, As Expected

Mar-09 data – 2nd consecutive MoM volume uptick of 13% is largely expected but we believe sustainability of volume recovery is uncertain once re-stocking induced improvement in trade runs its course. Outlook on G3 economies continues to be challenging despite recent stimulus & stabilization measures.

Precursors for shipping industry recovery lacking – 1) industry consolidation yet to occur as players focus on survival rather than growth/M&As; 2) shipyard orderbook is still high and dependent on additional funding, while demolitions and order cancellations have been slow. A large-scale coordinated response between shipyards, ship owners, and financiers is necessary to tackle the current shipping crisis. Recent hikes in Asia-EU rates since Feb-09, led by Maersk and followed tacitly by other players, was encouraging as pricing power returned to the industry. But sadly, the effort didn’t gather further momentum.

Refinancing risks – We expect NOL to report peak losses in 1Q09 and cut our estimates further, post management’s recent guidance for 1Q09 loss of US$240mn. We expect lower losses in 2H09 when cost-saving measures take effect. NOL has US$467mn short-term debt due in FY09; with negative operating cash flows this year, debt refinancing may be an option. NOL has ruled out rights issue, but we think it should not be entirely dismissed. Investors could remain wary in light of recent cash calls from other Temasek-linked companies.

Maintain Sell – In light of above concerns, we maintain Sell and keep target price at S$0.90, in line with support PB of 0.5x found in past down cycles, but above trough valuations of 0.4x as we are likely past the quarter of peak losses.

Keppel Land Rights Timetable

Please note these important dates for the Keppel Land Rights issue.

Keppel Land Rights Issue Indicative Timetable

Last day of Cum-Rights Trading: 11 May 2009

First Day of Ex-Rights trading for Rights Issue : 12 May 2009

Books Closure Date: 14 May 2009

Commencement of nil-paid Rights Trading: 19 May 2009

Last Day of nil-paid Rights trading: 27 May 2009

Last day & time (i) for acceptance & payment for Rights shares and (ii) for application & payment of excess Rights: 2 June 2009 at 5pm (at 9.30pm for Electronic applications)

Last date and time for renunciation & payment for Rights Shares: 2 June 2009, 5pm

Expected date of issue of Rights shares: On or around 11 June 2009

Expected date of commencement of trading of Rights shares on SGX: On or around 12 June 2009

CapitaLand: Starting The Year Slowly

1Q09 under expectations. CapitaLand (CapLand) reported an 82.7% YoY plunge (-45.0% QoQ) in 1Q09 PATMI to S$42.9m, which were off our estimates and the Street’s (8.5% and 7.8% of DMG’s and Consensus’ FY09F projections respectively). The subdued performance was largely attributable to a lack of divestment gains, absence of income from monetised assets, weaker operating performance from The Ascott Group and slowing residential sales. Stripping away non-recurring items (i.e. divestment gains, forex and MTM losses from hedging instruments), we estimate core operating income would have eased at a more acceptable 2.1% YoY (-29.0% QoQ)to S$139.8m. CapLand’s Financial Business Unit was the quarter’s star performer, posting a 57.9% YoY (+111.9% QoQ) surge in EBIT to S$29.2m.

China continues to deliver. On top of the 390 transacted units from 1 Jan - 22 Mar 09, CapLand sold another 70 units in China before 1Q09 ended. We note that this healthy take-up trumped the 13 units sold in Singapore, as well as the 348 and 55 units sold in 1Q08 and 4Q08 respectively. With 8,011 unlaunched and launched but unsold units, as well as 2.9m sqm in GFA of residential landbank in China, we believe CapLand should be well-poised to benefit from the country’s improving home-buying sentiments. This would also mitigate the current subdued appetite for domestic mid-prime projects, of which CapLand is highly exposed to. On the Retail front, CapLand’s 28 operational suburban retail malls should continue to chip in resilient cashflows given their product offerings of recession-proof basic necessities.

Contribution from Hospitality and Australand trimmed. In light of the deteriorating global hospitality sector, we are paring down topline contribution from serviced residences by 5 - 10% in FY09F – 10F. We have also reduced Australand’s revenue by a further 15% to reflect management’s forecasts of a 30% decline in FY09F operating profit. FY09F and FY10F EPS thus drop by 6.6 – 24.3% to S$0.09 and S$0.14 respectively. Going forward, we reckon CapLand would be less reliant on asset monetisation to drive earnings given the credit markets’ still-constrained condition. As such, it would be more dependent on recurring income from its Financial Business Unit. This will be supported by maiden contributions from two indigenous residential projects (The Seafront and Orchard Residences), as well as new rental income from ION Orchard beginning Jul 09 and the opening of 10 additional Chinese malls in FY09. Maintain NEUTRAL at S$2.36. CapLand’s share price has corrected back to our previous fair value of S$2.60 following our downgrade to NEUTRAL in the report “1Q09 > Half of 2008” dated 16 Apr 09. While we still view CapLand’s balance sheet strength (net gearing: 0.32x and cash: S$5.5b) and financial flexibility positively, and Australand’s recent S$350m debt refinancing exercise has eliminated any near term cash call, we do not envision any tangible catalysts for the counter at the moment. Our revised fair value of S$2.36, at 30% discount to FY09 base case RNAV of S$3.37 (previously S$3.71), assumes latest market values and revised fair values for its listed entities. Maintain NEUTRAL.

CapitaMall Trust - Buy: Operating Expenses Kept In Check

Annualised DPU largely in line — 1Q09 DPU was 1.97 cents, or 8 cents annualized. CMT will retain S$5.9m (of which $2.6m is from CRCT) of its distributable income in 1Q09. Had it paid 100%, DPU would have been 2.16 cents (annualized DPU: 8.7cents), in line with consensus estimates of 8.9 cents.

Flat revenue, lower operating and financing cost — CMT reported flat revenue qoq for 1QFY09, although its NPI was up 8% as it has been reducing costs aggressively. Operating expenses fell S$6.4m or 13.2% qoq on lower maintenance and marketing expenses. Finance costs also fell 2% as CMT repaid S$150m notes in late Dec 08. Post rights issue, we expect CMT’s finance costs to be significantly lower in the coming three quarters.

Performance of malls — Raffles City registered a 7% qoq decline in revenue, the worst performance amongst the company's mall properties. We think this could be due largely to the weakening office and hotel market. The other malls maintained flat or up 1-2% qoq.

Maintain Buy, reducing TP from S$1.50 to S$1.40 – We cut our DPU estimates by 6-10% due to our lower rental revenue estimates for Raffles City, offset by lower expected operating costs. Our TP falls to $1.40 as a result.

SIA - Potential for negative news is high

We are downgrading Singapore Airlines (SIA) to a Hold recommendation and suspending our price target, on the back of a global slide in travel related stocks as world markets react to the potential effects of the swine flu epidemic. SIA saw its share price plunge by 4.5% in yesterday’s trading, which so far has been less severe than the 15-20% sell-off seen in other travel related stocks in US and Europe.

Latest developments are ominous – Mexico, where the outbreak began, just reported a jump to 149 deaths (of which 26 so far have been confirmed as being directly from swine flu) and there are more signs that the virus can jump repeatedly from human to human. This has also prompted the World Health Organization to raise its pandemic alert level, and world governments are taking concrete steps to contain the fallout, including issuing travel advisories and warnings.

The virus has also quickly spread beyond Mexico. News reports now indicate that there are 40 confirmed cases in the US, 6 in Canada, 1 in Spain and 2 in Scotland. However, in almost all cases outside Mexico, people have been only mildly ill and have made a full recovery, with no reported deaths as yet. Other countries are in the process of testing suspected cases.

While there is yet to be any confirmed cases reported in Asia, the rapid progress of the virus seen so far leads us to believe that this would be inevitable, and this could be a significant negative catalyst for SIA. The knee-jerk reaction would also be for people to avoid air travel in the current uncertainty. At the peak of SARS, SIA’s passenger load factor rapidly fell to around 50% for a period of about 75 days but recovered sharply to over 80% as the scare abated. Current passenger load factors are running just under 70%.

During SARS, SIA traded to a low of 0.7x price to book, versus its current level of 0.8x. Of course, the two events are not necessarily comparable in their severity or impact, with these being early days yet for this latest outbreak. As such, we are not changing our forecasts for SIA, and will advise investors as the situation plays out. However, we are advising investors to avoid the stock for now.

Singapore Petroleum Co: Fuel's off at Jeruk

1Q09 results exceeded both ours and consensus' expectations. Singapore Petroleum Company (SPC) reported 1Q09 PATMI of S$55.5m (-43.7% YoY), exceeding our estimates and the Street's of S$33.6m. SPC's better-than-expected refining margins of US$4.50/bbl (vs. our forecast of US$3.10/bbl) was the quarter's main positive highlight, which led to a turnaround in operating profit of S$118.6m after two quarters of consecutive losses for its downstream activities. The negative drag ? though not unexpected - was the decline in average realisation achieved by SPC as a result of the steep drop in oil prices. This was, however, partially offset by a stronger US$. As such, E&P recorded an operating loss of S$18.2m for the quarter.

All bets off for Jeruk. SPC made a non-cash impairment provision that amounted to S$43.3m for drilling costs incurred from 2003 to 2006 at the Jeruk field. This suggests that the Jeruk discovery, once believed to contain over 170 million barrels of oil resources, would not proceed into oil production.

SPC's current share price implies overly-optimistic refining margin assumptionsof US$4.50/bbl and US$4.60/bbl for FY09 and FY10 respectively, which we opine would be difficult to achieve given the challenging outlook. Due to the lack of catalysts and no improvements in the leading indicators, we keep our forecasts and price target unchanged. As share price has surged 44% since our initiation, we downgrade SPC to NEUTRAL.

CapitaLand - 1Q09 results: In keeping with the narrative, no surprises

1Q09 results weak but expected: CapitaLand’s 1Q09 PATMI of S$42.9 million was above our expectations (and little below consensus) but there was little in the quarterly results announcement that showed deviation from recently flagged trends. Lower revenues (-23% Y/Y) were mainly due to lower development project sales and reduced rental income, whilst headline PATMI fell 83% Y/Y as divestment gains recorded in 1Q08 were not repeated.

