Olam International Ltd: Shopping for distressed assets

Revives acquisitions pipeline. Olam International Ltd (Olam) has acquired the tomato processing assets of SK Foods, a California-based company which has filed for bankruptcy protection, for US$39m (~S$58m). The cash transaction will be funded internally and Olam will not assume any debt arising from the purchase. The acquisition is small relative to Olam's 9M09 cash position of S$390.5m. Furthermore, with the additional S$437m proceeds raised from its recent equity placement to Temasek, this is probably just the start of a series of acquisitions that we can expect from Olam in the near future.

Opportunistic acquisition reaps synergy. The acquisition is a bargain at US$39m vs. its replacement cost of US$130m. Assuming net profit margins of 5%-9%, the deal is priced at an undemanding 2.2x-3.9x PER. Olam expects this acquisition to accelerate its entry into the US tomato processing industry, given that SK Foods was a dominant player ranked 2nd among US tomato processors and top 5 globally. With a processing capacity of 1.5m tons, its output accounts for 14% of the US market share and 5% of the global market share. The acquisition is expected to reap synergies on several fronts. For instance, it not only enlarges Olam's customer base, but also allows Olam to cross-sell tomato products to its existing customers. Other synergies can be derived from shared overheads and new product adjacencies.

Earnings accretive in the further future. We do not anticipate significant near term financial impact from the transaction. The acquisition is expected to be earnings accretive only from FY12 onwards and is expected to generate revenue of US$200m per year with an EBITDA margin of 12%-13% in steady state, higher than the group's current EBITDA margin of 5%. The incremental revenue translates to 3.3% of FY09F revenue. We are keeping our FY09 and FY10 estimates unchanged. Olam's share price has more than doubled since March and is trading at 26.1x FY09F PER vs. the STI's 16x, after taking into account near term dilution from its recent equity placement. Current valuations no longer provide an attractive entry level, in our view. Nevertheless, given its enhanced prospect of inorganic growth, we are keeping our HOLD rating intact. We are raising our peg to 20x (from 17x) as Olam revives its inorganic growth plans, deriving a fair value estimate of S$2.37 (previously S$2.01).

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Hyflux - Agreement to develop two mega desalination plants in Libya

Hyflux has signed a memorandum of agreement (MOA) with the General Desalination Company (GDC) of Libya to jointly invest into and develop two reverse osmosis desalination plants in the Libyan cities of Tripoli and Benghazi. These two plants will have capacities of at least 500,000m3 and 400,000m3 respectively.

The structure of these projects is likely to be similar to Hyflux’s current Magtaa desalinationproject in Algeria. This allows Hyflux to undertake the entire EPC portion of the work and part of the O&M work subsequently without an over-exposure to equity risk, which is capped at 10% of total projected value. Our preliminary estimates suggest the EPC contracts could be worth a total of S$1.2b.

Libya, which is situated in Northern Africa, has the 2nd highest GDP in Africa, largely due to its 12th largest oil reserves in the world, and has financial reserves of US$59b. Hyflux’s presence in the country will be preceded by large multi-national companies such as Shell and Exxon Mobil. While we recognize there is still an element of political risk, we believe this is mitigated by the structure of the projects.

Prior to this, Hyflux has not announced any major contracts for the past 12 months, which we believe has led to sceptism about earnings sustainability for the Group. This agreement affirms our investment thesis that with the successful execution of its Algerian projects, Hyflux is becoming a major global player, with many potential opportunities.

We expect more details of the contracts to emerge in about three month’s time and the construction to start in the 2nd half of FY10. These contracts could add earnings visibility till FY14. We are likely to raise our FY11 once contract details are ironed out. In the meantime, we are keeping our target price of $2.63 based on SOTP.

Starhub - EPL win largely priced in ; Switch to SingTel

We downgrade StarHub to Neutral as risk-reward appears balanced ahead of the bid for English Premier League (EPL) broadcasting rights in 2H09. We are trimming our PO 5cps, to S$2.05 as we factor structurally higher content cost. We recommend switching to SingTel where stub is 20% less expensive on EV/EBITDA but has superior earnings growth of 3% for CY10.

The market is currently pricing in ~75% chance of StarHub winning the EPL bid, based on our valuation range for EPL outcomes. We value StarHub at S$2.25/shr if it wins the bid and S$1.75/shr if it loses. Our PO of S$2.05/shr assumes 60% probability that StarHub wins. If StarHub loses EPL and drops to a price of around S$1.60 per share (roughly 10% discount to S$1.75/shr, 11% yield), we would revisit our opinion.

We forecast StarHub’s earnings to decline 0-3%, for FY0-11. Mature markets (mobile & penetration rates are >100%) and stronger offerings from SingTel (mobile & pay TV) mean StarHub will find it tougher to grow its top-line. Competition for content from SingTel should translate into structural margin pressure at StarHub and risk of eventually losing some key content, e.g. EPL.

StarHub has a yield of ~8% vs government bond yield of <3%, making it one of the most attractive yield stocks in the region. Mgt is committed to a dividend payout of S$0.18/shr p.a. (payable qtrly). This is backed by mgt’s strong track record of returning capital to shareholders and FCF coverage of 1.2x for 2010E.

Parkway - New fixed price packages likely driving day-case volume growth

We have compared the prices of Parkway’s 34 recently-launched fixed price all-in surgical packages, against the average bill sizes of similar procedures published by the other public and private sector hospitals in Singapore.

We observed that while the prices of Parkway’s new packages for day surgeries are below the median prices of similar procedures at most of the costly public facilities and those at Raffles Hospital, inpatient procedures, especially those requiring a longer length of hospital stay, are priced higher than the 90th percentile bill size.

With the discounted prices lasting till end of March 2010, our findings reaffirm Parkway’s near-term focus on driving day-case volume growth to partly mitigate falling inpatient admissions. Similarly, we see Parkway strategising on maintaining its premium franchise in complex procedures within the global medical travel context.

We have kept our earnings forecasts and investment thesis intact, and assume that Parkway would likely launch the sale of its Novena hospital medical suites in FY10E. Our SOTP-based target price is S$2.85. We maintain our OUTPERFORM rating.

City Development - Residential Versatility

Upgrade to BUY at S$12.34. Despite its reasonable exposure to Singapore’s deteriorating office sector (35% of RNAV) and weakening global hospitality industry (16% of RNAV), we believe the market continues to view City Developments (CDL) as the best proxy to the domestic residential market (35% of RNAV). From this angle, we think there is still upside re-rating potential for the counter, notwithstanding a 13.0% MoM (vs. Sector’s +20.8%) jump in share price. We reckon CDL’s versatile residential portfolio allows it to benefit during periods of downcycle and upcycle. With an expected shift in buying sentiments towards mid-prime projects, we believe CDL should benefit from launching and re-launching projects within these two segments. CDL trades at 1.22x P/B during the initial phases of property recovery cycles. We thus peg our new target price for the stock at a 20% premium to our new base case RNAV of S$10.28. Upgrade to BUY at S$12.34.

Best proxy to improving domestic residential sector. With a residential portfolio spanning the mass, mid and prime segments, CDL remains the best proxy to the domestic property sector. We view management’s ability to time its launches to good effect (during both downcycle and upcycle periods) positively. This is best evidenced by its recent buoyant sales for The Arte (we estimate > 80% sold to date) at a time when buying sentiments remain tepid. This can be best compared to its launch of The Sail during the last downcycle. Aside from continuing to benefit from the mass market interest, we reckon CDL could also begin looking at soft launching some of its mid-prime projects to tap the growing interest within this segment. Risks of provisions also appear low as its undeveloped land bank was mostly acquired at relatively low prices.

Strong balance sheet. While we admit that CDL’s balance sheet is not as strong as KepLand and CapLand, we view a net gearing of 0.49x as healthy enough to tide through the current period. With already 6.2m sqf in GFA (Mass: 3.7 sqf, Mid-Prime: 2.6 sqf) in its residential stable, landbank expansion does not form a salient need for CDL, in our opinion.

Singapore Technologies Engineering - Buy: Strength Amid Adversity

Maintain Buy – Share price outperformance has reversed (-20% vs. STI) post 1Q09 results and buying opportunities exist; earnings look poised to improve, with concerns, particularly MRO biz and margins, appearing overdone. ~6% dividend yield, record high orderbook and new orders in the pipeline – despite uncertain macro environment – strengthen the investment merits. We reiterate our confidence in mgmt execution and see >10% upside from current levels.

Key highlights – Chat with mgmt suggests infrastructure projects in the region have picked up; therefore Electronics (~20% of EPS) has potential to surprise. We also remain confident in the PTF conversion programs; delay risks should abate with recent cargo yields stabilizing. In the longer term, executing pipeline of MRO initiatives (e.g. GE and CFM engines; new capabilities) will be a key focus. ST Eng needs to translate outsourcing potential to stable revenue baseload and margins. We believe earnings from 2010 should reflect this.

M&A strategy – Recent acquisition of Precision Products, a casting and tooling manufacturer, suggest ongoing efforts to selectively use M&A to plug technical capabilities gaps and enlarge scope of services. We think more M&A deals may follow as valuations are now at more reasonable levels.

Encouraging new orders profile – The >S$200mn new orders secured in 2Q09 to date reflects: 1) diversification – greater proportion of orders from public sector, 2) repeat contracts, e.g. Guangzhou Metro for systems work, 3) secure new customers, e.g. Chittagong Port Authority contract for MIS system and Swedish Defense order for 40mm ammunition.

Singapore Telecom: Opportunity to redeploy capital?

Opportunities to free up capital in Singapore and Australia. We believe SingTel has multiple alternatives in Australia - to sell Optus' fixed network and/or list Optus on the stock exchange, which is more stable now as a result of healthier competitive environment post Hutch-Vodafone merger. We believe that SingTel also has an option of spinning off its IT subsidiary, NCS and re-list on the stock exchange in the long term. We assign higher probability to the sale of Optus fixed line network in the near term. We estimate that the potential sale of Optus fixed Network, listing of Optus and NCS can free up over S$1.5 bn, S$6-8 bn and over S$1 bn of capital respectively. If freed up capital can be redeployed in better opportunities, the stock may warrant re-rating.

Strategic rationale for higher investment in Bharti. SingTel may not want to see its stake diluted in Bharti post Bharti-MTN deal. This would require S$5-6b investment from SingTel and provide investors an exposure to the emerging markets of Africa, through tried and tested partner Bharti. We believe that Bharti can further enhance MTN's profitability, by transferring its "minutes factory" business model.

Recovering Telkomsel leads to 2% revision in FY10F earnings. Recently, Excelcom has taken-off its super off-peak free on-net call offerings while Telkomsel has extended the number of chargeable minutes during peak hourcall. As such, we believe that pricing downtrend is set to reverse in Indonesia.

Surging regional currencies lead to another 2% revision. Since our last SingTel update on 15 May, Aussie dollar, Indian rupee and Indonesian rupiah have strengthened 2-4% versus Singapore dollar.

F & N: Hitting a sweet spot

Hitting a sweet spot. Recent launches by the Group have met with overwhelming response in terms of units sold and ASPs. The latest being 8@Woodleigh, which sold c. 90% of the units over its soft launch last weekend at ASPs of S$770psf, 10% above our expectations. Higher-end projects such as Martin Place Residences also met with keen response, at ASPs of S$1,450-$1,700psf, higher than the S$1,250psf we had anticipated. Recent positive property sentiment in China could also bode well for the Group's developments there.

