CapitaMall Trust (S$1.58) - 2Q09 results - Meeting expectations

DPU in line despite S$1.5m retained. 2Q09 results were in line with Street and our expectations. Total income available for distribution was S$67.1m (+17% yoy). However, actual distributed amount was S$67.9m, including S$1.5m of distributable income retained from 2Q09 in view of economic uncertainties; and S$2.3m of net capital distribution income and net tax-exempt income from CRCT retained in 1Q09. Including the S$3.3m retained in 1Q09, management has retained S$4.8m of distributable income for 1H09. It is committed to distributing 100% of its distributable income for the full year. Hence, the S$4.8m retained will represent an additional 0.15cts for distribution in 2H09.

2Q09 DPU of 2.13 cts fell 40% yoy due to an increase in the unit base, forming 25% of our forecast for FY09. 1H09 DPU of 4.25cts, including retained income, represents 49% of our full-year forecast. Net property income of S$93.8m was up 12% yoy on new contributions from Atrium@Orchard and the completion of asset enhancement work in various malls. Qoq, the income was up 1.5% as positive rental reversions were diluted by higher property tax, marketing and maintenance expenses.

Occupancy stable at 99.7%; reversion rates flat. Portfolio occupancy stayed at 99.7%, the same as 1Q09. Average rentals grew 1.5% over preceding rates (typically committed three years ago), representing annual growth of 0.5%. Although shopper traffic was 2.2% higher than in 2Q08, gross turnover sales of tenants was only 0.2% higher, indicating more care in consumer spending.

New-to-market brands in Orchard could be prospective tenants. Management says competition in Orchard Road could be viewed positively as new-to-market brands who would first establish themselves in the prime shopping belt could also be persuaded to take root in suburban malls.

Maintain Underperform and DDM-based target price of S$1.30. For the rest of 2009, we expect CMT’s portfolio occupancy to be nearly full, anchored by its well-located suburban malls. However, reversions may turn negative as improvements in retail sales still lag behind. Maintain target price S$1.30, still based on DDM valuation (discount rate 9.5%).

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SMRT Corporation Ltd - Deal revived for Shenzhen Zona investment

Further to announcements made on 30 Sep 08 and 23 Jan 09, SMRT has unveiled a new sale and purchase agreement to acquire from Shenzhen Zoto Investment a 49% equity interest in Shenzhen Zona Transportation Group, a leading land transport company in Shenzhen. The purchase consideration of Rmb320m (S$68.4m) will be satisfied by wholly-owned subsidiary, SMRT Hong Kong Limited, in US$ cash equivalent. When completed, the purchase will count as a significant overseas investment for SMRT. To recap, Zona owns 33.5% of one of only three bus operating companies in Shenzhen.

Zona operates public buses, charter and tourist buses, long-haul coaches and taxi services. It also offers car rental & leasing services, and motor vehicle repairs. Its fleet comprises 803 buses, 142 charter and tourist buses, 78 long-haul coaches, 830 taxis, and 260 leased cars in the Shenzhen region. The group comprises 10 subsidiaries and three associated companies. Following the acquisition, Zona will become an associated company of SMRT.

Another Chinese company, the National Express Transportation Group, holds the remaining 51% of Zona. National Express was the first road passenger transportation company to provide extensive intercity bus services in 67 cities in China. Its other businesses include car leasing & rental, and charter & tourist bus services. It also develops and operates bus terminals.

Profit guarantee. Should Zona fail to meet certain profit targets for FY2010 and FY2011, SMRT will be entitled to additional amounts of distributable profits in Zona, in addition to distributable profits proportionate to SMRT’s stake in Zona.

Purchase consideration. Based on audited consolidated accounts for the financial year ended 31 Dec 08, Shenzhen Zona’s net asset value is Rmb376.7m (S$80.5m), represented by negative net tangible assets of Rmb48.0m (S$10.3m) and net intangible assets of Rmb424.7m (S$90.7m). Net intangible assets comprise mainly taxi operating licences acquired through open bids.

Details remain scant. The completion of the deal is subject to the satisfaction of certain conditions, including approval from the relevant Chinese authorities. No information has been given on funding or valuation. However, we again highlight that the intangible asset portion of the deal at Rmb424.7m appears excessive, probably due to a short supply of taxi licences in China and hence the premium pricing. We believe the situation in China is probably similar to Singapore, where taxi operators need to bid for certificates of entitlement (COEs). Notably, the new purchase consideration is 25.6% lower than the previous agreement, although it also corresponds to a 22% lower net asset value.

Impact based on assumptions. Despite the lack of information, we view this acquisition positively, given the growth potential of China’s public transportation sector. We understand from SMRT that Zona is profitable. If we take the average ROA of SMRT (FY09 ROA 10.8%) and ComfortDelgro (FY08 ROA 6.0%) (i.e. 8.4%) and apply that to Zona’s net asset value of S$80.5m, Zona’s pretax profit may be in the region of S$6.8m. Equity accounting SMRT’s 49% stake would result in associate income of S$3.4m, or a positive impact of 1.8% on SMRT’s FY10 pretax profit.

Maintain Neutral. We are keeping our forecasts unchanged as the deal appears to have a limited impact on the group’s business in the near term. We maintain our DCF-derived target price of S$1.77 (WACC 9.6%). Dividend yield of 4.4% is mediocre and the stock is unlikely to outperform the market.

Ezra Holdings - Positioned for long-term growth

Ezra unveiled its new growth strategy yesterday as well as its long-term plan into 2015. It is setting up a new business segment, a deepwater subsea unit (subsuming its current energy business) to expand as an integrated offshore & marine group.

No additional capex required. Ezra will be leveraging its existing assets, mainly two units of Multi-Function Support Vessels (MFSVs), to be delivered in mid-2010/beginning 2011 as well as a heavy lift construction vessel (delivery 2010) to venture into the subsea segment. Existing capex plans are, therefore, unaffected.

What will Ezra do for subsea segment? To be headquartered in Houston, the US, the new subsea division will expand Ezra’s market reach into the Gulf of Mexico, Brazil and Africa. The type of contracts it will be pursuing will include the installation of Subsea, Umbilicals, Risers and Flowlines (SURF), subsea inspection, maintenance and repair as well as well intervention and drilling (Figures 2 & 3). Management indicated that average day rates for subsea work could range from US$150,000/day to US$300,000/day, depending on duration (from 280 days to five years) and scope of work (term charter or lump-sum project). The subsea market is largely dominated by US and European players (Figure 5) and Ezra will be the first Singapore company to offer a full spectrum of subsea services.

Group revenue to grow by 50-60% by 2015. Management has an overall revenue growth target of 50-60% by 2015, with one-third contributions from the offshore support, subsea and marine divisions respectively. Currently, offshore support dominates Ezra’s revenue, at 60%.

Capacity growth from offshore support and EOC. Ezra plans to add four new AHTS to its offshore support fleet of 25 AHTS/AHT vessels, bringing its total capacity to 279,200bhp by 2011. Its construction and production arm, led by associate EOCL, also plans to increase its fleet with two new accommodation crane barges (300 tonnes, 300 men) within the next five months, via sale and leaseback arrangements or JVs with partners. The barges are likely to be deployed in South-East Asia with average day rates of US$22,000/day-US$30,000/day.

Earnings estimates raised by 4-9% for FY10-11. Our earnings upgrade incorporates: 1) higher day rate assumptions for the two MFSVs from US$80,000/day to about US$115,000/day; and 2) an enlarged fleet for the offshore support and production & construction divisions.