Group cash balances at end 1Q09 were S$5.5billion: The group reported net debt to equity ratio of 0.32x as at end Mar-09, and total corporate treasury liquidity of S$7.1 billion (S$4.0 billion in treasurycash balances, S$877 million of short-term debt facilities and the balance in the untapped portion of a Medium Term Note Programme).

China residential development sales momentum picking up towards the end of 1Q09, and this should flow through into 2Q09: Residential development sales in China (in Foshan and Chengdu) have picked up momentum particularly in Mar-09, and this positive pick-up should underpin an improvement in the group’s China revenues.

2Q09 valuations should be the next marker. The group undertakes semi-annual valuations of its investment properties, and 2Q09 results (announced likely in July or early August 09) are likely to be an important marker on the asset value front. Our full year FY09 net earnings estimate includes S$248 million for the group’s share of writedowns to the investment property portfolio.

We maintain our end Dec-09 price target of S$3.30/share, based on a 30% discount to our RNAV estimate of S$4.70/share. Key risks to our rating and target price: (1) prolonged period of depressed risk appetite for Asian real estate, and (2) weaker-than-expected property demand which lowers asset valuations.

DBS - Bad news priced-in

DBS has been trading at a PBV of 0.6-0.9x YTD - a steep discount to its peers that have been trading at above book values. The group’s earnings are relatively more vulnerable in this downturn due to its high-risk exposure to SMEs in Hong Kong, depressing NIMs and its huge trading book comprising $5.8bn in debt and equities. However, we view that the stock’s prolonged discount to peers would have reflected the potential earnings disappointment over the next few quarters.

In fact, the market consensus has already factored in an average 30% yoy decline in FY09 core earnings. Such bearish earnings expectations for FY09 have taken into account high provision charges of $1.2bn on average (a significant 61% surge from FY08), flat loans growth, a more than 10bps-decline in NIM and a 12% yoy dip in fee income. Lower market expectations will minimise earnings downside risks going forward.

The group’s recent $4bn rights issue will boost its CAR from 14% to a pro-forma 16.2% with tier-1 at 12.2% (way above regulatory requirements). As a result, we estimate its excess capital will double to $5.8bn or $2.50 per share. Post-rights, the group has emerged as the Singapore bank with the strongest capital strength that is essential to ride through the downturn and tap on growth opportunities.

The spike in Prime-Hibor spreads in 1Q09 bodes well for the group’s NIM in Hong Kong. The Prime-Hibor spread bounces off its lows in 4Q08 and has widened by 152 bps. This could signal the beginning of a recovery for its Hong Kong business that plunged 90% yoy in 4Q08 when the Prime-Hibor spreads narrowed along with rising provisions and operating costs.

The sharp 11.5% contraction in 1Q09 GDP - the steepest decline since 1976, suggests that the economy is bottoming out. Likewise, we reckon the valuations of the Singapore banks are near their trough valuations. In view of the improved economic outlook, we have turned most positive on DBS in view of its superior capital strength and attractive valuations. Upgrade to BUY at a higher target price of $11 (pegged to 1.1x PBV).

Ascendas REIT - BUY: A Yield of Almost 9%

DPU slightly ahead of consensus — For 4QFY09, A-REIT reported a DPU of 3.23 cents, bring the total DPU for FY09 to 15.18 cents. QoQ, A-REIT grew its rental income by 2% and NPI by 8%. A-REIT wrote down S$115.5m, or 2.5% in asset values, and the average cap rate for its portfolio is approximately 7%.

Portfolio updates — Three properties were completed during the year. Its multi-tenanted portfolio managed an improvement in occupancy in 4QFY09 to 95.6% from 94% a quarter ago. Renewal rental rates continued to grow but at a low rate. However, new demand rental rates for Biz & Science Park and Hi-Tech declined by 12-22% compared to a quarter ago.

Refinancing update – A-REIT will be refinancing its CMBS, due in August 2009, with existing credit facilities. Post refinancing, the average cost of debt would rise from 3.67% to 3.83%, and interest cover would still be a healthy 4.4x. A-REIT has incorporated a S$1bn MTN programme to diversify funding sources and to convert short term borrowings into mid term loans. Its gearing is now 35.5% and 90% of its interest rate exposure has been fixed for 3.4 years.

Maintain BUY, TP at S$2.00 – Operationally, we have raised our NPI to reflect the better than expected performance. However, we have reduced our DPU estimates to reflect the A-REIT change in payment of performance fees in cash rather than in units to minimize gap between EPU and DPU. DPU estimates are lowered by 4-5% and our target price is revised marginally to $2.00 (from $2.01).

Wilmar - Buy: The Preferred Downstream Player

CPO price assumption — We do not expect a sustainable rally in CPO price in 2009 after the recent surge, which has been driven by the decline in Malaysian production and significant reduction in stock levels. We are revising our FY09 CPO price assumption for Wilmar based on our revised sector assumption for 2009 of US$610/t from US$550/t previously.

Raising FY09E earnings, marginal change in target price — Factoring in our upward revision in average CPO price for FY09E, we revise our FY09E earnings forecast up by 3%. Correspondingly, our target price has been tweaked marginally to S$4.33 from S$4.32 previously.

Prefer downstream player — After the recent rally of all plantation names across the region, we recommend investors switch to downstream player Wilmar for its better quality earnings profile. We believe that CPO prices are unlikely to stage big movements from current levels, curbing earnings growth prospects for upstream players.

Reiterate Buy — CY09 P/E of 13.2x is at a 19-34% discount to the Malaysian planters. We believe this valuation gap should narrow given Wilmar’s scale, strong management, emerging market exposure, and relative earnings resilience. It also has a strong balance sheet with net gearing of 0.24x as at FY08. At our target price of S$4.33, Wilmar would trade on a FY09E P/E of 16.8x and FY10E P/E of 15.7x.

SMRT - FY09 results in line, dividend maintained

FY09 results in line, DPS maintained: FY09 earnings came in at $162.7MM (+8.5% Y/Y). A final DPS of 6 cents was declared, bringing full year DPS to 7.75 cents. This is the same as FY08. As a result, payout ratio decreased to 72% from 78%, against a minimum payout ratio of 60%.

MRT ridership grew 8.7% in FY09 against 7.9% in FY08. However, management guided that lower growth should be expected in ridership in FY10. Coupled with the reduction in fares from 1 April onwards, 1Q10 MRT revenue is expected to be lower Y/Y. Circle Line Stage 3 will commence operations in May 2009. Management expects CCL to be loss-making until all the stages are opened from 2010. We estimate CCL to break even only from FY2012 (2H CY2011 onwards).

Buses and taxis ended the year in the red: While full year bus ridership was up 3.9%, the segment ended the year with a $4.5MM operating loss although it turned around with a slight operating profit of $0.8MM in 4Q09. Taxis’ losses deepened to $6.3MM due to lower hired-out rate and disposal losses of taxis. Management expects the performance of the taxi business to recover in FY10.

Risks of losing tenants remains low: Rental revenue and operating profit was up 37% and 39% Y/Y, respectively. Management highlighted that it has not seen pressure on rental rates due to the strong human traffic in its MRT stations in line with ridership growth. Recent rental renewals were in fact at marginally higher rental rates. Tenancy contracts generally last 3 years. However, CCL Stage 3 does not add meaningfully to new lettable space and being all underground stations, CCL will also have relatively less rental space than the above-ground MRT lines.

Maintain Neutral: We trimmed our earnings forecast for FY10/FY11 by 4%/5% as we reduce our ridership growth assumption for MRT from 8% to 7% as well as factored in potentially higher idle rate for SMRT's taxis due to increasing competition from other taxi operators. We also maintain our DCF-based Dec-09 PT of S$1.80.

K-Reit Asia: Cloudy outlook

K-reits results were in line with expectations, with the effect of positive rental reversions offset by declining occupancy, as weak demand for office space amid rising supply dragged on rental rates and DPU performance. Office concerns have been well documented and share price appears to have largely factored in a deteriorating operating environment. While valuation is inexpensive at implied NPI yield of 6.8% and DPU yield of 12.4%, near term catalyst is lacking. Maintain HOLD with TP of $0.80.

1Q09 results in line. Kreit reported a 29% yoy rise in revenue to $14.8m, lifted by positive rental reversions vs a year ago. NPI and distribution income improved 19% and 38% yoy to $10.8m and $15.7m respectively, as the impact of higher property taxes was offset by reduced interest expense following its rights issue. However, quarterly operating performance was eroded by c9% as higher portfolio rents (+5.9% qoq to $8.06psf vs $7.61 psf in 4Q08) was offset by lower occupation of 95.8%. Both Bugis Junction and Prudential Tower saw take up moderating to 88-92%, and higher costs.

Challenging times. Looking ahead, Kreit's strategy is to retain tenants and manage cost efficiently amid difficult market conditions. While its portfolio seems fairly resilient with a long WALE of 5.5 yrs and 28% of its leases on LT structures, maintaining occupancy would remain challenging with new supply coming in over the next 2-3 years. Our assumptions of a 15% vacancy and 50% peak/trough rental declines till 2010/11 translate to an average DPU decline of 3% pa.

No near term visibility. At the current share price, valuation for Kreit is inexpensive with implied NPI yield of 6.8%. However, give the ongoing sector headwinds, we are hard put to find near-term re-rating catalyst and maintain our Hold call with a TP of 0.80.

SGX Upgrade to Buy: Target Price S$8, Passing the Earnings Trough

Based on STI going to 2,400 and 2010E ADT of S$1.68bn — 3Q09 profit of S$55.3m for Singapore Exchange (SGX) may mark its earnings trough for this cycle. On a 12m view of the STI going to 2,400, we raise 2010E average daily turnover (ADT) to S$1.68bn giving an S$8 target price (from S$4.7 on ADT of S$0.92bn), and raise 2009E-11E EPS estimates by 17-42%. Based on these new assumptions and target price we upgrade SGX to Buy from Sell.

Citi's new 12m-STI target 2,400 — Citi Singapore Strategist, Hak Bin Chua, has raised his 12m STI target to 2,400 (1.47x P/B, 0.5x s.d. below the post 1997 mean of 1.65x), viewing the 1Q09 flash GDP estimate of minus 11.5% yoy to be the quarter of worst contraction. Past market cycles suggest the STI "normalizes" toward mean P/B levels as expectations of recovery set in. An STI of 2,400 implies the Singapore market could pass S$530bncapitalization.