Acquiring land soon? Currently, the Group has an existing landbank of about 930 attributable units in Singapore - relatively low, in our view. We believe it will be looking to acquire land, particularly from URA's Reserve List GLS. This could be a catalyst for the counter, if it materializes, as it (i) signals a positive on-the-ground view of the property market; and (ii) prompt an upward revision on RNAVs.

Upgrade RNAV and recommendation, Buy. We raised our SOTP RNAV by 13% to $5.15 as we (i) revised up our ASPs for its development property launches to current clearing levels and transacted volumes; and (ii) factored in higher market values for its listed entities. We narrowed our discount to 10% (from 20% previously) premising on (i) our house view that the worst is over; (ii) a better than expected clearing levels for property; (iii) potential for land acquisition signaling on-the-ground view that the market outlook is brighter. Upgrade to Buy, TP: S$4.52.

Keppel Land - Remain bearish on office segment

After soaring 2.4x from its March low, KPLD is now priced at a mere 8% discount to our revised RNAV estimates of SGD2.37. The estimates reflect: 1) higher residential home prices of 10-20% compared to our earlier assumptions; 2) lower construction costs of 20-25%; 3) higher fair valuations for its listed associates and subsidiaries; and 4) rolling over to 2010 as our base year. We kept our BUY call when the market slumped in March and think it is time to take profit following the rally. Our SGD1.90 TP is pegged at a 20% discount (unchanged) to our RNAV estimates.

At current levels, the recent resurgence in optimism over the revival of the office and residential sub-sectors is more than priced in, in our view. Residential homes account for 26% of our RNAV estimates. KPLD is currently trading at par with its book value of SGD2.35 (post-rights). Historically, KPLD has never traded above 1.0x P/BV during the economic downturns, i.e. Asian Financial Crisis, Internet bubble and SARS outbreak.

While interest in the office sub-sector appears to have returned somewhat (eg, the VTB Building sold at SGD1,061 psf, Parakou Building at SGD1,280 psf and Anson House at SGD1,100 psf), we remain sceptical. Office demand is likely to remain weak as the financial services sector consolidates following an influx of new supply. A case in point: the leasing pre-commitment for KPLD’s Marina Bay Financial Centre (MBFC) has remained unchanged (61%) for more than a year. The office sub-sector accounts for 19% of our RNAV estimates.

Despite the REDUCE call, KPLD still has good fundamentals, with lower risk of landbank impairment and asset write-downs than many of its peers. Its balance sheet has strengthened following the recent rights issue, with its net debt/equity ratio improving to 0.2x from 0.5x. At this point, however, its valuation is far too rich.

Fraser and Neave - Property remains a key drag

F&B CEO Mr Koh is looking to grow the group’s F&B business organically. The focus will be on developing the soft drinks franchise in Malaysia and Singapore following the cessation of the Coke bottling franchise agreement. Otherwise the group’s brewery business is progressing steadily but with investments in newer markets such as India providing some drag. Longer term, the F&B and property divisions could be de-merged in bid to unlock value. Meanwhile the sale of its printing operations has been put on hold due to poor valuations.


The group has shelved projects in the UK and Australia until markets there stabilise. China is progressing while Singapore is seeing a revival in sales especially in the low-end of the market. Earnings from property, however, will decline with slower sales achieved, although there has been a recent pick-up in volume.


The restructuring of the investment in FCOT is progressing, which could involve the injection of F&N’s commercial properties into FCOT. Although the group has a gearing level of 0.6x, management has reiterated that cashflows remain strong and there is no need for a cash call.


We are update our NAV for F&N with mid-cycle discounts but also mark-to-market the value of its listed companies. The shares are trading at a 36% premium to our updated price target of S$2.67 (from S$2.55). REDUCE rating maintained.

Hyflux: A bigger victory in MENA

Going bigger and faster in MENA. The MOA is to develop in Libya (1) one 500,000m3/day capacity desalination plant in Tripoli, and (2) one 400,000m3/day desalination plant in Benghazi. Compared to Hyflux's biggest win in Algeria ? 500,000 m3/day in Magtaa, these potential contracts totaling 900,000 m3/day is almost twice as big in terms of capacity. It is anticipated that Hyflux will undertake the EPC portion while the 49/51JVCOs with its state-owned Libyan partner would be responsible for O&M throughout the 25 years concession period.

Projects worth S$1.1b potentially. While financial details are still in the works, we estimated these contracts could add S$1b to Hyflux's EPC orderbook, which is currently about S$700-800m. Assuming financial close for both projects are completed by 2010, projected completion duration of 36 months implies that Hyflux's earnings visibility will be extended to 2013.

Upgrade to Buy, TP S$2.82. We have raised FY10 forecast marginally in anticipation of minor contribution next year when the contracts are officially awarded. In addition, the expected receipts from these projects have also boosted DCF value of Hyflux's BOT projects. Consequently, our SOTP fair value was raised to S$2.82, translating to 24x FY09 PE, which is still below historical average PE of 26x.

City Developments - Back to Fundamentals

Quick Comment: CDL is currently trading at 1.3x 2010E P/B (BV/S: S$6.11), which we find difficult to justify in a property down cycle. To be accumulators of property stocks at these levels, we believe one has to assume a V-shaped recovery in Singapore residential prices and office rents in the next 12 months. In our view, a best-case scenario sees prices and rents stabilize at current levels for a while. We maintain our Underweight rating on CDL and price target of S$4.02 per share fully diluted (basic: S$4.45), pegged to its end-2009E NAV.

What's new: CDL’s 1Q09 operating and net profit were ~7% below our full-year estimates. In addition to lower hospitality earnings, our 2009 forecasts assume higher sales and construction progress from the Wilkie Edge, Shelford Suites, and Livia projects. While the construction progress will likely meet our forecasts, sales at mid-end projects Wilkie Edge and Shelford may fall short of our expectations. However, the shortfall could be offset by upcoming contributions from Arte at Thomson, which was successfully launched above our expectations. On a positive note, in addition to Arte, the re-launch of low-end project Livia led to the sale of 189 units in April alone versus 159 units sold in 1Q09. Encouraged by the low-end segment, CDL is preparing to launch its West Coast project – the former Hong Leong Garden Condominium – in 4Q09. Meanwhile, illustrating the tough office market, CDL’s office portfolio’s occupancy has weakened from 94% in 4Q08 to 91% currently. In addition, pre-leasing for the remaining ~25% of retail space at City Square Mall which is due to open in 4Q09, remains challenging.

Worst Not Behind Us Yet, hence fundamentally, we believe current sector valuations are unjustified. In our view, property stocks could trade down in tandem with the downward momentum in office rents and residential prices. For the rest of 2009, we would look to switch into higher-yielding S-REITs, with our S-REIT sector top pick CapitaCommercial Trust (CACT.SI, EW, S$1.02).

Singapore Press Holdings SPH - Job Ads Are Rebounding From Depressed Level

Job ads are rebounding from depressed level. Job ads started sliding from August last year (a total of 408 job ad pages) to hit a depressed level in December (172 pages, -41% yoy), according to our page-counts of The Straits Times. The latest May page-count is a clear sign that confidence is returning with recruitment drive stepping up. Job ads in The Straits Times totalled 230 (-48% yoy), 224 (-46% yoy) and 258 (-38% yoy) pages in March, April and May respectively. Apart from rising advertising spending, this trend also points to broader positive macroeconomic implications.

Worst in 3QFY09, but monthly data suggest a gradual recovery. Singapore Press Holdings (SPH) will be releasing its 3QFY09 results in early-July. 3QFY09 is likely to show the worst performance in the current economic crisis. Our page-counts point to an 18% yoy contraction in SPH’s advertising revenue (AR) in 3QFY09 (2QFY09 page-counts: -13% yoy). Our monthly page-counts, however, are showing a gradual recovery with a contraction of 23% yoy, 16% yoy and 14% yoy in March, April and May AR respectively.

Newsprint price continues on a downtrend. The price of 30-lb newsprint currently stands at US$550/tonne and has yet to bottom. Newsprint price peaked at US$760/tonne in December and has been on a decline since then.

Defensives to play catch-up with cyclicals, which have rallied strongly in the current market rebound from March lows. With advertising spending showing signs of a gradual recovery, we see a re-rating of SPH. While the stock is usually a late-cycle recovery play, we believe it will stage an early comeback this time round, aided by the opening of Singapore’s two mega integrated resorts, Marina Bay Sands and ResortsWorld@Sentosa. We maintain our BUY call and target price of S$3.90.

M1 is Emphasizing profitability over market share

M1’s latest offerings – Take3 and the Sunsurf VAS data plans – are aimed at luring higher ARPU users that can help improve margins instead of chasing market share. M1 has also been advertising more in recent months. We reckon these initiatives should impact positively on margins and market share in the segments that matter within 1-2 quarters.

Take3 (launched in Feb) allows users to choose a eligible handset within the subscription plan tiers without any upfront cost and exchange it for another handset after 9 months (for a fee) or after 20 months (without a fee). Out of the 5 bill plans, we reckon targeted users are most likely to opt for the $83/month SunMax plan as it includes popular phones (eg HTC Touch Diamond 2 and Blackberry Storm) that are also in the top-end $201 Talk All U Can plan. As phone buyers are more sensitive to the upfront handset cost than the monthly fees, this plan should boost ARPU.

M1’s new SunSurf VAS data plans also offers the most value-for-money. The $10.70/month 100MB Plus plan is the most compelling as it offers 10x more bundled data capacity vs StarHub’s Value plan. As these plans are targeted at high-end users that buy feature-rich smartphones that can download music or stream video, we believe these plans could also motivate users to switch to M1, especially SingTel which has no cap on monthly charges (unlike M1 or StarHub, which are capped at $36.38).

Although M1 lost 11,000 subscribers in 1Q09, the decline was due to a 53,200 fall in 2G subs, where users are being migrated to 3G, and the deactivation of 8,000 prepaid subs. Most notably, M1 gained 50,200 3G subs and we believe Take3 was one major factor. Management indicated that 20% of new subscribers in 1Q09 took up the Take3 plan.

Given these positive driving forces, we reckon margins should improve further and M1 stands a good chance of arresting its postpaid ARPU slide, which has fallen from $62 in 1Q08 to $60 in 1Q09. We maintain our Buy recommendation and target price of $2.01.

Neptune Orient Lines NOL - Bouncing along the bottom

NOL has released monthly operating data for the period from 2nd May to 29th May. Container shipping volumes were down -21% yoy (up 1% MoM) compared to a similar level of decline (-22% yoy) in April. Year-to-date volumes are down -25% versus our full year 2009 volume expectation of -9%. Average freight rate was down -23% yoy (flat MoM) and year-to-date average freight rate is down -18% versus our full year 2009 forecast of -16%.

Our latest UBS Container Freight Rate index (CFRI) indicates that Transpacific and Asia-Europe rates declines have sequentially worsened in the first three weeks of June compared to May. In the context of rising bunker prices and liners’ relative inability in mitigating rising fuel costs from surcharges, we believe current rates on both of the major trade lanes are well below cash costs for most (if not all) carriers.