Maintain Outperform; target price raised from S$1.39 to S$1.47, still based on sumof-the-parts valuation, following our earnings upgrade. We see sustainable earnings growth and the ability to secure charters for the new MFSVs as key catalysts for the stock.

Genting Singapore: New Starlet in Town

Proxy to Singapore casino market. Genting Singapore (GENS) has the largest exposure to Singapore's US$3b gaming market (89% of SOP, virtually 100% of 2011 EBIT). Resorts World at Sentosa (RWS) can tap on Singapore's existing domestic gaming market, rising regional tourism and leverage on Singapore's transformation into a global city.

Synergistic partnership: Genting+Universal Studios. We expect gaming revenue to come mainly from the more resilient and higher-margin grind segment (60:40 grind-VIP distribution, almost similar to Genting' 70:30). Universal Studios should help draw in the mass-market to RWS - differentiating it from Marina Bay Sands' MICE/business visitors focus as well as help diversify revenue base (non-gaming: 25-30% of revenue).

Potential first mover advantage. RWS could open earlier than expected, possibly in Dec 09/ Jan 10 to coincide with the Chinese New Year peak season. It could overtake Marina Bay Sands (launch postponed to 1Q10 from end-09) - an advantage in locking in local market share (S$2,000 annual pass in lieu of S$100/entry to be paid by Singaporean residents is exclusive to one casino). RWS' construction is on-track: 71% of project cost has been awarded to date with testing/ commissioning of ride equipments scheduled for Nov 09.

Potential catalysts: a) Award of casino licence in 4Q09 (already fulfilled requirement of >50% commitment spending and GFA construction), b) announcement of exact soft opening date, c) encouraging response for hotel bookings, and d) recovery in UK casino operations.

Sum-of-parts of S$0.98, valuing RWS at S$0.87/share (based on DCF assuming 7.8% WACC, 1.5% long-term growth). We expect RWS to be profitable in the first year of operation and earnings to grow at a 5-year CAGR of 37% (assuming no. of tables increase progressively from 500 to 1,000).

SMRT - 1QFY10 results preview

SMRT Corporation (SMRT) will be announcing results for the first quarter of FY10 after market closes on 31 Jul 09. A teleconference facilitated by the company will take place after the results announcement.

We are expecting SMRT to post stronger 1QFY10 results on a yoy basis, on maiden contributions from the Circle Line (CCL), as well as lower energy- and wage-related costs. For a more comprehensive operational update, please refer to our report “Still Worth Paying For” issued 8 July 09.

Maiden contribution from CCL. 1QFY10 will see the CCL contribute for the first time, as the first section of the line (CCL3) started operations in May 09. Ridership for CCL3 is at about 40,000/day at present. We expect ridership for the section to normalise at about 45,000/day, adding 14m to ridership in FY10.

Lower energy expenses. Electricity costs for usage spanning Apr-Sep 09 were contracted in Nov 08, when HSFO prices were significantly lower. We are expecting energy expenses to be 11% lower for the full year. Benefitting from the Jobs Credit Scheme. In spite of higher operational overheads related to the CCL on greater staff strength, we expect wagerelated expenses to be under control due to the Jobs Credit Scheme.

We have a BUY call on the stock with a DCF-derived target price of S$2.00 (cost of equity: 6.9%; terminal growth: 1%)

CapitaLand 2Q09 Results Flash: PATMI of S$124.0m in line with expectations excluding revaluations and impairments

CapitaLand reported a PATMI of S$124.0m in 2Q2009 (excluding revaluations and impairments), a 163% increase compared to 1Q2009. Including aggregate losses on revaluations and impairments totalling S$280.9m taken in 2Q2009 related to the Singapore office portfolio (including CapitaLand's share of CapitaCommercial Trust's revaluation losses), real estate assets in Australia and the former Char Yong Gardens site in Singapore, the Group posted a 2Q2009 net loss after tax and minority interest of S$156.9 million. The 2Q09 PATMI of S$124.0m is in line with expectations excluding excluding revaluations and impairments.

Revenue and Earnings before Interest and Tax (EBIT) in 2Q2009 benefitted from higher sales in China and Vietnam. In China, the Group saw healthy sales of its residential projects, including the new launches in Beijing, Chengdu and Foshan. This contributed significantly to the 163% quarter-on-quarter increase in PATMI. In Vietnam, the Group continued to recognise sales for The Vista, a residential development in Ho Chi Minh City. These mitigated lower sales revenue from development projects in Australia and Singapore, absence of rental revenue from commercial properties which had been divested and lower operating performance of serviced residence properties.

Raffles Medical Group – Yet another record quarter

RMG posted a solid set of results for 2Q09, with revenue increasing 6.5% yoy to a record $53.9m and net profit increasing 13.8% yoy to $8.8m. Revenue from Healthcare Services (clinics) and Hospital Services grew 12.3% and 4.8% respectively during this period.

For its hospital, a 7% decline in local patients was offset by a 13% increase in foreign patients. While the recession could have played a role in this decline, management believes the H1N1 pandemic was the major reason, noting that the public hospitals are seeing the same trend of people staying away from hospitals if possible. There were also minor exceptional costs involved in public and infection control measures.

Management continues to keep a tight lid on operating efficiencies. Staff cost, the major cost component, continues its steady decline from 49% of revenue in FY08 to 48% in 1H09, resulting in increased profits. 1H09 net profit of $16.6m now forms 45% of our FY09 forecast. With the effects of H1N1 now gradually subsiding, we expect stronger performance in 2H09.

With the full ownership of its Raffles Hospital since 2007, RMG has been generating stronger cash flow than ever. With a net cash position of $27.5m, management continues to be on a lookout for opportunities. However, since management prefers Greenfield projects which do not require as much outlay, we deem that a cash distribution could be likely.

With this stellar set of results achieved against the backdrop of the global recession and the H1N1 pandemic, it is another testament to RMG’s brand of consistent incremental growth. We keep our forecasts intact and expect RMG to comfortably surpass the FY09 consensus NP of $33.5m. Our FCFE target price of $1.38 implies 20X FY09 estimated earnings.

MobileOne - Q209 results provide some comfort

Q209 results better than expected; signs of stabilisation MobileOne (M1) results were better than expected due to higher revenues and good cost control (tables 1-2). On the cost side, staff costs and facilities costs remained low, similar to Q109. The turnaround in M1’s revenues in Q209 after a continued decline in the previous quarters (Chart 1) is comforting, in our view. Mobile data’s contribution to service revenue increased to 10.9% compared with 9.3% a year ago. We believe M1 has secured some mid-to-high-end subscribers through its Take3 plan.

Near-term outlook remains unexciting but dividends supportive M1 stated during the conference call that the revenue outlook in H209 remains challenging due to macro uncertainty. M1 will continue to show cost discipline to maintain net profit at the 2008 level. We believe 8% dividend yield provides share price support for M1. M1’s dividends are supported by the solid balance sheet (0.7x net-debt-to-EBITDA) and cash flows (11% eFCF yield). Management stated M1 will keep its dividend payout ratio at 80%.

Expect mid-to-long-term improvements as M1 utilises NBN Despite the unexciting near-term outlook, we believe the medium-term outlook is positive as the next generation national broadband network (NBN) gives M1 a potential new revenue stream from broadband.

Valuation: retain Buy rating with a S$2.00 price target We maintain our Buy rating on M1 as the company provides a stable dividend and potential mid-to-long-term growth through NBN. We base our price target on DCF, using a WACC of 8.6% and 0% terminal growth.