High beta play to STI recovery — Despite structural earnings improvements in derivatives/other revenues, SGX's key profit leverage remains equity ADT. It earns an estimated 8.8bps per S$ value of ADT, one of the highest among the global exchanges. Further leverage comes as turnover velocity increases as STI levels rise. Our study of past STI cycles shows that with one exception (post Sept-2001), every STI bull market recovered all (or more) of the prior bear market points loss.

Investment risks — Having rallied >50% in just over a month from its c.S$4 trough, we view SGX as susceptible to near-term price volatility and market corrections. A fundamental medium-term risk would be entry of a competitor exchange, which could materially impact SGX's equity pricing structure.

Ascott Residence Trust - Results below estimates

Ascott Residence Trust (ART) results were slightly below expectations. Decline in RevPAU is more than expected Uncertainty in major operational markets likely to cap share performance. Maintain HOLD with TP of $0.59.

Results slightly below estimates. Gross revenues and NPI declined by 3.7% to S$42.1m and S$19.9m respectively. This was driven by weaker RevPAU in its major operational markets, which fell by 15% to a portfolio average of S$120. Distributable income was 23% lower at S$10.8m, translating to a DPU of 1.77 Scts for the quarter. On a sequential basis, performance was also slightly weaker, with RevPAU registered a 5% decline.

Balance sheet remains healthy with a gearing ratio of 38% and interest cover of 3.4x. Adjusting DPU estimates. We lowered our forward RevPAU estimates to take into account a larger than expected fall in RevPAU for Singapore and China, resulting in a lower FY09-10F DPU estimate of 7.1 Scts and 6.9 Scts.

Maintain HOLD, TP $0.59 While ART’s valuation of 0.3x P/BV is one of the lowest valued S-reits in the sector, uncertainty from its major regional markets is likely to overhang on share price performance in the near term. Maintain HOLD, TP lowered to S$0.59 based on DCF. ART currently offers a FY09-10F DPU yield of 15%.

Frasers Centrepoint Trust - BUY: Resilient Suburban Malls

Strong 2QFY09 Results — FCT reported DPU of 1.86cents in 2QFY09, 6% higher yoy. Adding back the 5% retained this quarter and 1.67cents in 1Q, 1H09 DPU amounted to 3.63cents, about 49% of our and consensus full year estimates. The AEI on Northpoint should be completed in June-2009 and we expect greater contribution in 2HFY09. We believe full year results could outperform current consensus estimates.

Costs Down, NPI Up — Despite the 2% yoy fall in revenue, largely due to the AEI works at Northpoint, FCT still managed a 2% increase in NPI. This was due to an 11% decline in property expenses, largely attributed to lower maintenance fees and other property expenses e.g. advertising fees. Both Causeway Point (+10%) and Anchorpoint (+32%) recorded improvements in their NPIs and are fully-occupied as at March-2009.

Updates on Northpoint AEI — Some 94% of the enhanced Northpoint is either leased or under advance stage of negotiation, with full works expected to be completed by June-2009. Management expects full operation of the mall to start in July-2009 and should boost portfolio’s NPI by 7%.

Maintain Buy, TP $1.00 — We raise our revenue assumptions and lower property expenses but increase the cost of debt for the $80m of short-term debt from FY10 onwards. Our DPU increases by 11-13% for FY09-11E as a result and we raise our target price to $1.00 (from $0.94). Gearing is at 29.7% and interest cover at 4.55x. All acquisitions are delayed and we view there are no concerns on capital raising. We like FCT’s exposure to the resilient suburban malls sector and maintain our BUY (1L) rating.

NOL - Caught in stormy seas

Caution: Stormy seas. Neptune Orient Lines Ltd (NOL) is a global container shipping, terminals and logistics company. It ranks among the Top 10 players in the global container shipping industry. We liken NOL to a sturdy ship that has been caught in a disastrous storm - no doubt it is a sound company helmed by an experienced management team, but macro conditions are working against it and the challenges are expected to persist. The shipping industry is directly exposed to global economic forces. Ongoing recessionary woes have resulted in a severe slump in consumer demand and global trade, hurting carriers across the board, with many predicting losses for the year. The International Monetary Fund (IMF) has recently warned of a protracted global recession, quashing optimism over green shoots of recovery. In its statement, it said that "the downturn is likely to be unusually severe and recovery is expected to be sluggish".

Fragile industry outlook. The weak industry outlook is further exacerbated by excess capacity supply, driving down the already weak freight rates to economically unviable levels. Among NOL's main trade lanes, only the Intra-Asia route remains profitable. The Transpacific route is hovering precariously around its breakeven level, while the Asia-Europe route is chalking up losses. With more tonnage slated for delivery between 2009 and 2011, the industry will continue to struggle with supply overhang, delaying the recovery process.

Expect losses for the next two years. Having incurred a net loss of US$149m in 4Q08, the group expects losses to widen to US$240m in 1Q09 on worsening business operating conditions coupled with a seasonally quiet quarter. Losses are almost a definite for FY09 and even FY10 - we are projecting a US$422.5m loss in FY09 followed by a narrower US$170.2m loss in FY10, implying the absence of dividend payouts.

Management has put in place several cost-reduction initiatives that could result in cost savings of US$550m for the year. We expect these measures to take some pressure off the group's earnings in subsequent quarters. Lacking catalysts. A sustained recovery of the real economy and resumption of trade flows are prerequisites for NOL's revival. For now, the protracted slump will weigh on profitability. We see no near term catalysts for the stock and initiate coverage with a SELL rating and S$0.815 fair value estimate, based on 0.4x FY09F NTA. Risks to our assumptions include a speedier-than-expected global economic recovery and positive macro news flow which could lift sentiment.

Keppel Land announces rights issue to raise S$712.3m

Keppel Land has announced a renounceable 9-for-10 rights issue to raise approximately S$712.3m as part of its long term strategy to maintain an optimal capital structure. Up to 653,462,397 new ordinary shares will be offered at the issue price of S$1.09 per Rights Share. As at 31 March 2009, the net debt-to-equity ratio of the Group was 0.52 and the NTA per Share was S$3.50. After adjusting for the estimated net proceeds of the Rights Issue and the issuance of up to 653,462,397 Rights Shares, the proforma net debt-to-equity ratio of the Group is expected to improve from 0.52 to 0.22 and the NTA per Share is expected to decrease to S$2.35.

The Rights Shares are priced attractively at an Issue Price of S$1.09 that represents a discount of:

(a) 42.0% to the closing price on 23 April 2009 (being the last trading day prior to the date of this announcement) of S$1.88 per Share;

(b) 27.6% to the theoretical ex-rights trading price ("TERP") of S$1.50 per Share

(c) 53.7% to the Company's post-Rights Issue net tangible assets ("NTA") of S$2.35 per Share

Keppel Corporation: Recognition of O& M ’s order book to decelerate

Faster than expected draw down of orderbook in 1Q09. KEP reported a net profit of S$285.3m (+ 9% y-o-y) for 1Q09, forming c. 30% of our full year estimate, on revenue of S$2,978.0m (+35% y-o-y). The Offshore & Marine (O&M) division contributed the lion's share of group earnings (+38% y-o-y), which offsets a 33% y-o-y dip in net profit from the property division. While O&M margins rose to 10.4% (+0.6ppt y-o-y), management declined to commit if it is sustainable going forward, but pointed out that the cost of steel and cables have declined.

Order book draw down should decelerate through the year. Net O&M order book as of end 1Q09 stood at c. S$9.5b, with deliveries up to 2012. We believe that the rate of order book draw down is unsustainable, and expect it to decelerate going forward, resulting in a net order book of c. S$6.9b by end FY09. If current rate of draw down persists, we estimate remaining orders to be less than S$5b by year-end. Y-t-d, KEP has won S$315m of orders vs. our full year new order win assumption of S$3b.

Petrobras expected to award contracts. While management revealed that O&M enquiry levels are down, recent media reports that Petrobras is preparing to issue tenders for up to 8 FPSOs and 7 drillships worth US$15bn "as early as May" bode well for KEP, given its long working relationship with Petrobras.

Keppel Land rights issue. Keppel Land (KPLD) announced a 9-for-10 renounceable rights issue this morning to raise gross proceeds of c. S$712.3m. As KEP is partially underwriting this exercise, its minimum commitment would be c. S$373m(based on 53% stake). KEP's cash balance stood at S$2.1b at end 1Q09, with net cash of S$174.2m.

Maintain FULLY VALUED on KEP. We maintain our FULLY VALUED rating and TP for KEP at S$4.45. At current share price, KEP's implied FY10 PE for its O&M Division is lofty, at close to the peak cycle PE of 18-20x for offshore rig builders. Investors should also be reminded that ex-dividend date for KEP's final dividend of 21.0 Scts is 28 April 2009.

M1 - Decrease in market share

1Q FY2009 results. For 1Q FY2009, M1 reported operating revenue of S$186.4m (-8.6% yoy), profit before tax of S$44.1m (-5.8% yoy) and net profit of S$41.9m (+10.3% yoy).

There are four main revenue segments: telecommunication services, international call services, fixed network services and handset sales. Telecommunication services registered 8.4% decrease in revenue to S$140.3m. Postpaid revenue fell by 9.9% to S$122.6m while prepaid revenue increased by 3.5% to S$17.7m. Moreover, international call services posted 5.0% drop to S$32.0m while handset sales fell by 18.7% to S$13.9m. Fixed network services was a new segment that contributed revenue of S$0.3m.

Operating expenses also decreased to S$141.3m (-9.0% yoy) due to lower handset costs and staff costs. M1 benefitted from the Jobs Credit Scheme, paid lower bonus and hired fewer staff.

Despite the drop in revenue, net profit increased mainly due to the 75.0% decrease in provision for taxation from S$8.8m in 1Q FY2008 to S$2.2m in 1Q FY2009. This was a result of the reduction in corporate tax rate from 18% to 17%.

Profit margin. Net profit margin increased from 18.8% in 4Q FY2008 to 22.5% in 1Q FY2009 due to the tax adjustment. Based on a year-on-year comparison, it rose from 18.6% in 1Q FY2008 for the same reason.