Maritime consultant Drewry has recently downgraded global container volumes forecasts for 2009 to -10.3% (from -5.3%) while UBS is forecasting a -6% decline in volumes for 2009 and an effective supply growth (after delays, cancellations and scrapping) of 15%. We remain our view that supply/demand for the container industry will not return to balance until 2011.

Our PT is based on VCAM, UBS’s proprietary cash-flow based valuation tool (8% WACC). We are still in the process of revisiting our forecasts post rights issue.

We expect Bharti and Telkomsel to drive Singtel earnings growth

While we believe SingTel faces challenges in Singapore with the upcoming Next Generation National Broadband Network (NBN), we are positive on SingTel’s associates, Bharti Airtel (Bharti) in India and Telkomsel in Indonesia. We expect these associates to drive a 9% net profit CAGR for SingTel for the next five years.

In mid-2008, the A$, Rp, and Rs depreciated significantly versus the S$, pressuring SingTel’s YoY earnings trend as contributions from overseas associates became smaller in S$ terms. We think the YoY comparisons should no longer be a concern from mid-2009, as the A$, Rp, and Rs have now appreciated versus the S$.

Over the past three months, SingTel has been the worst performing large-cap stock in Singapore. SingTel underperformed the Straits Times Index (STI) by 26% as investors focused on high beta names. We believe the period of SingTel’s underperformance may largely be over as currency risks are subsiding.

Reflecting Bharti and Telkomsel earnings upgrades and recent currency moves, we raise our SingTel FY2010/11E EPS from S$0.237/0.252 to S$0.244/0.268. We also raise our price target from S$2.94 to S$3.38. SingTel’s 12-month forward PE is at 11.9x, and the implied 12-month forward EV/EBITDA multiple for SingTel’s Singapore and Australia businesses is 5.1x. These are below the five-year historical average of 12.7x PE and 6.0x EV/EBITDA.

Starhill Global REIT - Rights issue overkill

We have downgraded our rating for Starhill Global REIT (Starhill Global) to 3 (Hold) from 2 (Outperform) after the manager’s announcement (on 22 June) of a dilutive one-for-one rights issue. Aside from repaying part of the existing debt, we believe the other uses for the S$337.3m rights issue are highly uncertain and lack sufficient detail. We cannot regard the rights issue or manager’s plans at this stage as compelling.

The rights issue appears excessive, in our opinion, considering that Starhill Global was not even remotely over-geared, at a leverage ratio of 31.1% as at 31 March. Even after the 7.1% asset-value decline (latest valuation as at 15 June 2009) compared with December 2008, the leverage ratio would have increased to 33.4%, hardly overstretched, in our view.

Our earnings (and valuation) scenario assumes that the manager would do nothing with the rights issue except to repay S$236m of debt. We have revised down our distribution-per-unit (DPU) forecasts by 30.6% for FY09, and 47.4% for each of FY10 and FY11, as a result of the rights issue. We have lowered our six-month target price, based on our RNG valuation method, to S$0.47 (ex-rights) from S$0.72 (pre-announcement) previously.

SIA - 4QFY09 Results—Management Briefing Highlights

SATS dividend in specie and SIA Eng: There was no specific reason driving the timing of the divestment, but post SATS' SFI acquisition, over 40% of SATS revenue is non-aviation related. In contrast SIA Eng remains a strategic holding to SIA, as it is critical to maintaining the flying operations' integrity and reliability. Divesting SATS should produce neither a gain nor a loss for SIA.

Revisit the premium/corporate travel model? SIA will stick with its model of being a premium airline. Capex involved is substantial and the approach cannot be changed day-by-day. However SIA is active in offering promotional fares and encouraging use of frequent flyer points, reducing a key balance sheet liability.

Hedging: The decision to terminate hedging contracts early (for a loss of S$112m) was part of a review of hedging needs. With capacity cuts fuel requirements will fall to c.30m bbl, of which 25% is hedged at US$125-130/bbl. The S$106m 4Q associates loss was largely due to Virgin hedging losses.

M&A: SIA continue to be interested in M&A in the medium term but there are no on-going talks with China Eastern at present.

Demand outlook: advance bookings "leveling off" mean that the %yoy fall (Mar-2009 -21.8%) has leveled off, both passenger and cargo. SIA's traffic may have fallen more than Asian peers because of lack of a domestic business and less exposure to Mainland China that other peers have.

Fleet changes: SIA plan to reduce its fleet to 99 from 103 over FY2010, with 12 new craft (5 A380, 7 A330), 2 disposals (B747) and 13 "surplus" aircraft (9 B777, 4 B747). These are being actively marketed. The 5 A380s are near final production so delivery cannot be deferred. Two (the 7th and 8th A380s in the fleet) are due in May 2009.

Singapore Airlines: Dark clouds yet to clear

Lowering FY09F earnings by 14%. SIA’s load factor fell to 71.2% in Q4, which is down by 8.2ppt y-o-y and 7.3ppt sequentially. Whilst lower fuel prices may mitigate some of this, margins would still have been squeezed substantially, which led us to lower our FY09F forecast by 14%. SIA is due to announce its full year results on 15 Mar.

Demand still weak; swine flu not helping. Meanwhile, a recovery in the global economy is not yet certain and demand for premium air travel is likely to remain weak in the coming months, which should mean continued depressed load factors for SIA. The current swine flu situation will also curtail some amount of traveling, for at least in the short term.

Dividends likely to be affected. Given the weaker 2nd half of FY09 and weak outlook ahead, we are projecting dividends to be cut to 70cts (50cts final) for FY09, and 50cts each for FY10 and FY11, compared to S$1 for FY07 and FY08. Actual dividends may even be lower as our projections represent more than 70% payout compared to less than 60% historically.

Downgrade to Fully Valued. SIA has rallied over the last week, along with the market, but we believe the stock could de-rate when the company reports weak results and if dividends disappoint. Downgrade to Fully Valued, our TP of S$11.30 is based on 5x EV/EBITDA, SIA’s average multiple over the last 5 years.

Singapore Airlines - Qantas' new A380 deliveries could steal market share

• Passenger demand collapsed: Traffic fell 23% y/y in May, deteriorating sharply from the 16% decline in Jan-Apr. SIA’s year-to-date operating numbers have been weaker than sector average (-11%) and Cathay’s 7% drop partly because SIA has focused more on cutting capacity, giving up low-yielding traffic and has been less aggressive in offering promotional fares compared to some of its peers. The premium airline has also been losing market share to low cost carriers, which have been expanding flights on short-haul routes on liberalized air services agreements and as passengers traded down to cheaper airlines.

• Load factors fell to five-year low: Passenger load factor was 66.9%, down 8ppts y/y as SIA’s 14% capacity reduction failed to keep pace with falling demand. Planes were emptier across all route regions. US flights suffered the sharpest load factor decline, down 12ppts y/y to 68% (partly due to the conversion of A340s to all-business class cabins where loads are generally lower). North and Southeast Asian loads fell 9ppts y/y to 62%, hurt by Influenza A. Southwest Pacific flights held up best at 70%, down 5ppts y/y. Demand is expected to come down further in June as families defer/cancel vacation plans during the school holidays.

• Short-haul cargo did better than long-haul: Cargo traffic fell 21% y/y in May, worse than Jan-Apr decline of 17%. Demand on short-haul routes held up better than long-haul. SIA Cargo slashed capacity by 21%, which helped to keep load factors relatively flat at 61%.

• Competitors’ rising A380 deliveries could steal away demand: Qantas announced today that it plans to increase its Sydney-Singapore-London A380 services from three to five flights per week from Aug 6 after the airline takes delivery of its fourth A380 at the end of July. This, as well as Emirates’ (which has a secondary hub in Singapore) rising A380 deliveries, should put greater pressure on SIA’s passenger loads and yields over time.

• Rebounding fuel price a double-edged sword: SIA has hedged c.25% of its FY10E fuel consumption at c.US$125-130/bbl (Singapore jet kerosene). As such, the silver lining of rebounding oil prices is that SIA will incur smaller hedging losses and write back some of its previous mark-to-market fair value losses on balance sheet. Furthermore, y/y spot jet fuel prices are still c.28% lower versus FY09 average despite the recent rebound. However, the main challenge for SIA and the airline sector is on the demand side. Weak demand makes it harder for SIA and other carriers to pass on the rising fuel costs via surcharges in contrast with previous years. There are no signs that passenger demand is on the recovery path and SIA will likely be loss-making at the operating level in 1QFY10 (results due out in August).

• Recent rebound overdone: Last week’s bounce on market speculation that SIA will invest in the combined China Eastern-Shanghai Airlines entity is overdone; a potential investment will unlikely be value-accretive in the first 1-2 years. SIA is trading at 1.1x FY10E PB vs SARS/Sep 11 troughs of 0.9x, Asian Crisis trough of 0.7x and only 6% shy of historical average.

NOL - May 2009 Operational Update – Downside Risks are Limited

May-09 data — NOL’s May-09 revenue/TEU and shipping volumes were flat MoM and -23%/-21% YoY, the latter due to base effects. Mid-year seasonality will likely lift volumes slightly in coming months while rates may be forcibly raised from current “unsustainably low” levels. While the longevity of these positive data points is debatable, we re-iterate our view that freight rates and shipping volumes face limited downside risks from current levels.

Industry financing woes have eased — Recent improvement in equity and credit markets provides an opportunity for shipping companies to plug their funding gaps at a lower cost. Concurrently, better access to liquidity will also allow financially stronger players to acquire assets from their more distressed counterparts. The revival of the sale and purchase market may set visible price benchmarks that may, in turn, trigger loan-to-value covenants embedded in shipping loans, forcing further distressed sales.

Well-positioned for consolidation phase — NOL’s FY09E net gearing of 0.1x is one of the lowest in its operating history (Figure 4) and also one of the lowest amongst peers (Figure 5). NOL’s ability to make acquisitions from a position of strength is a distinct advantage as the industry enters a consolidation phase.

Maintain Buy/High Risk — Our S$2.00 (ex-rights) target price is based on 1.3x FY09E P/B, similar to levels seen in 2002 recovery. Catalysts: 1) ability to raise rates above current “unsustainably low” levels; 2) volume recovery as global trade resumes; 3) accretive acquisitions. Risks: 1) a prolonged economic recovery; 2) over-paying for acquisitions; 3) persistent vessel over-supply.

Singapore REITs - More fund raisings to come?

Starhill Global REIT (SGREIT SP; NR) to raise equity. SGREIT announced that it proposes to raise S$337million through 1-for-1 rights issue at S$0.35 per rights unit. The fund raising will be fully underwritten with YTL Corporation committing to up to 75% of the total number of rights unit. Proceeds from the rights issue, according to management, will be used to pare down some of its existing debt, and to capitalise on AEI and acquisition opportunities.

S$5bn capital raised for the sector, how much more do we need? We estimate that S$5bn capital has been raised from the S-REIT sector with S$2.9bn from equity capital market and S$2.1bn from debt capital market (including debt extension) The sector is currently geared at 31% with interest coverage ratio comfortably at above 4.0x on our estimates, with no more debt refinancing for most of the S-REITs over the next 6 months. That said, we are still looking for about S$1bn equity capital to be raised in the space to convert some of the debt to permanent capital.