Keppel Land - Earnings Risk in 2H09

KepLand reported 1H09 operating and net earnings, in-line with our expectations. In our view, it is the 2H09 earnings that are likely to disappoint, potentially from write-downs in the residential and commercial landbank and largely from losses from revaluation of commercial assets, a process which will likely be undertaken only in December. Given the current 23% downside risk to our price target of S$1.95, we maintain our Underweight rating on Keppel Land.

Stronger balance sheet post rights issue, with net debt/equity ratio as at Jun-09 at 0.23 times and according to the company, it intends to capitalize on opportunities, seeking acquisitions in Singapore and overseas. Strong 2Q09 residential sales, notably in China, Singapore and Vietnam with 1,345, 42 and 28 units sold respectively.

Asset revaluation losses or write-downs in landbank yet to be reported; hence, downside risk to earnings remains in our view. Singapore office outlook remains weak. Pre-commitments for its MBFC office development has stagnated at 61% since 3Q08, with nosubstantial commitments yet at Ocean Financial Centre. We expect the decline in office rents to continue from the current committed prime grade A office rents at S$9.50/sq ft, to S$8.40/sq ft and S$6.50/sq ft for 2009and 2010 respectively. According to data by JLL, of the 7.75mn sq ft of new office space entering the market in 2009-2012, only 26.5% of the space has been committed.

Price target at premium to CY09 NAV of S$1.80, attempts to capture the improvement in liquidity in the equity market, in which investors may be willing to pay a premium above intrinsic value. As Keppel Land is highly skewed to the Singapore office market (53% of its NAV), which we are most bearish on, we find its valuations uncompelling, particularly given that the only bright spot for the sector is the residential markets of Singapore and China which comprises 8% and 18% of its NAV respectively. The stock is trading at a 10% premium to our bull case NAV of S$2.31, which we believe is unjustified.

Keppel Corporation: Mind the gap

Exceeded expectations. Keppel Corporation (KepCorp) posted 2Q results that beat our expectations with topline growing to S$3.2b (+21% YoY, +7.5% QoQ) translating to a PATMI of S$739.5m (+147% YoY, +159% QoQ). However, excluding exceptional items, PATMI grew at a more moderate pace to S$317m (+6% YoY, +11% QoQ). The stronger results were due to more aggressive accretion of its orderbook as well as better operating efficiencies at its yards in building repeat rig units for its customers.

Dividends: Better than usual but worse than expected. We earlier warned of the unlikelihood of any special dividend from its SPC divestment where cash conservation was called for in view of its majority stake negotiation for a Brazilian yard (WTorres) and the need to provide its own working capital for about four Jackups from Seadrill and Skeie Drilling in its O&M division. Management also alluded to opportunities in the environmental, property and water sectors that the group could capitalise on by having sufficient capital on hand. KepCorp eventually declared 15 S cents interim dividend.

Gap in O&M orders. With better clarity on its operating margins and aggression of orderbook recognition (Exhibit 2), we now think that FY09 would turn in a laudable performance despite the difficult macro environment. However, we view the gap in substantial O&M orders for almost 12 months will significantly affect the group from FY10 onwards. KepCorp is presently trading at 9x FY09F PER (includes SPC divestment gains) and jumps back to 15x PER for FY10F. Despite the expected decline in earnings, the market is pricing KepCorp's stock above its FY07/08 trading band, where it experienced record earnings.

Raised estimates but remaining NEUTRAL. We have factored in KepCorp's better operational efficiency at its O&M division as well as a more aggressive recognition of its order book for FY09. We are also assuming that KepCorp wins 3 of the 8 Petrobras FPSOs hull jobs (prev. 2). Consequently, our FY09 and FY10 anticipated order wins are now S$2.5b (prev. S$2b) and S$3.8b (prev. S$3b), respectively. Upgrades by our property analyst for Keppel Land are also slotted into our estimates. Despite positively re-rating our model, we remain in the tepid recovery camp where we model in diminished (but not vanishing) intense cyclical growth risks. Our SOTP valuation is now S$8.20 (prev. S$6.40). Maintain HOLD. Look to accumulate around $7.40.

Singapore Petroleum Co Ltd: Dim near-term outlook

In line with expectations. Singapore Petroleum Company (SPC) reported its 2Q09 results yesterday, with revenue falling 47.6% YoY (+18% QoQ) to S$1.7b. The group's revenue in 1H09 accounts for 51% of our full-year estimate. Although net profit fell 75.9% YoY (-21.7% QoQ) to S$43.4m in 2Q09, we note that bottomline was impacted by an impairment of E&P assets. The fall in net profit was not surprising considering lower refining margins due to weak demand and excess supply in the market: the group achieved an average refining margin of about US$3/bbl for 2Q09 compared to US$13/bbl in 2Q08. This is also lower than the US$4.50/bbl in 1Q09. SPC's 1H09 net profit accounts for 58% of our full-year estimate.

Several factors affected revenue. Demand for refined products remained weak in the past quarter and the spread of Influenza A (H1N1) also resulted in travel curbs and weaker jet fuel demand. According to SPC, "surplus products flowed into the region", which was made worse by the commissioning of new capacities by other refineries. The group also carriedout a scheduled maintenance of a crude distillation unit which resulted in lower throughput (by 13%). Lower oil prices compared to a year ago also inevitably affected the group's topline (average realization of US$62.61/bbl for 2Q09 compared to US$122.90/bbl in 2Q08).

Additional impairment of Sampang development. SPC provided for a S$43.3m impairment for the Jeruk discovery in the Sampang PSC in 1Q09 due to significant uncertainties with regards to the possibility of future commercial development. An additional S$34.9m impairment was made in the past quarter as the group determined that the carrying costs of the Sampang PSC could not be fully covered by the estimated recoverable values under the current oil price environment.

Dim near-term outlook. The general industry outlook is dim until there is a sustained recovery in the global economy. However, SPC is now a part of PetroChina (holds 67.3% of SPC's as at 21 Jul 09), the listed arm of China National Petroleum Corporation. While PetroChina is in a better position to develop SPC's potential in increasing refinery's complexity rating and enlarging export market, the process will be very lengthy. PetroChina's current intention is to retain the listed status of SPC but the uncertainty of its longer term plans causes us to retain our SELL rating. Our fair value remains at S$4.40 and we encourage investors that have made gains to exit while PetroChina is still acquiring shares.

CapitaCommercial Trust: Outlook Remains Challenging

2QFY09 results in-line with expectations. CCT reported a (pre-rights adjusted) 31.5% YoY increase (+5.6% QoQ) in 2Q09 DPU to 3.42¢, in-line with ours and consensus estimates. Adjusted for the rights units, 2Q09 DPU would have been 1.71¢, with an annualised DPU of 6.86¢. Revenue was up 34.4% due to positive rental reversion. CCT will trade ex-2Q09 distribution on 31 Jul 2009. We are reviewing our Neutral Rating on CCT (with a view to downgrade). Our TP of S$0.71 may be adjusted.

Cautious on office sector. CCT share price has almost doubled since Mar 09, and now trades at a forward 420bps above risk-free instruments, providing a mere 110bps cushion over its historical 310bps average. Premising on our forecast FY10 DPU of 6.24¢, our bull-case scenario implies a 28% upside with a fair-value of S$1.11 (~5.6% yield at fair-value) should the current market rally continue. In contrast, our bear-case scenario could see the stock retracing 43% to the S$0.50 level, with the stock yielding at 12.5% (1,000bps spread over 10-year bonds yields). From current levels, we view risk-returns on the counter as unfavourable and recommend investors not to accumulate on the stock.