Decrease in market share. M1 saw a decrease in the number of prepaid and postpaid customers from 748,000 and 882,000 in 4Q FY2008 to 740,000 and 879,000 in 1Q FY2009 respectively. Its market share for the prepaid and postpaid segments has also decreased from 24.4% and 27.2% in 4Q FY2008 to 23.9% and 26.8% in 1Q FY2009 respectively. As M1 does not have Pay TV, it is unable to offer bundled services to customers. This is a concern as it is likely to lose market share to SingTel and StarHub.

Outlook for FY2009. M1 expects 2009 to be a challenging year due to the global financial crisis. Despite the economic downturn, it expects operations to remain stable. Moreover, its dividend policy for 2009 is to pay 80% of net profit after tax as dividend.

Maintain Hold with fair value at S$1.67. Based on our valuation using the free cash flow to firm model, the target price is at S$1.67. M1 remains a hold due to its limited focus on the domestic market and the lack of Pay TV services. The dividend yield of M1 is 8.8%.

Parkway: International operations expected to grow

Revenue from Singapore operations lower, but that from International operations higher. Management indicated that for the early part of the year, revenue from its Singapore operations may be lower, attributed to the declining number of visitor arrivals. This decline is likely to be offset by the growth in revenue from its International operations, especially Malaysia. Parkway had expanded the capacity at its Malaysian hospitals and would continue expanding, to meet the growing demand for its services. International operations accounted for 33% of Group revenue in FY08.

Update on the progress of Novena hospital. Piling works are expected to be completed by end Sep 09. The design for the fully single-bedded wards hospital is expected to be completed soon. Construction costs are expected to decline further to about S$400m (initial budget was for S$500m). The Novena hospital is targeted for completion in 2011.

Medical suites to sell for at least S$3,500 psf. The sale of the Novena medical suites will be carried out in phases. Management highlighted that it would prefer to sell its suites for at least S$3,500 psf. While it has not started pre-selling its medical suites, Parkway has received quite a number of enquiries from doctors.

Impact of Medisave liberalisation is minimal. As the only private hospital with a Malaysian arm, Parkway is likely to benefit from the government's recent policy change to allow Medisave to be used for elective treatments overseas. The impact from this policy change is likely to be minimal, as it is usually price-sensitive patients (i.e. these patients are usually not key customers) who would be attracted by it.

We maintain our earnings estimate of S$78.0m for FY09. We have a target price of S$0.92, based on 13x blended forward earnings. Maintain SELL.

KepLand - Buy: Trading at Deep Discount

1Q results — Keppel Land reported 1Q net income of $36.9m, about 15% of our estimates and 20% of consensus. Revenue of $145.7m came in ahead of our estimates while operating profit was in-line, but associate income of $29.3m was lower than expected.

Property trading main driver — Attributable profit for the property trading segment fell 35% yoy due to completion of several projects last year – namely The Seasons in China, Villa Riviera in Vietnam and Park Infinia at Wee Nam in Singapore. Despite the fall, property trading was still the main driver of net income, contributing some 86%. Both property investment and fund management segments managed improvements both on a yoy and qoq basis.

Income from associates — Recognition of profit from Marina Bay Residences and Reflections led to the higher profits from associates. Keppel Land guided that it had recognized $15.6m for the fully sold Marina Bay Residences (48.4% completed) but only $3.7m for the 55%-sold Reflections(22.6% completed) in 1Q09 alone. We expect progressive contribution from both projects over the next 9 months.

Maintain Buy (1L), TP $2.23 — While we remain negative on the office sector, we see value in Keppel Land. The stock is trading at a 44% discount to our 09E RNAV of $3.19 and 1.5 standard deviations from its mean on a 6-month forward basis. Even during the 2003-2004 period when both residential and office sectors were depressed, the stock reverted back to its mean valuation of a 16% discount. Maintain Buy.

OCBC - Key risk is loans growth

Economic outlook unfavorable The Ministry of Trade and Industry announced recently that it expects Singapore’s GDP to contract by 6.0% to 9.0%. According to our PSR economist, we are looking at -7.2% sa. One of the key factors impeding the recovery of Singapore’s economy is the reduction of global trade as WTO estimates that the volume of trade is projected to decline 9% in 2009. As a result, most countries in the region have also seen their exports collapsed as global tradesdwindle. Singapore’s total exports declined 23.7% in March 2009, Japan’s and China’s export registered a contraction of 49.4% and 25.6% respectively in February. This financial crisis is a mood of unwinding 30 years of global excesses and it willbecome clearer that US consumption will no longer be consumer of the first and last resort. This process will impact the bank earnings significantly due to weak demand of loans, lower margins and higher provisions. We trim our earnings by another 5.0% to S$1.45bil and reduce our call rating to sell with target price of $4.61.

Key risk is loans growth Singapore total loans contracted for the 4th time in February to –0.24% mom. Just for the two months of January and February, YTD total loans contracted 0.61%. There were only two occurrences in the last 20 years that we saw loans contract, -2.9% in 1999 and –1% in 2002 and since loans growth is closely tied to the economy, it is probable that loans will contract for the third time since 1999. We are projecting system loans to contract 4%. In fact, we expect loans growth to remain weak in 2010 going into 2011 even as the economy recovers. Borrowers draw down credit lines to tide over liquidity crisis rather than capital expansions and growth. We need to see the economy to resume growth and absorb the loan excesses from 2008 (loans growth of 16.6%) before system loans begin to expand.

Sustainable interest margins to compensate loans contraction OCBC’s efforts in improving margins via innovative saving products are commendable as net interest margins improved significantly from 2.14% to 2.47% in 4Q08. We think products like Mighty Savers deposit schemes are able to secure regular long term, low cost fundings and thus be able to mitigate the effect of lower interest rates in Singapore. Despite 3MSIBOR has been low of 0.675%, we are projecting net interest margins to soften but not deteriorate significantly.

Provisions to remain high The Group provided net allowances of S$447mil for loans and other assets. Although this amount is more than 10 times last year, we note that this was due to successful efforts in loan recoveries, repayments and upgrades in 2007. However, we expect allowances to remain elevated in 2009 through 2010 due to the weak economic conditions. We forecast NPL ratio to rise to 2.0% in 2009 and 2.4% in 2010.

Recommendation As with lower operating profits and higher allowances, we are trimming our 2009 earnings by another 5.0% from S$1.53bil to S$1.45bil and cutting our long term ROE assumption from 10.0% to 9.5%. Accordingly, our target price has been reduced to S$4.61, pegged to 1.02x FY09 NAV as we input the lower ROE and growth assumption in our Gordon growth model. Downgrade to SELL on revised fair value. We think the 42.3% run up within 30 trading days is a little excessive, as economic turnarounds do not happen within such a short span of time.

Capitaland - Massive asset write-down risk; downgrade to REDUCE

Downgrade CapitaLand to REDUCE. As much as we believe in its asset turnover and management of multi-asset classes, it cannot escape an erosion of shareholder value, which is tied to the cyclical property market. This is especially true for CapitaLand, due to potential impairment provisions on land purchased at the peak in 2007, together with asset devaluation risk of its large property investment portfolio.

Although CapitaLand’s direct investment property portfolio shrank due to a SGD3.3b asset divestment in 2008, it is still vulnerable to asset devaluation, largely to its holdings in listed associates such as CCT SP (31.1%-owned), CT SP (29.6%), CRCT SP (26.6%) and ART SP (47%).

The revaluation surplus/deficit is recognised as earnings contribution, according to its stake in the associate. Some revaluation deficits were already registered in its 4Q08 results: CCT (SGD242m), ART (SGD94m) and CRCT (SGD17m). It also recognised a deficit of SGD59m in its direct portfolio in 4Q08 (the first deficit since 4Q05). We believe this trend has just begun, and that a 10% fall in its listed portfolio valuation would result in BV erosion of 4.9%.

Our provision test on its Singapore land bank shows that large absolute provisions amounting to SGD470m are needed. These provisions come from the three land parcels it bought in 2007 – Char Yong Garden, Gilman Heights and Farrer Court. These impairment provisions represent 4.4% of its BV. Further provisions might be required on its sizeable overseas exposure in Australia, Vietnam and China.

With the fast deteriorating valuation across all asset classes, we believe CapitaLand’s large portfolio will not be spared from a massive asset write-down. As a result, we expect a further deterioration to its current BV. We downgrade to REDUCE with a TP of SGD1.88, pegged at a 40% discount to our RNAV estimate of SGD3.13. We prefer City Development and Keppel Land, which have low impairment and asset devaluation risks.

Wilmar - Initiating at Buy: Compelling Agri-Giant in Volatile Times

Prefer this downstream player — After the recent rally of all plantation names across the region, we recommend investors switch to downstream player Wilmar International for a better quality earnings profile. CPO prices are unlikely to stage big movements from current levels, curbing earnings growth prospects for upstream players.

A relatively more resilient earnings profile — Given its size, integrated structure and global market intelligence, the company can react to industry trends faster than its peers. In the last results reporting, Wilmar performed better than other Malaysian plantations companies with downstream businesses. To recap, IOI, KLK and Sime Darby reported losses for their downstream segment, which account for less than 20% of their earnings.

FY10-11E EPS to grow 15-16% — We forecast a 30% fall in FY09E earnings on falling PBT margins due to lower selling prices and processing margins. Earnings should rebound by 15-16% in FY10-FY11E driven mainly by volume growth.

Cheap versus big cap Malaysian planters — We initiate coverage of Wilmar with a Buy/Medium Risk (1M) rating. CY09 P/E of 13.6x is at a 17-32% discount to the Malaysian planters. We believe the valuation gap should narrow given its scale, strong management, emerging market exposure and relative earnings resilience. Strong balance sheet with net gearing of 0.24x. At our target price of S$4.32, Wilmar would trade at FY09E P/E of 17.2x and FY10E P/E of 15.6x.

Singapore Petroleum Co: Mixed result, still cautious on earnings

SPC results

· Net profit was at the low end of our estimate; excluding E&P asset impairment, core profit exceeded our expectation due to reversal of inventory write-down

· Mixed surprises: E&P loss was disappointing, but operating profit from refining jumped unexpectedly despite weaker refining margin

· Earnings forecast and target price are under review pending a conference call with the company, but we maintain a Fully Valued rating because valuation is expensive

Refining margin was within expectation at US$4.5/bbl (down 36%), but refinery utilisation rate was better than expected at 93%. Refining operating profit jumped 45% due to a reversal of inventory write-down from the previous quarter.