Opportunistic capital raising to come? Despite the substantial amount of equities being raised YTD, J.P. Morgan S-REITs index has increased by 30% since its March low. Share prices for some of the S-MID cap REITs have more than doubled from the trough, which in our view could help to propel management's decision on potential opportunistic equity capital raisings. In addition, the ever closing gap between the listed and public real estate could provide trust management with more reasons to further strengthen its balance sheet.

Our top picks for large-cap S-REITs remain A-REIT and CMT, which we believe would generate more than 15% in total return at this level. Our picks amongst the SMID-cap S-REITs are FCT and AIT.

Sembcorp Industries - An interesting laggard play; attractive on several fronts

Over the past one, three and 12 months, SCI has lagged the market largely on fears of weakening utilities earnings which we believe have been overplayed. At the current levels, its utilities business’ implied valuation is 6.3x FY09E PER (vs. 14x average for European and Asian utility plays). The group remains in a solid net cash position and is well positioned for any potential M&A activities. Maintain Buy.

Our calculations suggest that by reversing the other components of SCI, Sembcorp Marine’s (SMM;Buy;SGD2.93) implied valuations (through SCI) are currently at 9.5x FY09E PER vs. 12.6x, the actual multiple for SMM, or about 25% less. Over time, these valuation discrepancies tend to converge, as shown in Figure 3. The recent oil price strength bodes well for SCI (through SMM) as some of the E&P plans previously delayed/shelved may get revived.

The expiry of its favourable supply contracts in the UK and GBP depreciation are out of SCI’s control and arguably, should not be reasons for being negative on operations. The group’s core utilities business remains steady and its newer operations such as Fujairah and China are beginning to contribute more. The recent strength in the GBP vs. the S$, if sustained, should be positive for Sembcorp Utilities as earnings are translated back to S$.

SCI provides a combination of stability (through its utilities business) and growth (from its Marine division), and is backed by strong fundamentals. Our SOTP yields a target price of S$4.20. Downside risks include the execution of projects, unforeseen market risks in the countries in which it has invested, and sustained credit problems or contract execution failures for SMM (see p. 6 for more detail).

Singtel - Maintain BUY recommendation and target price at S$3.80

FY2009 Results. SingTel reported FY2009 operating revenue of S$14,934m (+0.6% yoy) and net profit of S$3,448m (-12.9% yoy). Although its Singapore and Australian operations posted revenue increases of 13.1% and 7.2% respectively, overall revenue only rose slightly by 0.6% mainly because of the 11.9% decline of the Australian dollar against the Singapore dollar. Its Singapore operations continued to have growth in its data, mobile and IT segments. In Australia, it managed to attract 652,000 new mobile customers and 143,000 new Internet customers.

Furthermore, net profit fell as the share of results from the regional associates decreased by 19.8% to S$2,051m. The weaker performances of the associates were due to the depreciation of the regional currencies and the poor performances by Telkomsel, Globe and AIS.

Dividend. SingTel announced a final dividend of 6.9 cents per share. Together with the interim dividend of 5.6 cents per share, the total dividend is 12.5 cents per share for FY2009. The dividend amount was the same as FY2008.

Profit margin. Net profit margin increased from 21.6% in 3Q FY2008 to 25.3% in 4Q FY2008 mainly due to better performances from its Singapore and Australian operations as well as its regional mobile associates. Based on a year-on-year comparison, it fell from 26.7% in FY2007 to 23.1% in FY2008 because of the negative impact from the economic downturn and the depreciation of the foreign currencies.

The actual revenue and net profit were 1.1% below and 3.6% above our forecasts respectively. Revenue was slightly lower because of the greater than expected depreciation of the Australian dollar. Net profit was higher as the earnings of the regional mobile associates came in above our forecasts.

FY2010F Outlook. The company expects the operating revenue for the Singapore and Australian businesses to grow at single-digit level and low single-digit level respectively. Moreover, the contributions from the regional mobile associates are likely to be affected by the fluctuations in the regional currencies. Its dividend policy is to pay 45% to 60% of underlying earnings.

Maintain BUY recommendation and target price at S$3.80. As the revenue and net profit of SingTel came in close to our expectations, we maintain our target price of S$3.80 based on the discounted cash flow method. SingTel remains a buy as its business continues to grow in Singapore and Australia with profit contributions from its regional mobile associates.

SPH: Sky@eleven fears debunked

Markets are expected to pull back in the near term and we would advocate a return to defensives like SPH. Our page count indicates that ad demand bottomed out early this year and we believe print ad revenue could beat expectations. Other positives for SPH include potential investment gains in 3Q09 and lower Sky@eleven default risks. We have raised our FY09 earnings estimate by 5% to account for lower investment losses. Maintain Outperform and our sum-of-the-parts target price of S$3.52.

Twin DPS fears over Sky@eleven unfounded; Maintain BUY. The market has been worried over the possibility of default over the deferred payment scheme as well as dividend payout beyond Sky@eleven. We believe that such fears are unfounded. The condominium project is a bonus to SPH, and following the project's TOP, investors will continue to enjoy good yields. Maintain BUY with a SOTP-based price target of S$3.40.

Deferred payment scheme (DPS) to hit this year's payout? The market is speculating that SPH may hold back on paying out the earnings from Sky@eleven till the money comes in upon TOP, dragging payout ratio down to 70% (90% in FY08). In our view, that is unlikely and we expect payout to be at 90%. SPH has stated that it will pay out a "high percentage of recurring earnings" and not cashflow. It has the capability to do so, given its healthy balance sheet (net gearing of 12%) and low capex requirements. We believe that default risk is low for the project, and have gotten even lower with the revival of the property market. CDL's The Arte, which is also located in the Thomson area, saw keen interest and units were sold at an average of S$1,000 psf (S$975 psf for Sky@eleven). Should buyers default, SPH actually stands to benefit as it has already collected the first 20% as down payment.

Dividend per share (DPS) beyond Sky@eleven to dive? Contributions from Sky@eleven account for 30-35% of dividends over the next two years. In FY11, there will no longer be any contributions coming through from property development when the project TOPs. We believe that Paragon, which has seen its rental space expand 6% to 700k sq ft after its recent renovation, will partially make up for the vacuum. We have assumed a 10% average rental growth to S$14.9 psf/month by 2011, which we believe to be a conservative figure given the successful remaking of Orchard Road. This will raise rental from Paragon by 17% from FY08. Coupled with its core newspaper business, SPH should be able to dish out at least S$320m in dividends (or S$0.20 per share) post Sky@eleven, and more during good years. At current share price, this works out to a palatable yield of 6.3%.

SingTel - Upgrade to Buy: Many Moving Pieces Coming Together

Many moving pieces coming together — (1) 13%/10% EPS growth in FY10E/11E appears respectable vs. telco peers. (2) Low expectations given modest FY09 and sedate FY10 company guidance – we see upside risk in delivery. (3) Improving associates – Telkomsel on industry repair, Bharti/MTN a longer-term opportunity? (4) A reasonable valuation case. (5) Macro/political trends bode well for favourable currency movements (A$, INR, IDR). Based on these factors we upgrade our rating to Buy (from Hold), lower the risk rating to Low (from Medium) and revise our target price to S$3.30 (from S$2.70).

Singapore and Australia: Building up for longer term gain — Consistent revenue share gain in Singapore has come with EBITDA stability but margin cost. Higher scale/lower aggression could drive growth but are not in current expectations. Little growth in Optus is largely in expectations but we view nothing is reflected for NBN opportunities/mobile consolidation – potential longer term positives.

Associates: Sound growth — We see associate contributions rising 20%/23% in FY10E/11E as Telkomsel regains growth momentum into a healing wireless industry in Indonesia. A potential Bharti/MTN combination could bode well for LT value/earnings accretion, we would see more involvement as a LT positive.

Valuation/Currency trends in favor, estimates revised up — 1) P/E discount to market highest in a long time, 2) 4% discount to spot SOTP compares with a LT premium of 8.4%, 3) Stub at 10.4x P/E and 5.7x EV/EBITDA vs. LT mean of 12.4x and 6.7x respectively, 4) Currency trends in favor with 5% strength in A$, INR, IDR could add 4/5/2 cents to SOTP. 5) FY10E-11E EPS estimates up 3%-4% on stronger A$ and higher Telkomsel profits.

Risks — M&A overpayment seen as primary risk. Bharti/MTN deal progression could see short term weakness, presenting entry opportunities, in our view.

SIA - May 2009 Operating Data—Weakest Since SARS

Target S$8.50: Passenger traffic fell 23%yoy in May as load factor fell to 67%, the lowest since SARS in 2003 (vs. 4Q09 breakeven 77%). Cargo fell 21%yoy, a 61% load factor (4Q09 breakeven 75%). The data suggests SIA may post operating losses in its June-09 quarter results. It takes time to cut excess fleet capacity, and a recovery in premium passenger demand seems some way off. Pressure on yields, uncertainties from the H1N1 flu virus and rising jet fuel prices could see downside risk to FY10E consensus. We concede that the "SATS dividend" (worth S$1.42/SIA share) may give near-term support, but post-Aug distribution SIA loses an annualized c.S$118m from group earnings.

Passenger. Passengers carried fell 23.7%yoy to 1.21m, while passenger traffic measured in RPKs fell 23.7%yoy. Despite aggressive capacity reduction (down 22.8%yoy), load factor fell 7.8ppt to 66.9% with all regions reporting weaker load factors (Americas: -12.4ppt, East Asia: -8.9ppt, Europe: -6.7ppt).

Cargo. Cargo volumes fell by 17.7%yoy while traffic measured in FTKs fell by 20.7%yoy (Mar-09: -21.6%yoy). Load factor, however, rose slightly by 0.5ppt yoy to 61.2% on better capacity management as FATKs fell by 21.4%yoy, with East Asia, Americas and Aus/NZ showing improved load factors.

"SATS dividend": SIA's proposed distribution in specie of its 81% stake in SATS amounts to a "dividend" of S$1.42/SIA share at SATS' share price of S$1.95. The EGM to approve this is on 31 July 2009, with the distribution likely made by end-August. Pro-forma data released by SIA showed that SATS contributed S$118m (EPS S$0.10) of SIA's FY09 S$1.06bn group profit (EPS: S$0.896), but the distribution would reduce group borrowings from S$1.7bn to S$1.45bn.

Jardine Cycle & Carriage: Systemic motorcar sales continue to decline despite interest rate cuts

Motorcar sales fall in May. Preliminary data indicates that new motorcar unit sales in Indonesia declined 34% YoY in May (or -6.1% MoM), to 32,500 units. This was despite the central bank cutting key interest rates by a further 25 basis points in May to 7.25%. The data seems to reaffirm our earlier view that consumers are still cautious and are not spending on automotives. Maintain SELL on JC&C, with price target of S$11.50.

4M09 market share of 57% likely to remain consistent. We are expecting domestic motorcar unit sales in FY09 to decline 25% after the strong sales achieved in FY08. This is expected to be dragged down by the global economic slowdown. We expect Astra to achieve a market share of 56% for motorcar unit sales in FY09, given its consistent performance in the first four months of the year.

Further interest rate cuts may not spur demand. Indonesia cut its benchmark interest rates by yet another 25 basis points in Jun 09 (the seventh consecutive month) to 7.0% and maintains that there is still room for further reductions as the nation’s inflation slows. We maintain our view that demand for automotives are not likely to surge even if interest rates continue to decline, due to protracted global economic downturn.