Refinancing concerns lifted; CCT now boasts sturdier financial credit metrics. Post the equity fund raising in Jun 09, management intends to utilize 80% of its S$828m proceeds (or S$664m) to repay loans comprising the two-year secured term loan maturing in Jun 10 and the bridge loan facility maturing in Aug 09. With that, the next maturing debt of S$150m (8% of total debt) comes due in Mar 10 and S$85m (4%) in Aug 10. Following the EFR, CCT’s gearing is projected to fall to 32% (from 43%) and interest cover to improve to 3.5x (from 2.4x). On the back of these improvements, Moody’s has recently upgraded CCT’s debt rating to stable whilemaintaining its corporate rating at Baa2.

Further rent declines expected in coming quarters. According to CBRE, prime office rents averaged S$8.60/sqft in 2Q09, reflecting a 18.2% QoQ decline (1Q09: S$12.90/sqft). Despite the economy being technically out of a recession, it is clearly still a tenants’ market and the focus on tenant retention remains paramount for all landlords including CCT. In our view, most office landlords will likely shift their focus on occupancy optimisation at the expense of rental rates. This will likely put further downward pressure on rents in the coming quarters. Our channel checks indicate that some landlords in prime areas are currently negotiating rents at between S$6-7/sqft, 20% lower than 2Q09 figures.

Keppel - SPC to boost full year earnings

Keppel Corp will be posting 1H09 results on the 23rd of July. Earnings will be boosted by an exceptional gain of S$660m from the divestment of its 45.6% stake in SPC to Petrochina for S$1.47bn in June. The gain works out to 41 cts per Keppel share. The gain may result in a distribution to shareholders. Our expectation is that Keppel will pay out about half of the gain to shareholders (20 cts) at 1H09, while retaining the remainder for further investments, primarily in infrastructure, and township projects in China.

We do not see an immediate need for Keppel to invest in further expansion for its Offshore and Marine division. While the yard is currently operating close to full capacity from contracts that it has secured over the past two years, new order flows have been muted over the past year. Keppel’s last reported orderbook was S$9.5bn. We expect the yard to have converted around S$2bn in revenue over 2Q09, in line with 1Q09.

For its 70% owned Reflections at Keppel Bay project, Keppel had previously sold 633 units at an average price of around S$1,880 psf. Reflections has 496 units remaining, which were unsold over the past year as the property market cooled off. With the revival in interest in the property market, we believe that Keppel and Keppel Land will take the opportunity to re-launch its remaining units. We estimate that achievable prices would be in the region of S$1,800 to S$1,900 psf, which would generate additional net revenue of S$1.1bn for Keppel.

We are not yet factoring additional Reflections sales revenue stream into our FY09 forecast, which stands at S$1.57bn. (S$913.1 net of gain from SPC sale). The loss of associate earnings from the divestment of SPC is also expected to be muted and in the region of just S$80m for FY09, as SPC was facing thinner refining margins from lower crude prices.

However, we are factoring in an average selling price of S$1,800 psf for the remaining 496 units at Reflections into our Sum-of-the-Parts asset valuation, while adjusting for the SPC stake sale. Our SOTP valuation now stands at S$7.77 per share, and we are accordingly raising our recommendation to a Hold, pending Keppel’s 1H09 reporting. Assuming a 20cts interim dividend payout, FY09 yield stands at 6.9%.

NOL - Volumes Up, Rates Down

Mixed signals: where to from here? — Volumes improved sequentially (-14% YoY in Jun-09 vs. -21% YoY in May-09) but rates worsened sequentially (-29% YoY in Jun-09 vs. -23% YoY in May-09) – we believe the latter could be due to erosion of rate hikes implemented in Mar/Apr-09. Recent statement by TSA on a “voluntary guideline” to raise Asia-US rates by US$500/TEU provides hope for a short-term reversal in rate decline in the coming months.

Bulk hot, containers cold — Our PRC Shipping analyst Ally Ma prefers bulk over container players as supply-demand dynamics are improving for dry bulk but not for container players (see her report, PRC Shipping – Bulk Hot, Containers Cold). While liners may have seen the worst, a rapid recovery is not on the cards due to shaky global consumption and a large inventory overhang.

News flow direction — We maintain our view that signals in the container shipping industry will be mixed with a positive bias: rate hikes and seasonal volume upticks may bring short-term cheer to the market and temporarily support valuations – however, we think any significant hike in rates is likely to be eroded due to vessel over-capacity. Liners may make repeated attempts to jump-start rates from “unsustainably low” levels.

M&A angle differentiates NOL from other liners — We maintain our Buy/High Risk (1H) recommendation mainly due to NOL’s ability to leverage its strong balance sheet position to acquire vessels or networks. NOL now trades below its historical P/B valuation; we maintain our S$2.00 target price based on 1.3x FY09E P/B, similar to levels seen in 2002 recovery.

SMRT announces new S&P for 49% stake in Shenzhen Zona

This is a new SPA which is slightly different from the previous one signed in Sep 08. The latter which has since lapsed earlier in 2009 as certain conditions precedent were not met. The new SPA is also subject to certain conditions precedent, including receipt of approval from the relevant PRC authorities. Given that this is a second time a SPA is signed, we think the chance of it coming to fruition is likely.

Upon completion of the acquisition, Shenzhen Zona will be an associate of the company. As completion will take several months, the impact on SMRT's FY10F earnings will not be material. Assuming an acquisition PER of around 8x - 15x, which is similar to regional/global peers trading range, we estimate the profit contribution of this acquisition is around S$4.6m - S$8.6m (or 3%-5%) of SMRT's Group profit.

As of Dec 08, Shenzhen Zona has a NAV of RMB376.7m, represented by a negative NTA of RMB48m and Net Intangible Assets of RMB427.7m. The intangible assets largely comprise taxi operating licences acquired through open bids. The acquisition price works out to be around 1.7x P/NAV.

Shenzhen Zona is engaged in the following services:
， Taxi services in Shenzhen, car and bus repair services in Shenzhen and Huizhou,
， car leasing, scheduled coach services from Shenzhen to other cities, tour and chartered coach services within and beyond Shenzhen; and,
， public bus services in Huizhou.

Maintain Hold, TP of S$1.65

Singapore Telecoms - Defensive with growth potential

Targeting wider football audience. SingTel recently unveiled its pricing plans for the upcoming UEFA Champions League, Europa League and Serie A matches next season. Offered via three platforms - on mioTV, online and on mobile, the sign-ups will cost S$15.90/month for access to all three platforms for its subscribers; it also has separate plans for individual platforms should subscribers opt not to take up the all-in-one package. And it has not forgotten about non-subscribers - they can pay S$13/month to watch these matches online or just S$6 per live match. We think the multi-platform approach is great as it enables SingTel to tap the whole market of football fans - well beyond its current mioTV subscriber base of 100k.

Defensive earnings still matter. On the economic front, there are increasing signs that the global recession has probably past its worst point, but the consensus is that the pace of the economic recovery is still expected to remain splotchy. As such, there could still be several quarters of uncertain corporate earnings for most companies. On the other hand, SingTel's suite of services is likely to remain quite resilient as consumers nowadays have deemed them to be near-essential or even a necessity. SingTel itself has guided for stable FY10 performance, with both Singapore and Australia turning in low single-digit revenue growth.