The E&P business reported an unexpected operating loss of S$18.2m, which included S$7.8m exploration expenses from Vietnam and Cambodia projects. This implied that break-even cost for E&P might be in the high US$40+, higher than our c.US$40 estimate. Earnings were also dragged down by S$43.3m non-cash impairment charge for the Jeruk project due to high uncertainties under the current oil price environment.

We remain cautious about SPC's earnings outlook for both the refining and E&P units. For refining, the unexpectedly strong profit in 1Q09 should be one-off. Meanwhile, weak oil demand and surplus capacity will remain major threats to refining margins. Our current estimate is being reviewed for a downgrade following the weak E&P results in 1Q09. SPC's share price has surged 52% YTD, outperforming the STI's 6% rise. But at 8.6x 2009 PE, the counter is expensive compared to 2005-09 average PE of 6.5x. Maintain Fully Valued.

MobileOne Ltd: 1Q09 results within expectation

1Q09 results mostly within expectation. MobileOne (M1) reported its 1Q09 results last evening, with revenue down 8.6% YoY and 4.3% QoQ at S$186.4m, meeting 24% of our FY09 forecast. Management noted that this decline was due to a combination of the economic slowdown and higher competition. But due to an improvement in operating expenses (mainly due to lower staff costs), profit before tax declined by a smaller 5.7% YoY and 2.2% QoQ to S$44.1m. Meanwhile, net profit jumped 10.4% YoY and 14.5% QoQ to S$41.9m, or around 29.1% of our full-year estimate, aided by a sharp drop in taxes; this was due to one-off accounting adjustment for the reduction in corporate tax rate from 18% to 17%.

Loses post-paid market share as expected. On the business front, M1 felt both the impact of the economic slowdown - leading to lower roaming revenue - as well as stiffer competition. More importantly, M1 saw a near-12k QoQ drop in subscribers in 1Q09, where its post-paid segment lost nearly 4k subscribers, which reduces its market share from 27.2% to 26.8%; this despite a drop in its monthly churn rate from 1.7% in 4Q08 to 1.6%.

We had previously articulated that M1 faces a slight disadvantage due to its lack of bundling abilities as compared to the other telcos, and this could continue to be a concern until it can become an integrated services provider when the NBN (National Broadband Network) comes online from next year onwards. In the meantime, M1 intends to defend and reverse the decline in its post-paid market share. We expect this to result in higher S&P expenses and reverse the decline in average acquisition and retention costs (See Exhibit 1).

Guides for stable operations for FY09. M1 continues to expect 2009 to remain challenging, mainly due to the economic downturn, but it maintains its guidance of stable operations; management later clarified that the stability will be in terms of profitability (See Exhibit 2), citing continued cost discipline and improvements in operating efficiency. We are leaving our FY09 estimates unchanged (already expecting drops of 2.7% and 4.1% in revenue and earnings, respectively). And against the still uncertain economic backdrop, we like M1 for its defensive and strong free cash flow-generating business, and dividend paying ability (80% payout ratio). We also see M1 as one of the biggest beneficiaries of the NBN initiative. As such, we maintain BUY and S$2.12 fair value.

Singapore Exchange: Too early to call for a recovery

3Q earnings fell as expected. Singapore Exchange Ltd's (SGX) 3Q net earnings of S$55.3m (-46% YoY and -26% QoQ) came in exactly in line with our expectation of S$55.9m. Revenue fell 31% YoY and 18% QoQ to S$119.8m, also in line with our expectation of S$119.2m. There were no surprises in SGX's 3Q performance as there were already indications of weaker quarterly performance. Securities Market revenue plunged 43% YoY and 21% QoQ to S$55.3m. Derivatives Revenue fell 20% YoY and 27% QoQ to S$31.2. Even its Stable Revenue was not spared and fell 3% QoQ to S$33.3m. What was heartening was the drop in operating expenses (- 3% QoQ) and the 9% QoQ decline in total staff costs. However, this was partially offset by higher depreciation expenses. Management has declared a 3Q dividend of 3.5 cents to be paid on 14 May 2009 (note the book closure date is 4 May 2009)

Too early to call for a recovery. Average daily volume on the Securities Market was around 1 bn units in Jan-Mar 2009, but has since picked up during the first two weeks of April to 1.76 bn. Average daily traded value has also improved from S$947 bn to S$1300 bn. However, it is still too early to call for a recovery as uncertainties still loom. While some indicators have shown signs of bottoming-out, our view remains that a sustained economics recovery is necessary for confidence to return to the market. As such, we are unlikely to see a return to the peak volumes seen in mid-2007 any time soon.

Retain FY09 estimates. As the 3Q numbers came in within our expectations, we are retaining our FY09 earnings forecast of S$280.4m or 4Q earnings of S$65.9m (up 19.2% from 3Q). Management outlined that SGX will continue to grow the domestic derivatives (including extended settlement contracts) and the options markets. On the operational side, cost containment will continue to be a key focus. On the business side, corporate activities and capital market exercises remained slow. As the decline in global equity markets has stabilised for now, the outlook is better than 3 months ago and we are also raising our valuation to 20x (to be in line with peers as well as to account for better outlook compared to a quarter ago). Based on this, we are raising our fair value estimate to S$5.60 (previous: S$4.50). We retain our HOLD rating.

CapitaCommercial Trust: Looking beyond the weak office market outlook

Wide tenant base mitigates tenancy risk. Tenancy risk for CCT is well-managed, with a wide base of 540 tenants. CCT's maximum exposure to a single tenant is ~13% of its monthly gross rental income and this comes from RC Hotels. The top ten tenants contribute approximately 50% of monthly gross rental income. Other than RC Hotels and Standard Chartered Bank, the remaining tenants each contribute ≤ 5% of CCT's monthly gross rental income.

Strong landlord-tenant relationship minimizes tenant turnover. CCT has maintained good relationship with its tenants. This is seen from the long term relationship between CCT and some tenants who have stayed with CCT since its establishment. Some tenants, such as Standard Chartered Bank, have also taken up long term lease contracts with CCT. S$282.3m of gross rental locked in for FY09. CCT's income visibility remains very healthy for FY09. At the end of FY08, CCT had already locked in 79% (~S$282.3m) of its forecast gross rental income for FY09. As prime and Grade A office average rents continue to decline, rental upside from lease renewals is expected to decline but the impact is mitigated by the small % of expiring lease in FY09.

An equity fund raising may be needed by 2011. While we do not foresee major issues with the refinancing of borrowings due in FY09 and FY10, chances of an equity fund raising appear to be higher in FY11 with the significant liquidity needs. Total borrowings due for refinancing in FY11 could increase to S$1,006m if convertible bonds holders exercise early redemption option. With the declining valuation of its properties, gearing level is expected to trend upwards and CCT may also have to consider equity fund raising to keep its gearing level in line with the S-REITs sector's gearing level.

Go for the yield and assets; re-initiate with BUY. We advise investors to look beyond the weak office market outlook and focus on the quality of CCT's assets and the DPU yield of CCT over the next 2 years. For FY09 and FY10, we still expect CCT to deliver DPU yields of 12.3% and 10.5%,respectively. Having a strong sponsor in CapitaLand could also providesupport to CCT if there is any need for fund raising. We derive a RNAV estimate of S$1.06 per share for CCT and we peg our fair value estimate at S$1.06, which is at par to its RNAV. We re-initiate coverage on CCT with a BUY rating.

SPH - Managing a downturn

We maintain our Outperform recommendation. Singapore Press Holdings (SPH) reported 2Q09 net profits of S$87m, with core media profits at circa S$62.3m. This was below our expectations. The interim dividend of 7.0 cents was higher than our estimate of 6.0 cents.

Core media revenue in 2Q09 fell 18.8% YoY, below our expectations of a 12% decline. The group has instituted cost-savings measures via staff salary reductions, lower profit share and recruitment freeze. Staff cost is the largest cost component at 40% of total costs, and SPH expects to save 20% of the wage bill from this exercise. The charge-out cost for newsprint (19% of total cost) rose 7.1% QoQ to US$827/tonne. We expect newsprint cost to fall progressively given lower spot prices as well as lower volume usage. We expect advertising revenue to fall 19.8% this year (from -11.5% previously) but only -3.3% next year as we anticipate an economic recovery toward the end of this calendar year.

The group retail rental income is stable, with the remaining residential profits from its Sky@eleven project expected to contribute to earnings until 2010, when the project receives temporary occupation permit. Retail rents could see mild pressure from three malls opening this year along the Orchard Road belt, as we estimate rents to fall about 10-15% YoY in this segment. The group’s investment losses totalled S$34m in 1H09, with the losses mainly in 1Q09 due to mark-to-market losses. We do not anticipate significant losses for the rest of FY09, but we expect overall investment income will be -87% YoY.

FY09 EPS lowered 28% to account for lower ad revenue and investment losses. Advertising revenue expected to fall 19.8% instead of -11.5% this year. Our target price is lowered 8.8% to S$3.83 from S$4.20 as a result of the FY09 earnings downgrades.

12-month price target: S$3.83 based on a Sum of Parts methodology. Catalyst: Weak results expected in 3Q09 but dividend support over the next two years and relatively resilient earnings versus other key sectors are attractions. The group has put in cost-savings measures to navigate through the current weak market conditions. Core media profits are expected to slide 25% this year but recover 16% in FY2010.

CapitaMall Trust - Signs of decline

DPU in line, gross turnover down. 1Q09 results were in line with Street and our expectations. Total distributable income of S$62.6m excludes S$5.9m of revenue which has been retained. 1Q09 DPU of 1.97cts fell 43.4% yoy to form 24% of our forecast for FY09. The yoy decline was due to more units as a result of its rights issue. Gross revenue of S$134.5m was up 11.1% yoy on new contributions from Atrium@Orchard and the completion of asset enhancement initiatives in various malls. Qoq, gross revenue was flat due to a 3.4% qoq decline in gross turnover (all categories affected) as well as a slowdown in reversions.