Maintain SELL. We are maintaining our estimates of a 22% and 20% decline in Astra’s FY09 motorcar and motorcycle unit sales respectively. Based on SOTP valuation, we have a target price of S$11.50.

Parkway Holdings Limited: 1Q09 indicative for 2009

Indicative quarter for 2009? Parkway Holdings (Parkway) reported its 1Q09 results on Friday with topline inching 4% YoY ahead to S$237.8m while PATMI rose 9% YoY to S$21.3m. Excluding impairment loss of Auric Pacific, Parkway's bottomline would have risen 20% YoY to S$23.4m. The group has not resolved the S$34.4m of outstanding debt incurred in 4Q08, but is confident of retrieving the full amount. Parkway is finalising plans with Colliers for the launch of its first tranche of Novena Medical Suites. As such, no sales were booked this quarter.

Hospitals: International will buffer Singapore performance. In line with our estimates, Singapore hospital performance started the year with a slide of 9% in topline in view of shorter hospital stays coupled with lower inpatient stays. However, its International hospitals have exceeded our expectations by growing revenue to S$54.8m (+26% YoY, +6% QoQ). This growth was primarily due to its Pantai Hospitals and increased patient loads at its cardiac centre in Brunei. In addition, the group also started consolidating revenue of Gleneagles Kuala Lumpur after raising its stake from 30% to 58% in Nov 08 and started recognising revenue from its management project in the Abu Dhabi Hospital.

Healthcare: Driver for FY09. With patients putting off elective surgeries and performing more diagnostic tests, a significant shift to outpatient treatment was seen through an almost double-digit rise in day cases. This boosted the Healthcare segment's revenue by 13% YoY to S$72.7m. Higher intensity of procedures performed helped to raise productivity and accentuated Parkway's EBITDAR's ascent by a greater magnitude of 27% YoY. The recently launched "Fixed-fee surgical packages" that are 10- 15% discounted from original prices will continue driving its day cases.

Fair value raised, but maintain HOLD. We have tweaked our estimates to account for Parkway's successful push for more outpatient treatment along with an anticipated strong performance from its International Hospitals. From a core operations standpoint, we raise our estimates to S$83.7m (prev: S$75.6m) in FY09 earnings. Our fair value is raised to S$1.28 (prev: S$1.15) on the same valuation peg of 15x FY09F EPS. While operationally sound, uncertainties still exist for the take up of its first launch of the medical suite sales which can change the dynamics for loan repayments. We will be incentivised to re-look the peg upon strong suite sales take up along with sustained cost containment and International division performance. Maintain HOLD.

Singapore Reit - Yield spreads highlight poor growth prospects

High yield spreads, as a consequence of low risk-free rates and historical DPUs (ie, current distributions are underpinned by rents that have yet to fully revert to market), appear to be encouraging investors to re-visit REITs. We see such spreads as indicative of the lower growth prospects facing asector that will continue to be dogged by negative reversions and asset revaluation deficits, rather than as flashing compelling value.

Net take-up in the CBD was a surprisingly low negative 550,000sf in 1Q09. With the demand outlook weakening, vacancy is likely to rise faster and remain higher for longer than expected, suggesting a drawn-out recovery.

Retail sales in 1Q09 (ex motor vehicles) fell 6.6% y-y, with tourist arrivals down 13.8% in 1Q09. Following a cut in our FY09 GDP forecast to -7.3%, our economics team continues to stress the risk for disappointment from private demand as consumption patterns are impacted by feedback loops from negative wealth effects and a worsening labour market. Operating conditions are likely to remain challenging for Singapore’s retail landlords.

With manufacturing output off 26.1% y-y in 1Q09, double-digit declines in production in most sectors (ex biomedical) suggest industrial landlords will face declining rents and, ultimately, downward pressure on asset prices.

We retain our core rent and yield assumptions, and roll forward asset valuations to FY10F. We continue to see value in the office sector — BUY CCT — though valuations prompt us to cut Mapletree Logistics Trust to REDUCE and Starhill Global REIT and Suntec to NEUTRAL.

Noble Group - Offer for Gloucester Coal closed, Acquires 87.7% of Gloucester Coal

Acquired 87.7% of Gloucester Coal. Noble’s A$7/share offer for ASX-listed Gloucester Coal has closed, with the company now having an 87.7% stake vs. 21.7% prior to the offer. A$7/share equates to 10.3x CY10 P/E, based on consensus estimates. We estimate the outlay for the additional 66% stake at US$301m, with funding likely to come from Noble’s internal sources, given its ample cash of US$1.2bn as at 1Q09. However, the 87.7% stake is below the 90% hurdle required for compulsory acquisition, implying that Gloucester Coal will remain listed. We understand that Credit Suisse and Itochu together own more than 10% of Gloucester. With Noble taking control of Gloucester Coal, a new Gloucester board has been appointed, which now includes Noble’s COO, Mr. Ricardo Leiman, and Noble’s Group Head of Coal and Coke, Mr. William Randall.

Outright acquisitions are not the norm. Noble prefers to take minority stakes mostly to secure the supply of commodities. While ownership of assets could bring greater margins (from value-add as producers), earnings volatility is also higher from product price changes and operating cost variability, and higher capital outlays to acquire assets outright. We believe that this acquisition was triggered by Noble’s view that Gloucester’s proposed merger with Whitehaven would not be in its best interests, and also recognition that Gloucester Coal is undervalued. An independent expert, PwCS,has offered a valuation estimate of A$8-11/share. Noble is familiar with Gloucester Coal, having taken a 21.7% equity stake earlier, and buys around 25% of Gloucester’s coal output. In 2007, Noble blocked Xstrata’s A$4.75/share bid for Gloucester Coal. With Gloucester Coal keeping its ASX listing, there is a possibility that Noble’s other Australian coal assets, such as Donaldson Coal, may be injected into Gloucester, rather than opt for a separate listing. The listing of Donaldson Coal, 70% owned by Noble, had been scuttled by the market downturn in 2H08.

Improving outlook. The outlook for soft commodities is a little mixed in the near term with lower prices, reduced fertiliser use, and poor weather contributing to lower production of soybeans in South America. Estimates are calling for 711m fewer bushels (19m tonnes) of soybeans this year over last year. While the reduced production could constrain volume in the near term, the resultant price rise will likely lead to increased plantings and fertiliser use in the next planting season, implying abumper harvest next year. The supply boost next year would benefit Noble when its new crushing plant in Argentina commences operations as the plant will be purchasing in a buyers’ market. The outlook for iron ore has also improved with prices rising and China’s steel manufacturers raising prices, suggesting stronger demand.

SPH: Press is set to spin, Buy

Newspaper ops valuation should normalise. SPH’s PE valuation to STI has narrowed to 8%, significantly below 10-year average of 34%. Newspaper operations implied PE is now at 12x, -2 standard deviation from its average. We think the market has under valued it; and, this should trend up towards normalized levels (20x PER) as the economy recovers.

Worst fall in AdEx seems over. AdEx fell sharply during past 2 recessions. But, they also recovered shortly thereafter. Latest data from Nielsen media research shows April’s AdEx for newspaper display and classified ads fell by 9%, significantly better than the 25% y-o-y fall in Jan. We also noted that recent pagination for The Straits Times (Saturday edition) is hovering above 210-odd pages, up from Jan’s 100-plus pages.

Lowered newsprint costs. Newsprint spot price is at around US$550/mt. We lowered our average newsprint charge-out rate to US$760/mt for FY09F and US$580/mt for FY10F.

Paragon valuation out soon. The independent valuation for Paragon should be released in mid-Jun. We expect it to stay above our RNAV estimate of S$1.5bn. There should also be nominal defaults at its development property project (Sky@Eleven), in view of the up tick in transactions and stable prices.

Upgrade to Buy, SOP TP raised to S$3.70. We upgrade our recommendation to Buy, from Hold as we believe the worst fall in AdEx is over. We believe valuations should normalize, and we peg our newspaper operations to 16x FY10F earnings, -1 std dev. of its average (20x).

SIA Engineering: Inspires confidence, Buy

Management remains confident of leading the recovery. We hosted senior management of SIE – including Mr. William Tan (President & CEO) and Ms. Anne Ang (CFO) –for a luncheon meeting, which was very well received by the investment community. On the heels of the recent announcement regarding pay cuts for management – signaling stricter cost management measures, Mr. Tan assured investors that they had the business model in place to withstand the challenging conditions in the near term and still be among the earliest to recover during a demand upturn.

And the downturn may not be too bad either. We believe earnings decline in FY10 will not be as bad as the 32% decline during SARS-affected FY04 owing to i) new hangar capacity coming online in 2H10 ii) additional capacity in key JV SAESL, which should offset to an extent any possible decline in overall associate/ JV contributions and iii) recurrent revenue from pay-by-the-hour fleet management contracts.

Still time to cash in on the upside. We feel that SIE, along with its JVs/associates, has the ability to boost its MRO market share and could demonstrate a steady growth trajectory, once the drop in demand caused by the aviation downturn has passed. Meanwhile, healthy upstream dividends from associates/ JVs should fortify SIE’s dividend payout potential. Our target price of S$3.20 still implies a potential upside of 23%, and dividend yield is close to 6%. Maintain BUY.

Hyflux - Positive on water tariff hike in China

Company Overview — Using its own propriety membrane technology, Hyflux provides water and wastewater treatment services. It has expanded to other applications including separation requirement for various industrial manufacturing processes and recycling of used oils and solvents. The market expects its 09 revenue to grow ~20%, on the back of 3 big projects in China and Africa. Based on 9% consensus EPS growth, Hyflux trades at 18x 09 P/E,

Business Strategy — Focus on municipal projects in China and MENA (Middle East and North Africa), particularly water projects. Municipal projects represent >85% of total revenue. China now accounts for >35% of total rev, and MENA represents >55%.

Industry Overview — Amid economic growth and urbanization, mgt sees tremendous potential for water treatment in China and MENA, and sustainable in next few years. Hyflux views increasing commitment from China on environmental control. Hyflux sees good growth in water plant operations as it believes water tariffs in China will rise for years. Mgt targets at 8-10% IRR in China and >10% in MENA.

Competitive Analysis — Competition is keen in waste water treatment. Mgt sees limited threat in other service areas like desalination and recycling, thanks to its membrane technology. While pricing is important in bidding process, track records, brand names and design & engineering are more critical, mgt views.

Recent Results — Despite 1Q rev reducing 2% to S$88, pretax profit grew 23% to S$6.8m, backed by 9ppt GM improvement. Net profit however dropped 11% to S$5m due to tax credit in 1Q08.

Strengths — Propriety membrane technology; in-house production facilities for membrane; good scale of operation; long track records in China; good R&D.

Weaknesses — 82% net gearing; volatile nature of revenue; tariff hike subject to gov’t approval; surge in receivable days.

NBN benefits StarHub’s corporate drive

NBN benefits StarHub’s corporate drive. NBN opens up new opportunities in the corporate segment. Currently, StarHub’s fibre optic network covers 25% of non-residential buildings, with the remaining 75% being a virtual monopoly for SingTel. Post-NBN, StarHub will be able to raise its market share at the expense of SingTel. Another area which the latter dominates is the government sector, and this is likely to provide some growth for StarHub in the next few years.