Growth potential from regional associates. Should there be a fasterthan- expected pick up in the economic recovery, we believe that emerging markets in Asia would be the ones who will benefit the most. We further believe that this would translate into faster growth for SingTel's regional associates, effectively adding a "recovery angle" to its investment thesis. Another potential positive would be associate Bharti's much-talked about merger with South Africa's MTN; this would allow SingTel to extend its reach beyond Asia and with well-established partners. Other catalysts would include possible M&As in the region.

Raising fair value to S$3.49. On the recent leadership change at rival StarHub, we do not believe it will affect SingTel much - while it is the de facto leader in the Singapore market, its importance is likely softened by its potential regional expansion. In light of the firmer regional currencies, we have bumped up our FY10 and FY11 estimates slightly; the recent rebound in the global stock markets has also increased our SOTP fair value from S$3.18 to S$3.49. Coupled with an expected 3.9% dividend yield for this year, we maintain our BUY rating.

Mobile One - More growth-targeted initiatives ahead of NBN

Although YoY comparisons are still negative, the critical postpaid mobile revenue stream reversed a five-quarter decline in 2Q09. M1 added 50,000 mobile subscribers in 2Q09 (including 7,000 postpaid subs), reversing 1Q09’s 11,000 erosion. Notably, the multi-quarter decline in postpaid ARPU was also arrested during the quarter and roaming traffic has also started to turn around for the first time since the crisis started.

As expected, margins improved from a year ago, offsetting the YoY decline in revenue. EBITDA margin on service revenue rose from 43.6% in 2Q08 to 44.7% in 2Q09. This was driven by more customers taking on mid to high-end mobile plans under the Take 3 program as well as higher mobile data usage on its HSDPA network. QoQ, net profit fell 12% to $37.1m only because there was a $5.5m tax credit in 1Q09. Adjusted for that, net profit rose 1.5% QoQ.

Although subscriber acquisition and retention costs of $301 were higher QoQ, it is still down from $346 a year ago. M1 is guiding for similar levels of spending in future quarters but our forecasts already assume higher customer spending. Further, we do not expect SingTel’s recent iPhone 3GS launch to drive a big jump in defensive industry spending, unlike 1H08, as there are now more smartphone alternatives available.

All the telcos will be racing to make sure they get all the high value subscribers they can before NBN comes online. Unlike StarHub and SingTel, which can bundle fixed broadband and Pay TV, M1 is likely to focus on mobile broadband, a growth area due to the profileration of smartphones and netbooks. This could raise costs but we believe M1 has already factored this into its guidance of earnings stability for 2009.

Management reiterated its outlook of a stable 2009 in terms of earnings, as well as a commitment to paying 80% of earnings in dividends, which will still yield a very attractive 8% at current levels. (Interim dividend was maintained at 6.2 cents.) The NGNBN should benefit M1 more than the other telcos in the long term given its relative lack of bundling capabilities, but growth-oriented investors may prefer SingTel in the short term.

Venture Corporation: Stronger momentum boosts upside

Recovery underway. Our latest company update points to higher momentum throughout Q2 (except for RSSI and TMI), as customers stock up ahead of the buying season in 2H. This sequential growth, we believe, will sustain through 4Q09, bolstered by seasonality & demand recovery, which is underpinned by incrementally positive macro development. Contrary to market concerns of erosion at Printing & Imaging, P&I appears to be outperforming as Venture, through full configuration offering, continues to strengthen its position with HP in existing and new platforms.

Margin pressure short term pain, long term gain. We were previously concerned by the sharp plunge in margin as Venture switched to full turnkey for HP in Q1. However, as Venture continues to secure new ODM platforms from this customer, we appreciate that full turnkey is the last mile solution necessary to complete the total value chain management, which ultimately would enable Venture to strengthen customer alliances and stickiness in the long term. For Q2, we expect net margin to inch up 0.5%pt q-o-q to 4.8%.

Upgrade to Buy, revised TP to S$9.40 from S$6.50 previously. In tandem with a higher profit forecast and a rollover to average valuation peg of 15x PER (vs previous peg of 1SD valuation of 11x PER), our new target price is S$9.40, translating to 15% price upside.

Key highlights from NOL

With about US$1b proceeds from rights issue, NOL is looking for opportunities to purchase distressed assets after paying down part of its debts.

Management guided a time frame of at least two years for new asset acquisitions (WACC is approx 9%).

Sharing of slots with its alliance partners have helped to remove some capacity, raise utilization rates and reduce costs.

Demand is picking up due to seasonality factors rather than real recovery.

Funding situations have not improved.

NOL is cash profitable but not earnings positive.

Losses are expected for 2009.

Company has managed costs by reducing 10% of headcounts globally.

Thirteen vessels will be delivered in 2009 and five in 2010.

NOL has delayed some new orders by six to two-and-half years.

Expect plenty of tonnage to hit the waters in 2009-2010 with approximate 10-11% of supply coming on board this year.

The trough valuation for the container shipping sector is about 0.4x P/B and the long term average is about 1.3x P/B. Based on consensus forecasts, NOL is currently trading at 0.9x 2009 and 1.1x 2010 P/B.

Singapore Press Holdings - Shifting expectation towards an earlier recovery

We price in an earlier recovery: SPH has underperformed the FTSE STI Index by 30% YTD, reflecting the market’s preference for high-beta stocks and the expectation of a recovery in core business in FY11. With improving economic conditions in Singapore (J.P. Morgan has raised its real GDP growth forecast to -4.3% for 2009 and 4.4% for 2010), a stabilizing job market, and the recent strong pick-up in the property market, we could see an earlier-than-expected recovery in the group’s core business. We therefore raise our FY10 and FY11 EPS forecasts by 12% and 9%, respectively, and our FY10/FY11 DPS forecasts by 11%.

Operating margin to improve in earnest in 2010: The spot newsprint price has fallen to US$500/ton, a 75% drop from the peak of US$875/ton. As SPH locks in newsprint on a rolling basis, we expect low newsprint prices to kick in during FY10. In addition, the S$ has appreciated 5% in the past three months, further helping SPH to reduce raw material costs. In view of this and the staff cost cuts earlier in the year, we estimate operating costs to fall 11% YoY and operating margin to improve to 39% in FY10.

Reduced risks associated with property division: With the strong pick-up in the property market, and as secondary prices for the Sky@Eleven project have increased to S$1,100psf on average since May, the concerns about potential default upon completion should be alleviated. In addition, the stronger-than-expected take-up rate for the upcoming retail space along Orchard Road should also help to reduce the pressure on rental renegotiations for Paragon.

We reiterate our OW rating, and raise our SOTP-based PT to S$3.90 from S$3.15: The increase is a result of our higher earnings estimates, change in valuation methodology for the core business, and rolling forward our timeframe to Jun-2010 from Dec-09. Key risks to our rating and price target include a later-than-expected recovery in ad revenues and a quicker-than-expected pick up in raw material costs.

SIA - Cargo shows further improvement

Singapore Airlines (SIA) posted a sequential rebound for its June 09 passenger load factors, hitting 75.7 versus 66.9 in May. Although YoY this was below June 08’s 79.2, this is still a strong showing in the current market environment. The load factors were also boosted by SIA’s capacity cuts to match demand – passenger capacity has been cut by 14.4% YoY, while passenger loads have fallen 18.2%.

On a sequential basis, passenger loads were up by 9.1%, partly due to the school holidays – however, the sequential boost this year is higher than the usual seasonal 3-5% of previous years, which probably indicates that passenger loads are picking up off the lows of May, which were impacted by H1N1 fears. Cargo posted a load factor of 62.9, on the back of a 20.8% reduction in loads, matched by a 22.3% drop in capacity, to actually post a YoY improvement of 1.3 ppts. Thisreinforces the trend that the business may have bottomed out, with a consecutive improvement of 1.7 ppts in load factors.