Reversion rates slowing. While portfolio occupancy had remained stable at 99.5%, reversions showed the first signs of slowing. Based on 125 leases renewed in 1Q09, average rentals grew 1.3% over preceding rates (typically committed three years ago). This represents an annual growth of 0.4%, below the 6-year average annual growth of 3.2%.

Asset enhancement for JEC and Atrium still under review. Plans for the asset enhancement of Jurong Entertainment Centre and Atrium@Orchard are still under review. Subject to market conditions and regulatory approvals, work could start at the end of 2009 for JEC and end of 2010 for Atrium.

No changes to our forecasts; downside risks remain. For the rest of 2009, we expect CMT’s portfolio occupancy to stay rather stable, anchored by its well-located suburban malls. However, with leases accounting for more than 50% of its rental revenue expiring over 2009-10 (21.5% in 2009 and 36.4% in 2010) and possibly worsening unemployment and retail sales, downside risks for rents remain. Maintain Underperform and target price S$0.87, still based on DDM valuation (discount 9.7%).

City Dev CDL - Downgrade to Underperform from Outperform on valuations

Valuations have run ahead. CityDev’s share price has improved substantially from its low in early March. It is now trading at 1.0x CY09 P/BV vs. 0.8x on average during the last plateau in 2003-04. While we continue to like its management and robust balance sheet, we believe valuations now provide little upside.

Large inventory and unbilled presales put CityDev ahead of the curve. Take-up for The Arte has been good with over 90 units sold at ASPs of S$880psf. Margins remain healthy, thanks to its low land cost. We believe CityDev has enough lowcost land bank to meaningfully participate in the current mass-market rally. Cash flows remain strong with management expecting unbilled presales to last till end-FY10. However, its stake in South Beach remains a concern. Including others, we estimate total provisions could exceed S$500m or 7% of total book value.

Resilient commercial book values but little upside in the mid-term. CityDev’s commercial properties are booked at cost and write-downs are unlikely soon. However, with new supply of office space expected in the next three years, commercial rents for its older buildings could face further downward pressure. Anecdotally, we observe that cap rates have risen from 3% in 2007 to 5.8%.

Downgrade to Underperform from Outperform on valuations. We lower our FY09-11 core EPS estimates by 3-26% as we now peg selling prices closer to the last down-cycle in 2003-04. Our end-CY09 RNAV estimate has been lowered from S$7.32 to S$5.92. Our target price, however, has been raised from S$5.90 to S$5.92 as we now peg our target at parity to RNAV (previously 20% discount for further downside potential in selling prices). We believe our estimates adequately capture downside risks in capital values. Downgrade to Underperform from Outperform on valuations.

Ezra Holdings: Tepid 2Q performance

2QFY09 results within expectations. Ezra Holdings (Ezra) released its 2QFY09 results yesterday. Topline increased by 30% YoY but fell 44% QoQ to US$63m. This was largely due to the decline in contribution from Energy Services (from US$39.9m in 1QFY09 to US$6.4m in 2QFY09) as the previous contract with STP Energy had been completed. The breakdown of revenue was Offshore Support Services (US$43.9m), Marine Services (US$12.7m), and Energy Services (US$6.4m). Core operating profit, excluding forex gain, was US$16.1m, an improvement of 58% YoY and QoQ. Going forward, we expect revenue and operating profit to mirror this quarter’s results.

Need to keep an eye on the receivables. Ezra’s collection period gapped up to 271 days on an annualised basis for 1H09 as compared to 127 days in FY08. Management said this was largely due to the revenue mix which resulted in different receivables’ collection periods. In our view, as Ezra moves to managing new or longer gestation projects, it would be important to keep a tight control. As a result, Ezra’s cash conversion cycle increased from 100 days as at end FY08 to 130 days as at 1H09.

Anchored three AHTS chartering contracts. In addition, Ezra announced new and renewal contracts of three AHTS with charter periods of up to two years valued at US$47m. Our back-of-the-envelope calculations suggested that the chartering rate was at an average of US$2.22 per bhp/day. This rate is slightly higher than the guided US$2 per bhp/day, suggesting that there is still demand for Ezra’s higher capacity AHTS.

Maintain Neutral. We are leaving our FY09 and FY10 estimates intact for now. Given Ezra’s exposure to contingent liabilities arising from sale-and-leaseback financing and a fleet comprising of high capacity vessels, we opine Ezra’s greatest risk is a reduction in chartering rates. Our target price is revised up to S$0.72 (from S$0.45 previously) based on revisions to our SOTP valuation. As Ezra share price has risen 61% in the past month, and given that our assumptions remain intact, we do not find further upsides from current levels justifiable by fundamentals.

Singapore Telecom: Clouds fading away

SingTel has underperformed STI by 6% year to date. The good news is that regional currencies have rebounded back and risks due to Aussie National broadband Network (NBN) have subsided. The bad news is that Bharti witnessed its first ever market share decline in March 09. With more positives than negatives, we raise our FY10 earnings forecast by 6% but our numbers are still 3% below consensus. Upgrade to HOLD with revised target price of S$2.75, incorporating higher valuation for regional associates. We would be monitoring Bharti's results and outlook on 30 Apr, for further update on SingTel.

The good news (i) Regional currencies (AUD and IDR) have rebounded back by 8-10% versus SGD in the hope of broader economic recovery, which is inline with our house view of recovery in 2H 2009 (ii) Aussie government decided to build NBN itself, which implies that SingTel dividends are secure, as it does not have to commit funds for NBN, in case it had won the award.

And the bad news (i) Latest data released by Cellular Operator association of India (COAI) shows that Bharti's GSM market share declined for the first time in March 09, from 33.5% in Dec 08 to 32.5% in March 09, as Vodafone, BSNL and Reliance increased their market share (ii) Telkomsel has been gaining market share in Indonesia, but ARPU may weaken in ex-Java region, which account for more than half of its business, due to lower usage.

4Q09 earnings preview We expect SingTel to report net underlying profit of S$826m (-15% yoy, -1.5% qoq) on 14 May 09, lower than consensus' S$887m, due to (i) impact of weak AUD, INR & IDR during the quarter (ii) lower roaming revenue in Singapore. (iii) Bharti faces headwinds due to tariff wars.

Upgrade to HOLD with revised target price of S$2.75. We have replaced market price of associates with target prices to reflect higher risk appetite. We narrowed holding company discount to 5% from 10% previously to reflect lower currency risks.

Ascendas REIT - Ending the year on a good note

FY09 results in line. FY09 distributable income of S$210.9m was up 12.6% yoy. FY09 DPU of 15.18cts was in line with Street and our expectations, forming 97% of our estimate. Full-year revenue of S$396.5m grew strongly by 23% yoy from positive rental reversions in multi-tenanted buildings and stepped increases for single-tenant buildings. Portfolio occupancy as at Mar 09 was 97.8%, down marginally from 98.4% one year ago. However, occupancy of its multi-tenanted buildings improved qoq to 95.3% in Mar 09 from 94% in Dec 08, indicating positive tenant-retention efforts.

Renewal rates still in positive region. AREIT continued to report positive renewal rates (vs. last contracted rates, typically three years ago) for its multi-tenanted properties, with Business and Science Park remaining the strongest at 41.3%. However new take-up vs. the last quarter was mixed: double-digit declines for Business & Science Park, and Hi-Tech sector, but increases for its Light Industrial and Logistics sector. Despite the positive reversions, management stressed that emphasis would be placed on maintaining occupancy, retaining customers and containing operating costs.

Increasingly expensive; downgrade to Neutral from Outperform. We reduce our interest expense assumptions for FY10 from 4.7% to 4.3% as: 1) 90% of its total debt has been hedged, with limited exposure to fluctuating interest rates; and 2) expected all-in cost after Aug 09 refinancing is low at 3.83%. We also reduce our net property income margins from 75% to 73% as we expect development projects completing over the next two years to have lower margins in the first year of operation due to fitting out, and possibly weaker occupancy levels. As a result of our changes, our DPU forecasts for FY10 and FY11 decline by 1-4%.

We also introduce our FY12 DPU forecast of 12.7cts. Our DDM-derived target price (discount 8.7%) decreases correspondingly from S$1.67 to S$1.63. AREIT’s share price has gained 39% since its last low of S$1.06 on 9 Mar 09. Our new target price reflects our view that AREIT will track market performance with 11% upside potential. P/BV at 0.91x looks expensive relative to its industrial peers MLT (0.51x) and CREIT (0.39x). Downgrade to Neutral on valuation grounds.

Sembcorp Marine - Rig order from start-up SeaDragon, increasing order book risk

Sembcorp Marine secured a US$247m semi-submersible drilling rig order from start-up UK-based SeaDragon Offshore. The rig hull, which has been built in a Russian shipyard, will be shipped to Sembcorp Marine’s shipyard by this month, and Sembcorp Marine will complete the topside rig construction by end-2010. The SeaDragon Offshore I semi submersible rig (SDO I “Oban B”) had been chartered to Mexico’s national oil company, Pemex for a period of five years, now delayed vs. the original target starting 1Q10.

According to our industry checks, Tees Alliance Group was supposed to construct the topside in Haverton Hill shipyard in Teesside, UK, with the support of international drilling contractor KCA Deutag (part of The Abbot Group). The order by SeaDragon was significant for the UK, as it would have been the first rig to be constructed there after many years. However, despite the consortium completing a quarter of the rig already, industry independent news provider Upstream reported that SeaDragon apparently pulled the contract in favor of Sembcorp Marine after a UK bank withdrew its asset funding. While the market may view the order win favorably, especially given that Sembcorp Marine had none in 1Q, we remain cautious. Little is known about the start-up SeaDragon, other than its rig contract win by Pemex, as well as another rig hull under construction; Bloomberg also reported in early Sep 08 about an aborted sale of SeaDragon to Indian-listed Great Offshore. We are concerned about order quality, as we see potentially higher order book risk with the start-up order win and believe that financing could be an issue.

Retain Sell (on Conv list); our 12m P/B-based TP of S$1 implies 53% downside. Valuation appears rich at 2009E P/BV of 2.9X, vs. historical avg of 2X, trough of 1X, and est. forward 3-year earnings CAGR of -12%. We remain negative, as we see sharply lower new orders this year (forecast US$500m), given weaker industry fundamentals. Key risk: Higher oil prices and new orders.