… while retail segment may not be as hard hit. Consumers may be salivating at the prospect of having high speed internet at a fraction of today’s prices with the launch of NBN, but thinkagain. CEO Clontz believes that the pricing may be as much as S$75 per residential line, less than 10% lower than today’s prices. The high cost and low margins may deter competitors from entering the fray. He concedes that M1 will try to gain market share resulting in some near termdownward pressure on margins, but beyond that, it will still be a “shoot-out” between StarHub and SingTel.

EPL up for grabs in 3Q09. StarHub will likely fight hard to retain the broadcast rights for EPL. We estimate that StarHub’s winning bid will be 50% more than the US$160m that it paid previously, and this would likely lower EBITDA margins by 1.5%. However, Media Development Authority (MDA) is now studying the possibility of non-exclusivity of such coveted contents, which we believe is positive for StarHub as it lowers content costs substantially and allows it to retain its customers.

Growth drivers. Mobile broadband growth will likely peak this year, with handheld smartphones usurping the throne. It will be applications driven, leading to higher ARPUs. In management’s view, Pay TV also has some room to grow, from the current penetration rate of 46% to 55-60% in the steady state.

Singtel - Financial discipline across the group

Management highlighted that macro challenges and the NBN (National Broadband Network) rollout are the key uncertainties both in Singapore and Australia. It acknowledged that the operating landscape could change over the next three to five years, with the imminent fibre rollout in various countries. The operators could just become bit-pipe providers if there isn’t a dedicated push to diversify businesses. It stated that the way to differentiate and retain customers is to use brand reputation and venture into adjacent markets like media / IT services. SingTel is now one of the largest regional IT / managed services businesses and also aims to become a large multi-media provider over time. The launch of http://www.insing.com/ (a local Singapore search engine) is an example. Other incumbents like Telstra or Telecom NZ have also highlighted similar aspirations.
The company has and will continue to differentiate itself in the following ways:
1. Strong execution focus and continuing to deliver differentiation;
2. Financial discipline across the group. This not only applies to acquisitions, but also for capital investments across various businesses; and
3. Deriving synergies by leveraging group scale (combined 250mn mobile subs). These include central equipment sourcing functions and exchanging management and operational expertise.
The company highlighted the iPhone as an example of being able to negotiate on a group basis. In Australia, for example, Telstra, Optus and Vodafone Australia all provide iPhones. Telstra was able to secure a deal being the largest carrier in Australia; and Vodafone was able to leverage off its global scale. Similarly, SingTel/Optus also negotiated it on the combined-group basis, and the company now estimates its share of net adds in Australia is around 50%.

We maintain our BUY rating with a S$3.15 price target. The stock is up 7% since the last results on 14 May, 2009, and has outperformed its domestic peers. However, all three telcos have underperformed the local market since the beginning of the year. If broader markets do recover from here onwards, it is likely that developed market telcos could under-perform on a relative basis. However, if markets are volatile, we think SingTel remains a strong defensive play – it generates in excess of S$3bn in free cashflows pa from various markets.

With the recent announcement of a possible merger of Bharti (BHARTI IN, INR805, BUY) and MTN (MTNJ J, ZAR120, BUY), there is some uncertainty around the earnings / cashflow impact on SingTel in the near term. We note that while SingTel’s stake in Bharti could be diluted to around 19.4% (from 30.4% now) as per the current deal terms, the risk to medium-term earnings and cash contributions remains to the upside, owing to a solid operational outlook for both Bharti and MTN. The final deal structure and terms are yet to be determined — it is quite possible that SingTel could become directly involved in the deal by taking a stake in MTN, which could preserve its current Bharti stake or offset the dilution.

SIA - SATS FY09 Net Profit S$147m

4QFY09 net profit S$42m — SATS (81% owned by SIA) reported 4QFY09 net profit of S$42.2m (+12%qoq and -12%yoy) which included 2 months contribution from SFI (S$4.8m). Excluding SFI’s contribution and S$15.5m net gain from sale of property to DHL in 4Q08, 4Q09 net profit of S$37.4m was 15% higher than the same period last year, and down 1% qoq.

Operating performance — 4Q operating profit S$45.7m included S$5.8m contribution from SFI. Excluding SFI, operating profit rose by S$6m or 18%yoy as weaker business volume (unit services -8%yoy, unit meals - 14%yoy, passengers handled -11%yoy, cargo -21%yoy) was offset by lower expenses, including a S$12.3m grant under the Jobs Credit Scheme.

Overseas units still impacted by poor economic conditions — 4QFY09 PBT contribution from AJVs fell by 26%yoy due to poor business volume and higher expenses related to capacity expansion. For FY09, AJVs contributed S$22m, less than half of FY08, with all JVs except JAS (Indonesia) showing lower contribution. Worst hit included the ground handling JVs in Beijing (- S$10.4m) and Hong Kong (-S$5.4m), and inflight catering JV (-S$4.7m) in India.

Capital management — Final DPS of S$0.06 bringing FY09 total DPS to S$0.10, or 73.5% payout ratio (FY08: S$0.14, 77.5% payout). Mgmt has not decided on whether to refinance S$200m term loan maturing Sep-09, but added that internal cash generation could be used to repay the loan.

SMRT Corporation : Circle Line to provide new chapter of growth

Circle Line to boost ridership growth. After months of grueling trial runs and safety checks, the Circle Line Stage 3 (CCL3) was finally opened for passenger service on 28 May 2009. SMRT Corporation, the operator of CCL, is excited about the growth opportunities the new rail line will provide. According to management, this orbital line, which essentially links up the existing radial lines, is likely to lead to offer better connectivity, higher ridership for the group, and reduced travel time and fares for commuters. We are equally optimistic, as passengers are likely to see greater incentivesto take rail transport, and may switch from bus to train for reliability and frequency reasons. We understand from Land Transport Authority (LTA) that it is expecting 55,000 people to use the five CCL3 stations each day. As more stations along the CCL are progressively opened in 2010, we expect significantly better ridership, and in turn better revenue for SMRT coming from enhanced accessibility and bus-rail integration initiatives by LTA.

Leveraging track record for local and overseas opportunities. Apart from the higher ridership growth that SMRT is expected to enjoy, the group also said that successful operation of the CCL would further build on its widely-proven track record and better position itself for opportunities both locally (e.g. bid for Downtown Line) and overseas. In fact, during our visit to SMRT's Kim Chuan (CCL) Depot a month ago, management revealed that the depot has been strategically built to be able to house 70+10 trains - enough capacity for trains meant for the Downtown Line. Should the group win the bid to operate the new network, it has already in place plans for achieving synergies with its main lines. This, in our view, is a clear testimony of SMRT's far-sighted goals and dedicated management team.

Reiterate BUY. We see SMRT as a stock offering good growth potential but it has to a certain extent been neglected as investors switch from defensive to higher-beta plays. Despite our seemingly over-optimistic view on the group, we note that our FY10-12F earnings are not aggressive (still 1-4% below consensus). With consistently generous dividend payouts of at least 60%, backed by strong operating cash flows, we keep our BUY rating and S$1.81 DDM-derived fair value on SMRT. Key risks to our valuation include lower-than-expected average fares resulting from fare-reduction package and potential adverse effects from H1N1 influenza outbreak.

REIT - Restarting The CMBS Market

The "catalysts for recovery include the following: a) normalisation in credit markets as systemic risks subside over time, and b) eventual reflation in Asian economies due to fiscal stimuli and growth in domestic consumption." Our anticipated scenario for recovery in the REIT sector has started to unfold.

Extending TALF loans to commercial mortgage-backed securities (CMBS). The Federal Reserve announced on 1 May that CMBS would become eligible collaterals for Term Asset-Backed Securities Loan Facility (TALF) starting Jun 09. TALF loans with five-year maturities will also be made available for purchases of CMBS, asset-backed securities (ABS) backed by student loans and small business loans. Up to US$100b of TALF loans could have five-year maturities, which are more suited for investors in CMBS. The CMBS market has rallied with yield for AAA-rated CMBS falling from 15% to 10%.

OVERWEIGHT REITs. The US Federal Reserve's decision to extend TALF loans for CMBS will restart the CMBS market, an important source of funding for REITs. Current yield spread for REITs is 4.7%, much higher than the historical average of 3.0%. We expect the yield spread to contract due to normalisation in the credit markets.

We like laggards such as Ascendas REIT (BUY/S$1.55/Target: S$1.93) and CDL Hospitality Trusts (BUY/S$0.755/Target: S$1.24). We also have BUY calls for Ascott Residence Trust (BUY/S$0.675/Target: S$0.90), Frasers Centrepoint Trust (BUY/S$0.80/Target: S$1.44) and K-REIT Asia (BUY/ S$0.89/Target: S$1.15). We have downgraded CapitaCommercial Trust (HOLD/S$1.12/Target: S$1.14) to HOLD as the stock has rallied 64.7% since 18 Mar 09.

Parkway Holdings: Boosted by international operations

1Q09 net profit was up 9% YoY to S$21.3m, and revenue growth of 4% YoY to S$237.8m was in line with our estimates. Included in 1Q09 results was impairment loss of S$2.2m for its investment in Auric Pacific. Excluding exceptional items, net profit would have grown 20% for the first quarter. The growth in revenue was largely helped by its International operations (37% and 32% of 1Q09 and 1Q08 Group revenue, respectively), which grew by 20% YoY, thanks to healthy patient volumes.

Foreign patient volume at Singapore hospitals expected to remain low. Singapore visitor arrivals are expected to continue to decline, as the recession continues and the H1N1 virus deter discretionary travelling. This is likely to translate to lower foreign patient volume as patients put off seeking treatments in Singapore. If the H1N1 virus outbreak becomes more widespread, overall patient volumes (both local and foreign) could decline as patients avoid visiting healthcare establishments (e.g. radiology centres).

Maintain SELL. Management’s continual implementation of cost-cutting measures across all operations would help to cushion revenue impact from decline in patient volumes at its Singapore hospitals. The growth in its Singapore Healthcare segment (as more patients opt for outpatient treatment) and International operations are also expected to offset the decline in the Singapore Hospital segment. We are maintaining our earnings estimate of S$78.0m for FY09. Our target price of S$0.92 is based on 13x blended forward earnings. The stock is trading at 18x forward PE, which is unattractive compared with its peer average of 12x.

SIA - April loads factors show further improvement

With weak load factors a given in the current economic climate, Singapore Airlines’ (SIA) April’s numbers were better than expected. SIA showed resilience on both the passenger and cargo side. While YoY, both indicators slid by 4.2 pts and 3.7 pts respectively, passenger load factors at 72.2 were a sequential 2.8 pt improvement over April, while cargo load factors at 58.0 was flat.

On a YoY basis, passenger loads slid by 17.7%, but was an improvement over the 20% slide seen in March 2009. Cargo’s loads slid by 21.6%, versus an 18% decline in March. However, we are encouraged by SIA’s response to market conditions through capacity cuts. For April 2009, Passenger capacity was cut by 12.9%, while cargo was reduced by 16.5%. This level of reduction is ahead of assumptions.