These latest numbers reinforces our belief that the worse of the H1N1 flu scare may be over, as air travel returns to non-crisis conditions. While we reiterate that this may not entirely indicate that SIA is out of the woods, and that the situation remains very fluid, we believe that the signs are encouraging.

We are leaving our full year load factor and yield assumptions unchanged, and maintaining our FY10 earnings forecasts at S$865m. We also maintain our Buy call on SIA, with a target price of S$14.70, based on 1.2x book value. Despite weak business conditions, SIA is well equipped to weather the downturn, and investors continue to recognise the quality of this blue chip investment.

ST Engineering - Levering up

US$500million MTN issue: ST Engineering announced a US$1.2billion multi-currency Medium Term Note (MTN) program on 6 July. This was swiftly followed by the sale of US$500million (~S$730million) 10-year notes at a coupon of 4.8% (150bps above 10-year U.S. Treasuries) 3 days later. As of 1Q09, the company has a net cash position of S$467million, with S$249million of borrowings repayable in 1 year.

Improving balance efficiency or arresting working capital squeeze?: We estimate net gearing to rise to 1-2%. The move could improve balance sheet efficiency given the historical net cash position. However, drawing down 42% of the MTN program raises concern that a significant part of the proceeds could be used to address near-term working capital needs. We estimate that cash conversion cycle increased from 50 days (1Q08) to 69 days (1Q09), translating to an additional ~S$280million annual working capital needs. Channel checks also suggest that MRO rates remain under pressure. The upcoming 1H09 results (early August) should provide greater clarity on the working capital situation and key rationale for the notes issue.

Gearing up for M&A: Management signals potential M&A in the pipeline. Assuming the proceeds are deployed to repay current borrowings and fund incremental working capital, there should still be at least S$200million for M&A. Likely candidates may include the in-house MRO units of distressed airlines looking to spin off and outsource their MRO work to manage costs. Historical share price performance post announcement of M&A deals have been mixed (Table 1), although there was greater visibility of synergies and earnings accretion at Aerospace and Marine, in our view, in the cases of the Panama MRO facilities (PAE) in Feb-06 and Halter Marine in July-02.

Dividend risk reduced, but “cash-rich premium” no more: The bond issue alleviates concerns over dividend risk but we note that the potential move into a net gearing position should remove the “cash-rich premium” that the market has traditionally placed on the stock.

Current valuation looks rich: Recent share price performance puts the stock at 16.4x/16.0x JPM/consensus P/E, which we see as unattractive versus the peer average of 9x. Maintain UW.

Singtel - Speedier iPhone off to fast start

The iPhone 3GS was launched last Friday and will run until today. We understand that the pre-launch response is comparable to the 3G launch in Aug 2008, with “several thousand” orders placed online between 6th and 9th July and customers still clamoring to place orders even after the pre-ordering closed. A new Lite price plan has been added, with a $39 monthly fee (vs $56 for the cheapest plan when 3G was launched).

Assuming most new users will take up the cheapest plan, we estimate handset subsidies will be significantly lower this time round, e.g. $150 for the 16GB 3GS model vs $505 for the 16GB 3G model, as Apple has cut the price by US$100 but SingTel is actually charging more for the 3GS model ($548) compared to the 3G model ($508). However, it is a trade-off as the monthly fee for the cheapest plan is also lower than before.

Typically, carrier margins would be hit if iPhones outsell other handsets as subscriber acquisition costs would soar in the product launch quarter, and contrary to expectations, worldwide demand for iPhone 3GS has not waned. Apple reported 1 million sets sold in the first weekend, the same as 3G. However, due to the estimated lower subsidy, we expect SingTel to maintain its FY10 EBITDA margin guidance of 36-38% when it reports 1Q10 results, which we reckon has already considered the new iPhone, and there may be upside if the economy improves further, unless content costs run out of control.

On the M&A front, Bharti is expected to complete its due diligence on MTN by end-July. The deal is reported to have the support of the Indian government. In addition, the Australian dollar andIndonesian rupiah have continued to strengthen in 1Q10. Optus and Telkomsel contribute about 15% and 18% of SingTel’s pretax profit, respectively.

We have updated our SOTP model incorporating our latest forecasts and market values for the listed associates, and derived a SOTP value of $3.35. Hence, we maintain our BUY recommendation.

Fraser & Neave - FCOT overhang resolved

With a bit of luck and sacrifice, the sky is finally clearing up for F&N. It has been able to move most of its unsold property inventory in Singapore but only after lowering prices and margins. FCOT has resolved its funding needs without diluting unitholders but it did require a sacrifice by F&N. Finally, F&N has bought more time to build its own-brand F&B business after wrangling a time extension from Coke.

F&N has moved 88% of its projects under development in Singapore, following a resurgence in the primary market. F&N has about 1,000 units left in its landbank and it is likely to start buying land soon, given its policy of keeping 2,000 units in stock for redevelopment. Balance sheet headroom should come from renewed cashflow momentum, while the FCOT recapitalisation has removed the overhang.

FCOT has also proposed a plan to resolve its funding needs without immediately and substantially diluting unitholders but it did require a sacrifice by F&N via the injection of Alexandra Technopark into FCOT at a yield-accretive price and the guarantee of a rental income stream for 5 years in order for FCOT to obtain banking facilities.

Finally, F&N has bought more time to strengthen its own-brand F&B business after Coke agreed to delay the termination of mutual bottling arrangements by 20 months from Jan 2010 to Sep 2011. While the removal of geographic and category restrictions could be exciting, &N does not have the home ground advantage in other SEA markets, and Coke will also be able to compete with F&N.

At the current share price, F&N is trading close to our RNAV of $4.14, which has been raised from $3.78 following the recent improvement in local property sales and our assumption of lower construction costs going forward, which will boost property development surplus. We reckon the stock has already priced in recent positive developments and maintain our HOLD call.

Wilmar International: Raising growth

Raising volume growth and M&P margins. We revised Wilmar's earnings model to reflect the group's capacity expansion that will maintain its leading market position beyond 2010. We also raised our merchandising and processing (M&P) margin assumptions, as recent spot margins have shown sharp turnaround (see page 8). This results in upgrades to FY09F-10F EPS by 9.2-12.5%.

New TP yields 18.4% upside - Buy. Our DCF valuation now yields a TP of S$6.10 (WACC 9.7% and terminal growth 3%). This includes associates' book value ? previously unaccounted for ? and conversion of the group's remaining US$575m CB (154.4m new shares at S$5.38). At our TP, Wilmar would trade at 16.2x FY10F PE.

Plenty of growth opportunities. Wilmar's presence in the world's fastest growing region presents plenty of growth opportunities for the group. Demand from China, India, and Indonesia should continue to drive growth for Wilmar's products.

Margins are more sustainable than previously thought. With the group's scale, integration and significant market shares, Wilmar is able to push its costs down and pass on these cost savings. Having recognized brands also underpins earnings power; while upstream expansion would continue to augment long-term margins.

Singapore Press Holdings: Stabilisation ≠ Recovery

Remains sluggish overall. Singapore Press Holdings (SPH) reported its 3Q09 results with a topline of S$331.2m (-4.8% YoY) while bottomline came in at S$126.7m (-5% YoY). The group experienced an 18.9% reduction in staff costs as the effects of its recently announced pay cuts flowed through the system. However, its core operations dived 13.5%, signalling that the group might still be in for a bumpy ride in the next few quarters.