NOL - 1Q09 profit warning; share price pullback may offer entry level

On April 16, NOL announced that it expects 1Q09 results to show an estimated net loss of US$240mn, which would be comparable to the full-year loss for 2009 assumed by consensus per Bloomberg. We havesuggested that consensus estimates were subject to downside risk, and do not think the market should be terribly surprised by the profit warning.

However, given the sharp 53% surge in NOL’s share price over the past month, we would expect investors to take profit on the news, which could present an entry level for investors looking beyond what we think could be the worst quarter in 2009 for the industry. With one of the last remaining negative share price overhangs being digested by the market, we would expect NOL stock and the containership sector to re-rate, as investors anticipate losses to lessen from mid-09 onwards with volumes recovering from dismal levels of 1Q. 1Q09 results release May 16.

Our estimates remain unchanged, as the loss is within our expectations. We estimate a full-year pretax loss of US$394mn for 2009 and assume tax credits of US$90mn to partly mitigate the losses. We have a Neutral rating on the stock, because we believe that most of the negatives are discounted at current valuations, with the stock trading at a 40% discount to its fleet.

Our 12-month SOTP-based target price of S$1.30 is based on a target fleet multiple of 0.53X, underpinned by an estimated average return on fleet of 7.2% (2009E-11E) and WACC of 10.3%. Advise adding on weakness. Upside risk: Cost-cutting initiatives could provide upside earnings surprise. Downside risk: Possible rights issuance.

SIA At Risk of Only Second Quarterly Loss in History as Traffic Dives

March 2009 passenger traffic down 22% yoy — Passenger business dived in March (Feb-2009: -17%), for a March quarter load factor of 71.2%, the lowest since SARS, and 1.5ppts below the December 2008 quarter breakeven of 72.7%. Cargo load factors fell further to 56.5% (vs. Dec-2008 quarter breakeven of 63.4%), suggesting deepening losses. The March quarter breakeven levels have been helped by lower spot fuel prices, but hurt by lower yields from fuel surcharge cuts, promotional packages and weak demand at the front of the plane. We maintain our Sell (3L) rating and S$8.50 target price.

March 2009 operating data — The sharp decline in passenger traffic (- 21.8%) against 9% capacity cuts resulted in passenger load factor falling by 11.3ppt to 69.4%. All regions experienced lower PLF, particularly Europe (- 18.4ppt) and Aus/NZ (-13.0ppt). The cargo load factor dropped 4.3ppt yoy to 58.5% as traffic declined by 18.0% while capacity was reduced by 12.0%.

4QFY09 traffic — For the quarter ending March 2009, passenger traffic fell 15.2% yoy (3QFY09: -1.2%), while PLF declined by 8.2ppt yoy to 71.2%, possibly below breakeven (3QFY09 breakeven: 72.7%). Cargo is likely to suffer higher losses as traffic slumped 16% for the quarter, dragging the load factor down to 56.5% (3QFY09 breakeven: 63.4%).

Operating update — SIA will progressively implement the planned 11% reduction in fleet capacity to try and cut costs, as well as a shorter work week for senior management and pilots. Earnings will be helped by lower tax rates and the job credit scheme. Hedging losses could continue to hurt earnings through Jun-09, as spot prices peaked in Jun-08 (at US$180/bbl). However, book value erosion may taper off if spot prices continue to level off as in recent months.

Singapore Exchange: A prelude to beta play

SGX’s 3QFY09 results were within expectations. Earnings were weak for the quarter due to continued soft trading volume, coupled with a drop in derivatives activities and lower stable income. SGX declared a 3.5cents base dividend, as expected. Volume had picked up strongly for both securities and derivatives in early Apr09. If sustainable, this could be a key re-rating catalyst for SGX. Upgrade to Hold with a target price of S$6.15 based on 17.5x PE, which is equivalent to early mid-cycle PE.

3QFY09 earnings weak, as expected. Net profit was dragged down by all segments, especially securities trading. Average daily trading volume and value fell 11% and 12% q-o-q, respectively. Derivatives activity volume fell 21% q-o-q with reduced trading activity in MSCI Taiwan and CNX Nifty futures. The Nikkei 225 futures product held up the fort. Stable income was lower, mainly due to lower account maintenance and corporate action fees. Meanwhile, operating expenses were stable, as higher depreciation and system maintenance costs were mitigated by lower variable staff costs. We trimmed earnings by 4-7% after revising stable revenue.

Expect a pick up in FY10. Apr09 trading volume surged to 1.7bn, while trading value rose to S$1.3bn (3Q09: 1bn; S$946m). Our expectations of a market recovery in 2010 support our volume and value assumptions for SGX of 1.4bn and S$1.3bn, respectively.

Upgrade to Hold (from Fully Valued), after rolling over our valuation window to FY10F PE. Our target price is raised to S$6.15 based on 17.5x FY10F PE. This is derived based on a correlation relationship with market velocity, similar to our valuation methodology for HKSE. SGX is currently trading at 18x forward PE, which is above the mean PE of 15x since its listing in 2000. Our target PE of 17.5x is equivalent to an early mid-cycle PE. Supporting our call is SGX’s base dividend of 3.5cents per share. Based on 90% payout, FY09F and FY10F DPS should be 26cents and 32 cents, respectively, implying 4-5% dividend yield.

CapitaCommercial Trust (CCT) - Negative outlook on Singapore office

Potential equity raising: We believe CCT will come to the market for equity within the next six months as asset write downs hit the balance sheet. We believe gearing will need to be addressed via equity issuance in order for CCT to secure future financing commitments. As CCT is trading at a large discount to NAV, potential capital raisings will be highly dilutive to valuations and future distributions.

Negative outlook on Singapore office: We continue to see office as the asset class with the greatest downside risk to capital values and rentals. With expectations of demand contraction and massive supply coming onstream, we now expect rentals to decline faster than previously expected and revise our forecast Grade-A office rents to fall to S$8 psf pm, S$5 psf pm and S$4 psf pm in 2009, 2010 and 2011 respectively. About 75% of CCT’s portfolio is exposed to the Singapore office market, with leases representing 14% of its gross income up for renewal in 2009.

Geared up on peak capital values: Our biggest concern for the office REITs is potential asset value write-downs and the implications for gearing. Assuming a 30% asset write down, CCT’s NAV will halve and gearing will increase to 53% from 37%. In addition, CCT has S$1.0bn of debt due for refinancing by 2010.

Better-than-expected renewal rates: CCT’s portfolio is under-rented versus market rents. If the company is able to secure better-than-expected renewal rates, earnings may beat our expectations.

Improvement in global economic outlook: If we see a turnaround in the global economic outlook, demand for office space may pick up and relieve the additional pressure on office rentals and capital values.

SGX 3Q FY09: below expectations

Average securities daily value traded (DVT) continued to fall in 3Q FY09, by 12% q-q to S$0.91bn, while clearing fees fell a sharper-than-anticipated 21% q-q as the positive trend over 2Q in terms of a rising share of higher-margin uncapped trades (ie, those paying full 4bp fee) reversed. We estimate every 10% change in DVT (no change in share of capped trade) moves forecast earnings by 6%.

Derivatives revenues saw a second straight quarter of decline, by 27% q-q (2Q: -7%). Core Nikkei contract (comprising about 50% of total Asian equity derivatives contracts traded) experienced a deep slump over Jan-Feb (exacerbated by short trading months), while the Nifty contract saw a further 36% q-q drop in contracts traded (2Q: -46%) as investor interest in India remained low. However, significant recovery in broad futures trading activity was seen over March (+23% m-m) and continues to build into 4Q. The OTC clearing business via AsiaClear continues to show strong growth but from a small base, with net contribution at a modest S$2mn.

Notwithstanding a weaker-than-expected 3Q performance, SGX is expected to close the financial year on a strong note (securities and derivatives trading improving sharply in April) with the market to be a key beneficiary of improving financial market sentiment and declining risk aversion. In our view, SGX is a quality leverage play with attractive yield.

We derive our PT using a P/E-based method derived from the Gordon Growth model. We estimate cost of equity of 11.5%, market equity risk premium of 6% and stock beta of 1.6x. We derive a fair P/E of 19x, which when applied to FY10F (June year-end) adjusted net profit of S$415mn, gives a fair value of S$8.0bn. On the current share base of 1,072mn shares, this comes to a PT of S$7.40. Risks include another slump in market sentiment, a pickup in regional competition for listings and derivative contracts, and an SGX participant defaulting on its obligations.

CapitaLand - Looks fairly-valued now

Strong recovery in share price. The recent market rally had seen the share price of CapitaLand (CapLand) staging a significant recovery. While the STI has now gained 23.7% after hitting its 52-week closing low of 1,456.95, CapLand has surged 43.6% over the same period. With no catalyst in sight for a sustainable recovery in the property market, we believe that the recent spike in share price is largely sentiment-driven, rather than fundamentally-driven one.

Rights issue completed. Since our last report in February, CapitaLand has completed its Rights issue and with that, it had successfully raised gross proceeds of S$1,835.5m. For CapitaMall Trust's (CMT) Rights issue, CapLand subscribed for a total of 446.1m Rights units and the capital commitment for the subscription amounted to S$365.8m. Upon the completion of its Rights issue and its subscription for CMT's Rights shares, CapLand now has a cash hoard of ~S$5,698.1m and its net gearing has fallen from 0.46x to 0.3x. Focus will now be on the deployment of the funds raised, which could be a potential catalyst to the re-rating of CapLand's shares.

Limited impact on landbank write-down. As the property market continues to deteriorate, we are seeing increasing risks of write-down in landbank, especially those acquired during the later stage of the property upcycle. For CapLand, its acquisition of Char Yong Garden (at S$1,788 psf ppr) and Farrer Court (at ~S$780 psf ppr) could be at risk of write-down. Taking into consideration CapLand's effective stakes in these two acquisitions (50% in Char Yong Gardens and 35% in Farrer Court), CapLand's total exposure is ~S$877m and the exposure on CapLand's book value is limited as these account for ~6.3% of CapLand's book value.

Downgrading to HOLD on valuations; Fair value S$2.51. To reflect the increase in market valuation of its listed REITs and investments, our RNAV estimate of CapLand has now been raised to S$3.06 (previously S$3.00). At current share price of S$2.57, CapLand is trading at price/ book of 0.87x and price/RNAV of 0.84x. We maintain our 30% discount on our valuation of CapLand's development profits and investment properties and no discount for its listed investments. Our fair value of CapLand has now been raised to S$2.51. While fundamentals remain solid, valuation looks rich now. Purely on valuation, we are now downgrading CapLand to HOLD.