While we warn that April’s load factors could be an anomaly rather than a trend, the signs are encouraging. Management’s recent indication that forward bookings are showing signs of leveling off are also cause for optimism, but we share management’s caution in its outlook. We also note that May’s passenger load numbers have a strong likelihood of being weak, which was during the height of the H1N1 flu virus scare.

We are maintaining our net FY10 profit forecast at S$865m. We expect SIA to remain profitable, despite lower revenues, due to reduced operating overheads, such as fuel and staff costs. We re-iterate our Buy call on SIA, with a target price of S$13.20, based on 1.1x book value.

Maintain Buy on ComfortDelgo with Target Price of S$1.75

1) Central planning has been delayed as the government is having consultations at the grass roots level. LTA could start to amend the bus routes in 2H09 but has not revealed plans as to how the bus industry will be deregulated.

2) CD expects its bus routes to be unaffected by the opening of Circle Line. Bidding for Downtown line has been postponed till next year and mgmt believes that they stand a good chance of winning given their prior experience operating a driverless system.

3) Question on the 41% YoY jump in insurance costs in the 1Q09. Mgmt replied that this was due to a change in the formula of calculating its insurance from burning cost (back-end loaded) to a fixed cost formula in 2009. On an annualized basis, CD's cost of insurance would only have increased by 3.7% YoY.

4) CD has kept its hedge on its diesel and electricity costs at 50% in FY09E at an average cost that is 30% lower than the actual cost in 2008 (average price of oil was US$99/bbl in 2008).

5) Overseas operations continue to see growth. CD can benefit from long-dated fixed operating bus contracts in Australia and UK. Bus and taxi operations in China continue to perform well. However, its taxi call centre in the UK has been affected.

Maintain Buy on CD with TP of S$1.75. We remain comfortable with our earnings forecast as the company can continue to benefit from resilient ridership, moderating costs and higher overseas contribution. The stock has been an underperformer and is trading at a 25% discount to the market PE, below its long term average which is at a 22% premium to the market. We expect the stock to outperform the market if there is a pullback.

Singtel - Merely a passenger in the Bharti-MTN transaction - valuation impact minimal

Bharti is currently undergeared and the US$4.0 bn net cash outflow from the transaction drives the net debt to unconsolidated EBITDA to 1.4x; still comfortable. Therefore, Bharti does not require financial assistance from SingTel to complete the transaction. SingTel confirmed it is not directly involved in the transaction and will not, therefore, contribute any cash or issue shares as a result of the deal.

As a result of the equity issuance, SingTel’s effective stake in Bharti would decline from the current 30.7% to only 19.6% of the enlarged, merged business. Bharti is already equity accounted anyway, so no deconsolidation is required. Furthermore, at the “entry price” being paid by Bharti on the current terms (14x P/E and 5.4x EV/EBITDA) the dilution to Bharti’s EPS would be limited to only 2.3%. SingTel’s management has not yet been able to inform us of the impact on SingTel’s shareholder rights (and veto powers) following the transaction (and the resulting stake dilution).

Thus, the prima face impact on SingTel will simply be felt through the valuation impact of the transaction on Bharti. Given the share-for- share exchange, the valuation impact on Bharti is complicated. But taking the closing prices of the two shares on Friday 22 May, it appears US$3.8 bn in value would be transferred from Bharti shareholders to MTN shareholders as a result of the deal. This can be thought of as a control premium (equivalent to a 14.3% premium to MTN’s closing price).

SingTel’s share of US$3.8bn in “value destruction” in Bharti would equate to S$0.11/share in value destruction at SingTel, or 3.3% of our current target price of S$3.34/share.

On the other hand, the US$3.8 bn in assumed value destruction is based on the deal terms at the closing market prices on Friday. It takes no account of potential synergies (either on procurement of operating/’back office’ costs), although we are not a big believer in either cost/revenue synergies from international acquisitions. What will probably be of far greater importance in the medium-to-long term will be MTN’s operational performance and the currencies/macro environment in Africa and the Middle East. On 4 March, our MTN analyst cut his MTN target price 38.7%, from ZAR150 to ZAR92 on currency and macro weakness. Should this prove short-lived, Bharti might destroy less than US$3.8 bn in value.

CITY DEVELOPMENTS - Confidence of The New Investor

City Dev and its 2 partners: Dubai World and El-Ad, have secured refinancing for the South Beach project: $800 mln 2-year term facility from DBS, OCBC, UOB, HSBC, and Sumitomo Mitsui Bank; $400 mln 5-year convertible notes issued to City Dev: $195 mln, and Nan Fung (HK): $205 mln.

Land cost for the South Beach development, secured in a land tender in 2007, is $1,688.8 mln (reported to be $500 mln lower than the top bid). It was funded by $1.2 bln bridging loan and $489 mln equity from the 3 partners. The development, designed by Norman Foster (HSBC Building in HK), has to be completed by 2016.

Nan Fung is a privately owned company, founded by the 86-year-old Ningbo-born Chen Din Hwa, who is ranked the 9th richest man in HK. Nan Fung is reported to hold equity stakes in HK-listed Sino Land, Lai Sun, and has a joint venture with Metro Holdings.

1. We believe the refinancing is positive news, largely because the new investor, an old hand in properties, is prepared to invest literally at the “original” land cost of $1.7 bln. Nan Fung will end up with about 23% equity stake upon conversion. (City Dev will see its stake increased to 40% from 33.3%. The stakes of Dubai World and El-Ad will drop to a combined 37%.)

2. This should more than offset the negative aspect that Dubai World and El-Ad have scaled back their investment. Recall earlier market speculation of either, or both had wanted out of the venture.

3. The only people who therefore appear to have a bit of cold feet are the bankers, whose exposure drops to $800 mln from $1.2 bln, representing 70% of land cost. But this could very well have been necessitated by the recent credit crisis. (Only Bank of Tokyo has dropped out of the consortium.)

4. With oil prices close to doubling from the low of US$34 per barrel, it is a relief that Dubai is still in, as is El-Ad now that the financial crisis is well past its worst.

5. We further believe there is still room for flexibility or manouvre, given there are 7 years to mandatory completion, and the project needs no more than 3-4 years to complete. City Dev, which is taking charge of the development estimated to cost $2.5 bln including land, has indicated plans to commence work by end 2010.

6. We have a BUY on City Dev.

StarHub: Margin expansion raises the bar

Earnings up 3%, above expectations. In the three months to 31 Mar 09, earnings inched up 3% YoY to S$82.5m on the back of a 0.8% YoY contraction in revenue to S$530.6m. EBITDA margin, at 33%, is flat from a year ago but improved 0.9ppt QoQ. Rising margins for mobile (+0.8ppt YoY) and fixed network (+1.6ppt YoY) led to better than expected results. Strong cash flows. Free cash flow surged almost 4x to S$115.3m (6.7S¢/share) due to improvement in working capital. As a result, Net Debt-to-EBITDA improved to 1.05x, from 1.25x a year ago. Its target is 1.5-2x, which suggests room for capital management. But given the tight credit conditions, this is unlikely to happen. Capex, at 10% of revenue, remains comfortably in check.

OpCo win shaves fears. StarHub, which derives the largest portion of its revenue from broadband among the three telcos, is deemed to be the biggest loser when it comes to the National Broadband Network (NBN). But its OpCo win would have partially alleviated such fears. Moreover, NBN will likely lend a boost to its commercial business, which currently accounts for 20% of revenue.

Confident of snagging EPL rights. Investors have also been worried whether StarHub can retain the English Premier League rights for the 2010-12 seasons. When probed, CEO Terry Clontz appeared confident of winning the rights, claiming that a bidding strategy is already in place. We have assumed that StarHub would win the race by paying 50% more than what it paid three years back. He further believes that incremental costs will be covered, and thinks that analysts who have assumed lower margins may be too conservative.

Earnings estimates, target price raised. We have raised our earnings estimates by 4.2% to S$310.9m in FY09 on the back of improving margins. Dividend yield, at 9.2%, remains the highest among the telcos and the best among the STI components. We derive a target price of S$2.39 based on DCF (previously S$2.35), which implies an upside of 22.5%. StarHub remains our top pick and only BUY in the telco sector.

StarHub : Commendable 1Q09 Results

1Q09 results within expectations. StarHub reported its 1Q09 results last night, with revenue down 0.8% YoY at S$530.6m, almost smack on our S$530.0m forecast, while net profit rose 3.1% to S$82.6m, or shy of our S$82.9m estimate; this included a tax credit of S$0.8m due to the corporate tax rate cut from 18% to 17%. On a sequential basis, revenue fell 1.1%, reflecting the economic slowdown, while net profit declined by 5.6%. But we note that the sharper earnings QoQ decline was due to a lower effective tax rate in 4Q08; otherwise, pre-tax profit rose 2.5% to S$101.5m, thanks to lower cost of sales and operating expenses. It also declared a dividend of S$0.045/share.

Drop in mobile revenue. On its key business segment, mobile revenue came off 3.1% YoY and 2.8% QoQ to S$264.7m, mainly due to lower revenue from its post-paid segment, which fell 4.8% YoY and 3.5% QoQ. Although it managed to grow its post-paid subscriber base by 9k users, we note that ARPU (average revenue per user) eased from S$71 in 4Q08 to S$67, hit by lower voice usage, IDD and outbound roaming services, while monthly usage also dropped from 469 to 442 minutes. A higher mix of customers on the discounted MaxMobile Data plans also had a diluting effect on post-paid ARPU. On the other hand, pre-paid revenue rose 2.7% YoY (down 0.5% QoQ), as the base grew by 40k to 914k users, though ARPU slipped from S$25 in 4Q08 to S$24. Mobile EBITDA margin improved from 36.6% in 1Q08 to 37.4%, thanks to lower acquisition cost and quantity of equipment sold.

Guides for stable service revenue. StarHub is guiding for stable service revenue (excludes non-core equipment sales), which management considers as "recurring revenue". Earlier, management guided for a low single-digit growth in total revenue. On the other hand, it has bumped up its service EBITDA margin from 31% to 32%. It has also kept its capex guidance to 11% of operating revenue. More importantly, based on its projected profitability and cash flow, StarHub intends to continue to pay S$0.045/ cent dividend every quarter, totalling S$0.18 for the full year. Maintain BUY. Overall, StarHub posted a pretty commendable set of results, despite the economic slowdown. As 1Q09 results were well within expectations, we are leaving our FY09 estimates intact; we may see room for upward revision should the economy recovers faster than expected. Maintain BUY with S$2.88 fair value.

Wilmar - ROEs are higher than they appear; retain Buy

On a reported basis, Wilmar’s ROEs are at the low end of the sector and appear to be on a declining trend from when the stock was listed in 2006. However, we believe the company’s ROE is understated due to non-cash intangibles from its merger in 2007, and is not representative of Wilmar’s cash returns or the returns on incremental investments.

We estimate underlying 2009E-2010E ROE at 23% (vs. reported ROE of 15%-16%), and our analysis indicates that incremental investments in Wilmar’s core merchandising and refinery, consumer products and plantations divisions could generate returns as high as 27%-86%. The market has seemingly been concerned that Wilmar’s downstream margins have been boosted by unsustainable directional trading. We disagree, as we believe there has been a significant change in the competitive structure of Wilmar’s key downstream businesses, while our analysis of similar agri-processing businesses worldwide indicates margins are not only sustainable but may have upside risk over the long term.