Key swing factors: Property & Investment. Its property division continued to chalk up a 40% YoY rise in revenue due to stronger-than-expected progress recognition from its Sky@Eleven condo project. However, rental growth from Paragon has started to flatten out and we are pensive on its ability to continue upward rent revisions. SPH's investment income was another swing factor. While it incurred a 31% YoY fall, it managed to register a S$17.6m absolute gain (mostly due to stronger portfolio valuation) compared to a loss of S$104k in the previous quarter. In view of the volatile market, we opt to retain our conservative estimates for SPH's investment income.

Display and Classifieds still at rock bottom. SPH continues to have a short runway of visibility for its core business, indicating that businesses are still keeping their advertising belts tightened. SPH's Display and Classifieds adverts are still experiencing short printing notice periods of 1- 3 weeks and 5-7 days respectively. Businesses are also choosing to utilise black & white or single colour adverts vs. full colour adverts. As such, despite seeing a positive uptick in advert pages printed, profitability remains suppressed. We were updated that all advertising segments are still declining/flat, with the telecoms and finance segments experiencing the most sluggish performance. The only silver lining for advertising lies in the recent acceleration in property launches.

Final quarter will not see recovery. The Great Singapore Sale (GSS) may be able to buffer declines on a QoQ basis but we opine that it would still pale to the comparable GSS quarter in the previous year. We are maintaining our earnings estimates but have bumped up our SOTP valuation in view of a better-than-expected valuation for Paragon at S$1.98b (prev: S$2b valuation). We had estimated S$1.8b. We are retaining our HOLD rating with a SOTP fair value of S$3.31 (prev. S$3.18). Our forecast of 14.5 S cents for SPH's final dividend can yield 4.7% if investors accumulate around S$3.05.

SIA - June loads improved but 1QFY10 losses unavoidable

Passenger demand still weak but y/y decline narrowed and loads are no longer falling off a cliff: Traffic fell 18% y/y, improving from May’s 23% decline. This was partly driven by more aggressive fare discounting. With more airlines slashing capacity, this will help to support industry loads and yields which will be positive for SIA over time. Cheap tickets are less easy to find than a few months ago based on our research. Load factor was 75.7%, -3.5ppts y/y, but much better than May and Jan-Jun’s 71% average, -7ppts y/y. This is still below breakeven as yields have fallen substantially. West Asia/Africa load factors rose 3.5ppts y/y in June while the loads in other major route regions fell 4-7ppts, with US the worst hit.

Cargo did not recover but the improvement felt by N. Asian carriers should filter through over time: Traffic fell 21% y/y, similar to May’s decline and worse than its 19% drop in Jan-Jun 09. SIA Cargo has a weaker catchment area and handles more transshipment cargo than N. Asian carriers whose traffic declined less in June. We believe the gradual recovery in cargo demand will filter through to SIA over time. Load factors have inched up, +1.3ppts y/y to 63%, vs. its 59% average, -3ppts, in Jan-Jun 09.

Buy early: SIA is in its worst earnings cycle in history and will likely report losses next month. However, we see this as an opportune time to accumulate as 1) airlines are early cyclicals and SIA has historically priced in a recovery 12M ahead, 2) premium traffic will pick up with increased economic activity and as corporates relax their travel policy, 3) Emirates’ A380 deferrals will lower competition risks, 4) SIA is the “safest” choice in the sector given its well-capitalized B/S, strong track record at managing costs, 5) more value could be unlocked from SIE, Tiger, 6) it is trading cum S$1.83 DPS, 6) mark-to-market hedging gains will bolster book value.

PT, valuation, key risks: Our ex-div Jun 2010 PT of S$14 is based on 1.2x P/BV, SIA’s average valuation since 2003 when its competitive environment intensified with the entry of low-cost carriers and Emirates’ increased presence in Singapore. Key risks: 1) WHO issues travel restrictions due to Influenza A; 2) stagflation; 3) making value-destroying investments.

Parkway Holdings - Positive long-term prospects

Parkway will likely continue to position its Singapore hospitals to attract foreign patients while seeking growth in other Asian markets. The group is well positioned regionally, with a footprint in Malaysia, Brunei, India, China and Vietnam.

Management said that its healthcare services subsidiary, ParkwayShenton (unlisted), was awarded the border H1N1-screening contract, with a potential top-line contribution of S$2-3mn/month. The group also has seen minimal impact on patient volume despite the H1N1 situation. Management guided its patient volume has recovered in June, with flat revenue growth y-y. Revenue intensity, however, has not improved.

Malaysia. The group’s Pantai Hospital (unlisted) is looking to grow its top line by 20% to 30% annually and plans to expand by about 1,000 beds to 3,300 beds in Malaysia. The group is building a new 300,000-sf block at Pantai Hospital in Bangsar, of which 150,000sf will be medical suites for sale. China. Through Worldlink (unlisted) (Parkway Health China), Parkway will add two more clinics to its current six and add three more dental locations in Shanghai.

The group is looking to market the Novena medical suites to doctors, who currently do not own their medical suites. Parkway is looking to sell the first phase with 88 units out of a total 200 units (200,000sf) when it receives approval, which is slated in 2H09.

SembCorp Ind - Earnings sensitivity from possible Salalah contract

In a recent BT article, it was mentioned that SCI is discussing with banks about closing the financing for the US$1bn-plus Salalah independent water and power project (IWPP) in Oman, suggesting that the group is likely to complete the deal to build, own and operate the IWPP by year-end. This runs counter to earlier reports which suggested that Oman would call for project re-bids. The article also indicated that the group had recently signed a letter with the Omanis which guarantees they would not engage any other party during a 'standstill' period. The Omanis are looking for early completion of the Salalah IWPP, which comprises a 400 MW power station and a de-salination plant to produce 15m gallons of water a day, as demand for resources in the sultanate is growing fast. While our discussion with SCI did not yield much new information as the potential contract is currently in a sensitive stage, a simple analysis suggests that depending on the level of financing obtained, earnings accretion required by the group in four years time (i.e. FY2013) could range between S$29m and S$58m in order to achieve an assumed equity IRR (EIRR) of 13% which is similar to the Fujairah project. These, we think, may be factored into their analyses as SCI works to determine the adjusted tariffs with the Omani government. Our study assumes two years of construction time for this US$1bn greenfield project, one year to ramp up operations, and 23 years for the O&M contract. If an 8.3% cost of equity (rf 2.6%, rp 4.8%, and beta 1.192) is used, the NPV for the potential stream of earnings could range between S$127m and S$255m (or S$0.07/sh and S$0.14/sh, respectively).

Management expects the successful launch of projects in Singapore to enhance the - Steady amid property downturn

Management expects the successful launch of projects in Singapore to enhance the group’s cashflow and strengthen its balance sheet position. F&N said it will look to expand its F&B activities organically, while evaluating M&A opportunities.

Management explained that the rights issue and the Alexandra Technopark transaction were meant to improve FCOT’s balance sheet to help secure refinancing of its debt. F&N said there is no need to raise capital at the holding company, given strong cashflow and available funding to meet its FCOT rights entitlement.

The priority in the F&B segment is to look at ways to capture new opportunities following the cessation of the bottling arrangement with Coca-Cola. F&N believes it can enhance its brand presence in Singapore and at the same time grow its 100 plus isotonic drink regionally. Elsewhere, there is scope to grow its dairy business organically, while APB continues to invest in new markets in Asia.