Venture Corporation: Navigating well; BUY Price Target : 12-month S$ 6.80

We expect Venture’s 1Q09 operating profit to fall 29% y-o-y to about S$39m on sales of S$633m when the company reports result on 30 April. In line with house view for a 2H recovery, we have re-rated valuation peg to normalized early cycle PER (NECP) of 11.5x, from 9x previously. Consequently, our new TP is S$6.80. Maintain Buy.

Widening 1Q09 revenue q-o-q decline to 30% from 20% previously. Our recent update indicated that Retail Store Solutions and TMI have contracted more than expected while other SBUs are easing within expectations. Venture’s printer business is pretty much intact; industry sources indicated that Foxconn’s projected run has hit some problems. Operating margins are also trending within expectations, thanks to continued cost control and operational efficiency.

Near term visibility is low but forward planning encouraging. In this season of low tides, Venture is careful not to build volume because visibility is only limited to May. However, there appears to be some demand traction in its future build plans although the phase-in is gradual and it is by no means a massive restoration for end demand.

Maintain Buy, revised TP to S$6.80. We have cut FY09 earnings by 11% to account for lower than expected Q1 earnings. Notwithstanding, TP is raised to S$6.80 as we lift valuation peg to 11.5x (NECP) from trough of 9x previously. Our FY09 forecast did not include provision for the remaining S$18.8m of CDO investment because we expect Venture to write back a significant amount when the instrument (host value: S$167.8m) matures in Dec 2009.

Keppel Land - Downside risk to office rents and capital values

Potential capital raising: Given the funding requirements of Keppel Land’s ongoing developments, we believe that the company will need to come back to the market for equity. We estimate that the group will require S$1bn to strengthen its existing balance sheet and fund current investments.

Downside risk to office rents and capital values: Given the expectation of demand contraction and massive supply slated to come onstream, we now expect rentals to decline faster than previously expected and forecast Grade- A office rents to fall to S$8 psf pm, S$5 psf pm and S$4 psf pm in 2009, 2010 and 2011 respectively. On the back of falling forward rentals, we are forecasting capital values to fall to S$1,200psf in 2009 and S$800psf in 2010. In particular, Keppel Land’s key office assets will be completed when supply risk is close to or at its peak.

Deferral of projects: Keppel Land has announced that it will be deferring the construction of Madison Residences. At the full year results management has guided that it was reviewing all current and planned development projects with the intention to delay those which no longer add value under current market conditions.

Office market recovers: If both rents and capital values for the office sector remain strong, Keppel Land would benefit the most, given its extensive exposure to Singapore office sector.

Economic recovery and revival of the property market: If economic conditions improve, the health of the property market is expected to get better too.

Indofood Agri Resources - Valuations attractive versus peers

We are raising our target price for Indofood Agri Resources (IFAR) to S$0.90 from S$0.72 previously on the back of higher sector valuations, The sector has seen a significant re-rating with CPO prices rising by 18% in the past month, and up 67% from its October 2008 low. Firmer CPO prices also gives us impetus to raise our ahead-of-consensus earnings forecast, but we shall defer on this until further validation from its 1Q reporting, scheduled for 29th April.

CPO has traded at an average of Rm. 1,940 per tonne year-to-date, and is ahead of our FY09 assumption of Rm 1,800. On this basis, we had factored in a 35% decline in cooking oil average selling prices. If CPO prices remain firm, this assumption will prove too conservative. IFAR has this year reduced its cooking oil prices by just 10%, and has also absorbed half of a 10% re-instatement of value added tax.

IFAR had indicated in its last briefing that cost of production is likely to come down to around US$230 per tonne, versus US$250 per tonne in FY08, mainly from lower fertilizer and fuel prices. IFAR will be completing its tender for its 2Q fertiliser purchases in the next few weeks, and we expect fertiliser costs to remain low, in line with weak crude oil prices.

IFAR has also indicated that there is no material impact to sales from the Indonesian elections. Furthermore, the trend of migration towards branded cooking oils is still intact, due to the growth of supermarkets. It is also ramping up production on its recently expanded Medan refinery, while its new Jakarta refinery is on track to come on-stream in early 2010.

We are maintaining our FY09 forecast of Rp. 1,071.8b, or an EPS of 10.1cts per share, versus consensus of 8.2cts, with the potential for further upgrades. Our target price is raised to S$0.90, in line with the median of 9.2x for SGX-listed palm oil related companies. We maintain our BUY recommendation.

SMRT - Savings from the Budget & energy costs

SMRT will report FY09 results on 24 Apr. We expect a relatively weak operational quarter in 4Q09 as ridership was weak for both trains and buses. Train and bus ridership in Jan-Feb 2009 rose 1.5% and fell 1.3% yoy respectively, compared to 8-13% growth in the past four quarters for train ridership and 4-6% growth for bus ridership. Our full year profit forecast is $157.7m, suggesting 4Q net profit of $33.7m (-1.5% yoy).

However, there could be upside from 2009 Budget corporate goodies such as the Jobs Credit Scheme (which we have not factored in) as well as savings on energy costs. Specifically, the loss on its diesel fuel hedge should be smaller in 4Q compared to 3Q ($2m loss) as diesel prices likely rose sequentially in 4Q. Energy cost savings should benefit SMRT more in FY10 as the fuel hedge expired at end-Mar while electricity prices are set to fall from Apr onward.

Train and bus ridership fell sharply in Jan 2009, likely due to an unusually high monthly base in the previous year. Overall, the upward trend of the past few years appears to flattening due to the recession but we expect ridership to sustain low single digit growth in FY10, as people will still prefer public transport in bad times and Circle Line Stage 3 should boost ridership once it comes onstream at the end of May.

The Australian media reported last week that SMRT has partnered with Vibrant, a consortium between Veolia and Bombardier that is bidding to operate the Melbourne metropolitan train network. If the bid is successful (outcome reportedly will be known by mid-2009), the services to be supplied by SMRT (rail asset management, customer experience, systems and infrastructure development and business management systems) will be worth A$5m a year.

We expect overseas M&A to be a potential catalyst for SMRT. However, the dealflow so far has been small or delayed (e.g. Shenzhen Zona). At this point, we prefer ComfortDelgro to SMRT.

Keppel - Secured UK infrastructure contract

Awarded to build one of largest waste and renewable energy projects in the UK. Keppel Seghers, the environmental technology division of Keppel Integrated Engineering Limited, has secured an Engineering, Procurement and Construction contract worth GBP 233m (or S$518m) to build an Energy-from-Waste Combined Heat and Power Plant (EFW CHP) to serve the Greater Manchester region in the UK. This EFW CHP plant, expected to be completed in 2012, will boost a capacity to treat up to 420,000 tonnes per year of solid recovered fuel and supply 270,000 MWh of electricity and 500,000 tonnes of steam per year when operating at full capacity.

Deal clinched from Municipal client. The EFW CHP plant is part of a Private Finance Initiative (PFI) waste management project by the Greater Manchester Waste Disposal Authority. We believe this award is positive for Keppel as it opens doors to securing more contracts from Municipal clients (ie. local government/authorities). We see opportunities in Europe as there are currently more than 20 PFI waste management contracts up for tender. Though the current economic downturn may have affected the progress of these highly capital-intensive projects in the short term, we note that the UK government has announced the provision of up to GBP3b of funding for waste PFI contracts that are facing financing difficulties. Securing this contract also signifies the UK government’s acknowledgement of Keppel Seghers’ technological strength, especially in meeting stringent EU environment targets.

Raising TP to S$5.24 (from S$4.55 previously), but recommendation stays at NEUTRAL. We estimate that this contract would only contribute to Keppel’s revenue from FY10 onwards. Thus, we have raised our FY10’s topline by 1% and bottomline by 0.6%. Our recommendation stays at Neutral, with a revision to our target price to S$5.24 (from S$4.55 previously), following adjustments to our sum-of-the-parts valuation:
1. 2.5x P/B FY10 valuation for KOM.
2. DMG’s target prices of S$1.80 for Keppel Land and S$2.95 for SPC
3. 11x P/E FY10 valuation for Infrastructure
4. Market values for Keppel’s listed entities (closing prices as of 9 Apr 09).

SPH - 1H09 impacted by one-offs but core ops generally in line

1H09 impacted by one-offs but core ops trending in line; Hold maintained SPH reported S$160m 1H09 net profit, slightly below DBe (S$180-200m), as 1Q09 investment losses and 2Q09 associate losses impacted. But the core operations are trending in line, with stable rental income and advertising revenue decline within expectations. Management declared a S$0.07/share interim dividend and reiterated commitment to the existing dividend policy. We maintain Hold given our expectations the stable core operations and Sky@eleven will support FY09e yield.

1H09 total operating revs +2.8% YoY, largely supported by Sky@eleven and Paragon rental income. And although 1H09 core print revenues -9% YoY, this did not exceed expectations. For example, while 1H09 ad revenues fell 14% YoY, the S$334m 1H09 ad revenues were in line with DBe (S$340m). 1H09 Sky@eleven revenues (S$91m) were below expectations on slower-than-expected construction progress, but management assured the project is on track for CY2010 completion. We recognize SPH’s FY09e earnings and yield are dependent on Sky@eleven contributions and as such will watch construction progress closely.

1H09 core print opex grew 5.7% YoY as higher newsprint costs and new media investments offset an 8% YoY decline in staff costs (lower bonuses). As such, core print EBITDA margins declined to 28.1% (vs 1H08 36.1% and DBFY09e 29%). Going forward, management is implementing a number of cost controls (e.g. controlled hiring, salary reductions) that should support 2H09 margins.

Despite the general slowdown and various one-offs impacting SPH’s 1H09, the core operations were generally in line and we expect cost controls to increasingly support. We believe SPH’s near-term dividends are sustainable and maintain Hold. Our SOTP TP of S3.10 is derived using DCF for the core media business (7% WACC & 1% g, reflecting S’pore’s long-term growth potential), Paragon at discount to book value, M1 at DB TP and investments as at end 1Q09. Key risks include adex, property valuations and investments.