On an adjusted basis, Wilmar’s 2010E underlying ROE and CROCI move up to the top quartile of comparables in the Singapore market and plantations sector, while “reported” figures put Wilmar in the middle to last quartile. This could have positive implications for the company as investors tend to reward stocks in the top quartiles with premium valuations. Our new 12- month target price of S$6.50 (up from S$4.70) is based on 15X CY10E P/E, comparable to its historical 6X-19X trading range (since listing) and at a 15% premium to the Singapore market average. Our DCF-based SOTP is S$7.40/share. We reiterate our Buy rating and add it to our Conviction List.

Key risks are sharp decline in CPO or oil price; adverse government policy in China.

SIA - Better Luck Next Time?

The Asian Wall Street Journal yesterday quoted MM Lee as saying “talk may resume between SIA and China Eastern (CEA)”. SIA’s CEO Chew Choon Seng (CCS) was quoted by BT as saying “in the longer tem, we are still interested in any industry consolidation and in any investment opportunity in China, India or any growth market”. (MM Lee and CCS were in Kl attending a IATA function.)

Looking at SIA’s price movement yesterday (up 56 cents to $13.34 on a down day), it is clear investors liked the story of SIA going after CEA, and why not?

CEA was an eager bride 2 years ago, until Air China killed the deal with support from Cathay Pacific. Under that deal, SIA and Temasek were to acquire a combined 24% stake at HK$3.80 per CEA share. The surge in CEA’s share price to HK$10.50 in September of that year had also made it difficult to cement the alliance. The deal was called off in Jan ’08, as it failed to secure shareholders approval at an EGM.

With CEA last at HK$1.74 before trading halt (for the merger with Shanghai Airlines, which will give the combined group a 50% share of the Shanghai aviation market), another attempt to get together will likely be even more welcomed by investors. Shanghai will hold the World Expo next year.

SIA first confirmed interest in CEA in May ’07, when its stock was at $17.70; it hit $20.20 in October of that year. And when CEA’s EGM failed to approve the deal, SIA had fallen to $16.90.

SIA’s resilience amidst all the caution or more aptly, bearishness surrounding the airline sector (IATA hasraised the estimated loss this year for the global airline industry to US$9 bln from US$4.7 mln made in March this year), suggests that our Neutral stance merits re-consideration. A correction of the general market that many believe is now in progress, will likely provide such an opportunity.

Singapore Airlines: Resuming Talks with China Eastern?

A Bloomberg report said Singapore Airlines (SIA) and China Eastern Airlines Corp. may start talking again after an investment from the Singapore carrier failed last year, citing the South China Morning Post which quoted Singapore Minister Mentor Lee Kuan Yew. However, SIA Chief Executive Officer Chew Choon Seng, speaking at the same gathering, said the comments were Lee's ``personal view'. He also added the company is only keen on acquisitions in China in the longer term, when the regulatory environment is proper.

A quick recap. In 2007, SIA, along with majority shareholder Temasek, offered US$920m (SG$1.34bn) for a combined 24% stake in China Eastern, but the Chinese carrier's shareholders rejected the bid, which also faced strong opposition from rival Air China.

Not likely at this juncture. Putting aside the CEO’s comments, our first impression of the talks at this stage is that these are highly unlikely to have taken place given the fact that shares in China Eastern Airlines and its smaller rival, Shanghai Airlines, were suspended this week after media reports said the two loss-making carriers were close to a merger deal. The combination of the two China carriers would potentially give the new group a 50% market share in Shanghai. Given the challenging environment, we think the enlarged group may take a while to realise any merger synergies before looking at other possibilities.

More on longer term plan. While not upbeat on the possible revival of talk between SIA and China Eastern, we believe the company is still keen on acquisitions in China and India in the longer run. Especially with Singapore Minister Mentor, Lee Kuan Yew expressed its bullishness of both countries particular that China likely to achieve a GDP growth above 6% during the Special Session organised by International Air Transport Association (IATA).

Reiterate SELL. With IATA having recently revised its 2009 forecast for industry losses to US$9bn from the March 2009 estimate of US$4.7bn, industry players also mostly expecting more turbulence ahead and the latest news do not have any fundamental impact on SIA. Thus we maintain our SELL recommendation on the company. Our fair value of SG$8.80 is derived from 0.68x FY10 book, or a -2 standard deviation from its historical trading band plus the SATS share entitlement.

City Developments: South Beach Project Secures S$1.2b Refinancing

South Beach Consortium secures S$1.2b refinancing. The South Beach Consortium (SBC), equally owned by City Developments (CDL), Istithmar and El-Ad, has secured an S$800m syndicated 2-yr bank loan and S$400m 5-yr convertible notes. Both loans are secured loans and will refinance the S$1.2b bridge loan (Jun 09 expiry) for buying the South Beach Project land parcel in Sep 07. DBS, OCBC, UOB, HSBC and Sumitomo Mitsui are the syndicated loan’s providers, while CDL and Hong Kong property developer Nan Fung Group will subscribe for S$195m and S$205m of the convertible notes respectively. Interest cost was not revealed, but we estimate all-in margin to range from 3.0 – 3.5%, based on REITs’ recent debt refinancing exercises.

Refinancing risks removed, but concerns remain over two foreign partners. The refinancing of another substantial loan (after Suntec REIT: S$825m, CDLHT: S$350m and CCT: S$160m) further indicates that credit markets have eased, which is good news for the real estate sector. While we view the refinancing exercise and introduction of a new established foreign investor positively for CDL, concerns remain over the possible exit of Istithmar and El-Ad. Earlier this year, Istithmar was reported to be looking at offloading assets to generate cash for its parent – Dubai World to help pay its debts. During 2H08, El-Ad had also deferred the construction of Plaza casino-Hotel in Las Vegas and deferred payment of an S$625m loan used to buy its land. To date, both companies have yet to provide clear indication of their financial status and priority of projects under their portfolio.

Minimal impact, reiterate BUY on CDL. Net gearing of CDL would only inch up to 0.49x (currently 0.47x) upon subscription of the S$195m convertible notes, which is still healthy in our view. CDL’s 33% stake equates to S$0.15 per share (assuming project completes by end-2016), accounting for only 1.5% of our S$10.28 base case RNAV. We continue to favour developers with sizeable Singapore residential exposure. Reiterate BUY on CDL at S$12.34, pegged at 20% premium to base case RNAV.

NOL - Premature to Turn Positive

Apr-09 data remain weak — Rates continued to head lower by 1% MoM and 21% YoY on lower core freight rates and lower bunker recovery. Volumes +2% MoM, -22% YoY led by decline across all major trade lanes; strong MoM volume upticks in Feb/Mar-09 have eased. See Figures 2 and 3.

Port data points not encouraging — While we believe NOL’s losses peaked in 1Q09, continued weak ports data into 2Q09 suggest recent optimism on a turnaround in container shipping is premature at this stage. Our US transport analyst, Matthew Troy, in his 18-May US/Asia port monthly report, noted that sequential deterioration in rate of decline in port container volumes contrasted sharply with Feb/Mar improvement. Our China transport analyst, Ally Ma, observed “no sequential improvement in container throughput from China ports in first 2 weeks of May, following the deep Apr reversal of previous uptick in March” (see her report on 19-May). Singapore ports data showed a similar reversal in container throughputs trends in April. See Figures 4, 5 and 6.

Watch out for cash call — NOL’s strong share price rally of 61% since its Mar- 09 low provide a window of opportunity for equity issuance to plug funding gap (recall that debt was drawn down to plug negative operating cash flow in 1Q09 when capex was negligible), reduce gearing, or build up cash hoard for future M&A opportunities. Rights issue by NOL cannot be ruled out in light of recent cash calls by other Temasek-linked companies as well as shipping peers.

Other reasons not to own NOL – 1) Industry oversupply from near record high order book and idle vessels; 2) book value erosion from persistent losses.

STX Pan Ocean - notwithstanding a short-term rally in the BDI

According to the management, the Baltic Dry Index (BDI) has bottomed in Dec 08. STX Pan Ocean (STX PO) has an operating fleet of 306 vessels. Out of which, 70 are owned and 236 are chartered-in vessels.

Of the chartered-in fleet, 206 are dry bulk vessels. Twenty two of these have a hiring period of more than one year and the others are chartered out for an average period of three months. Due to the high chartered-in cost for nine dry bulk vessels and low profit margin for its chartered-in fleet, the management expects a recovery in earnings in 2H09. These nine vessels were secured when BDI was at 3000-4000 level.

Twelve vessels are scheduled for delivery in 2009 and 2011 while 18 vessels are scheduled for 2010. STX PO has not cancelled any of their vessel orders but they are looking to delay some of the deliveries for 6-18 months.

For the US$600m CAPEX allocated for 2010, the Company has secured US$70m financing and have issued Corporate Bonds of KRW200b on 8 May 09 (US$157.5m) at an interest rate of 7.95%.

In our opinion, notwithstanding a short-term rally in the BDI on China's higher iron ore imports, freight rates will likely be soft when vessel oversupply hits the market from 2H09 onwards. Maintain SELL and fair price of S$4.35 based on 0.4x P/B (a typical shipping cyclical trough valuation).

SingTel: Possible 4Q09 earnings surprise

Upbeat 4Q09 results likely. SingTel is due to report its 4Q09 results on 14 May before market opens. We had earlier expected revenue to show a modest QoQ decline (<5%) as we expect the economic slowdown to exert a slight toil on its business; the weaker AUD is also expected to negatively impact its consolidated revenue. But based on the relatively upbeat quarterly results from its peers MobileOne and StarHub recently, as well as the strong 4Q09 results from 33%-owned associate Bharti Airtel, we may see better- than-expected showing from SingTel. Another area of earnings surprise could also come from forex gains, as the regional currencies have appreciated some 2-5% against the SGD over the quarter.

Systems are go for NBN. Separately, the Infocomm Development Authority (IDA) recently announced the successful achievement of the contractual and financial close (CFC) by OpenNet, the NetCo of the NBN (national broadband network). SingTel has a 30% stake in OpenNet. As such, OpenNet has now obtained its Facilities-Based Operator License for it to commence the roll out of the NBN, where the plan is to achieve 60% coverage of all residential premises and non-residential buildings by end-2010, and 95% of all residential premises and non-residential buildings by 2012.

Divestment of SingTel's underground assets. The IDA has also approved OpeNet's implementation plan of the AssetCo, which will be established as a business trust within 24 months of the CFC, and will own and control the relevant underlying passive infrastructure assets that are used to support OpenNet's deployment. SingTel will transfer these underlying assets to the AssetCo; it will also need to reduce its unit holdings in the AssetCo to less than 25% within 60 months of OpenNet's CFC. We view the move positively as it would allow SingTel to monetize its assets.

Room for upward revision. In line with the recovering equity markets around the globe, we note that share prices of its listed associates have also risen over the quarter, with Bharti up as much as 16%. However, we are still not entirely convinced that a sustainable recovery has taken place, as the economic fundamentals continue to lag the sharp rally in share prices. Still, should the global economic recovery come earlier and stronger than expected, we see room to raise our FY10 estimates. For now, we maintain our SOTP fair value of S$3.09 until we see the 4Q09 results. In the meantime, we retain our BUY call.