The group appears to have done well, with strong responses to its property projects, including Caspian, St Martin’s Place, 8@Woodleigh and Waterfront Waves. In Australia and China, the group is selectively launching projects and has shelved projects in the UK.

MobileOne Ltd: 2Q09 results within expectation

2Q09 results mostly within expectation. MobileOne (M1) reported its 2Q09 results last evening, with revenue down 7.2% YoY to S$190.5m, or around 24.5% of our full-year estimate, again feeling the effects of the economic slowdown; but up 2.2%3% QoQ at S$186.4m, thanks to its Take3 program, which resulted in subscribers taking up higher price plans. However, net profit dropped 9.7% YoY to S$37.1m, or around 25.8% of our FY09 forecast. While it was also down 11.5% QoQ, we note it was really due to a tax credit of S$5.5m in 1Q09; excluding it, earnings would have risen 1.9%.
For the first half, revenue slipped 7.9% to S$376.9m, while net profit eased 0.3% to S$78.9m, meeting 48.4% and 54.9% of our FY09 forecasts respectively. M1 has also declared an interim dividend of S$0.062/share, or 70% of its 1H09 earnings, unchanged from last year.

Regains lost ground. On the business front, M1 managed to regain lost ground following slightly more aggressive promotions in both the pre- and post-paid segments; overall subscribers rose by 50k vs. 12k decline in 1Q09, led by a 43k increase in pre-paid users. But on the post-paid front, we note that its market share continued to slip from 26.8% in 1Q09 to 26.5%, despite adding 7k more subscriptions. While monthly churn rate eased from 1.6% to 1.5%, it came with higher acquisition and retention costs (see Exhibit 2). However, this came as no surprise as we had already highlighted a likely increase in our previous report. As for its IDD business, revenue fell 13.7% YoY to S$32.8m, hit by lower tourist arrivals, but rose 2.5% QoQ, suggesting the worst may be over.

Outlook remains tough. Going forward, M1 continues to expect the operating environment to remain "challenging", mainly due to the ongoing economic slowdown. Nevertheless, it intends to remain disciplined in cost management and improve efficiency; also guides for comparable net profit vs. FY08. M1 has maintained its 80% payout ratio for the full year as well as S$100m capex target. As the economic outlook is still uncertain (may face a long-drawn recovery), we continue to like M1 for its defensive and strong free cash flow-generating business, and dividend paying ability (80% payout ratio). We also see M1 as one of the biggest beneficiaries of the NBN initiative. As such, we maintain BUY and S$2.12 fair value.

SMRT - Still Worth Paying For

Still worth paying for. SMRT Corporation (SMRT) has, over the last 18 months, been trading at about 23.5% over and above the sector average, based on the PE metric. Even on a P/B basis, the stock is not cheap, trading at 3.6x P/B (though this is largely due to its low fixed asset base). However, the stock is still worth paying for, given its strong margins that outshine that of sector peers, outstanding return on assets (ROA), sustainable dividend payouts based on solid earnings, and its ability to leverage on the Singapore growth narrative.

Growth potential not yet exhausted. We view SMRT as a play on Singapore’s growth trajectory, and the rail system as the biggest beneficiary of the government’s push to nudge commuters and peak hour traffic towards public transport. The rail system is, by far, the best alternative transport method to avoid congestion on roads.

Stronger operating performance than peers’. We compare SMRT and sector comparables and find that the company commands the highest margins and ROAs among listed land transport operators. SMRT also has the added silver spoon advantage of lower capex due to strong government support.

Maintain BUY; target price raised to S$2.00. We have lowered our profit forecasts (by between -5.1% and -6.3%) and changed our valuation methodology from PE to discounted cash flow. We value SMRT using the firm’s discounted free cash flow to equity at S$2.00/share (6.9% COE, 1% terminal growth). Our revised target price (up from S$1.86) gives a return of 17% over the last closing price of S$1.71.

Singapore Airlines - Time to exit

Reiterate SELL. We had earlier warned investors excited with the signs of recovery in leading indicators that have pushed SIA’s share price ahead of its fundamentals that premium traffic, which accounts for 40% of the company’s traffic, may take longer to recover this time around. While the proposal to distribute SATS shares is net positive to SIA’s valuation, our fair value of S$8.80, which is derived from 0.68x FY10 book, or a -2 standard deviation from its historical trading band plus the SATS share entitlement, implies a downside of 30.4%. Maintain SELL.

Outlook still gloomy. Although jet fuel price has corrected, it may still be offset by the progressive settlement of fuel hedges contracted at higher prices. The International Air Transport Association (IATA) has revised upwards its forecast for the airline industry to lose more than US$9b and projected passenger and cargo demand to fall sharply. While advance bookings are lacklustre, SIA has met another setback in the form of uncertainties arising from the H1N1 epidemic. Aggressive promotions, reduced business travel and possible down-trading activities may worsen the situation.

Operating statistics look ugly. Uncertainties arising from the H1N1 flu outbreak since late April 09 have dealt a blow to forward bookings. System-wide passenger carriage in the form of revenue passenger kilometres (RPK) was worse than the reduction in capacity in terms of available seat kilometres (ASK). As a result, passenger load factor (PLF) fell 7.8% to 66.9% while the number of passengers carried plunged 23.7% YoY to 1.2m in May 09. With leading indicators such as China’s Purchasing Manager Index beginning to show positive recovery together with aggressive capacity management, cargo load factor across the region is beginning to recover from a very low base. As the marginal rebound in cargo load factor is too small to compensate for the lacklustre premium numbers, SIA’s next two quarters are likely to be in the red.

Singapore Press Holdings Ltd - Recovery underway

SPH's 3Q09 net profit was S$126.7m (-5% yoy), beating consensus estimates and 20% above our forecast. The outperformance came mainly from higher-than-expected operating revenue of S$327.1m (-5% yoy) and lower-than-expected operating expenses thanks to lower-than-expected newsprint costs. We continue to believe that ad demand is close to a bottom and project a faster recovery for print ads in FY10-11. We have raised our FY09-11 earnings estimates by 1-6% on the better-than-expected media earnings. Maintain Outperform with a higher sum-of-the-parts target price of S$3.62 (from S$3.52) following our earnings upgrade.

3Q09 operating income declined marginally to $131.3m but was up 40% qoq mainly due to the stepped-up revenue recognition for Sky@Eleven. An investment gain of $17.6m was recorded, compared to $25.7m in 1Q08. Net profit was 5% lower yoy at S$126.7m; Overall, a decent set of results with the fall in print ad revenue being cushioned by strong development profits and cost containment measures.

Core publishing business could have bottomed as operating profit in 3Q09 posted a sharp rebound qoq. Display ad revenue had reversed the downtrend and the risk of more cutbacks on the budgets of SPH’s top ad revenue contributors (telcos, property) seems low given that government’s pump-priming measures such as the jobs credit scheme are taking effect. Government ads spending also support the recovery of print ad revenue.

Sky@Eleven remains on track for TOP in CY2010. To date, 56% of the project’s revenue has been recognised. Property development margin was consistently strong at 71.7%. At Paragon, rental revenue declined 5.4% qoq despite the addition of 40,000 sqf of space in the quarter. We suspect renewal rental rates could have fallen or replacement of commercial tenants could have led to disruptions.

Group investible fund remained at $0.9b. Net loss from investment to-date narrowed to $16.1m from $33.8m as at Feb-09, as dividend and interest income offset the loss in value of the externally managed funds during 1Q09. SPH’s cash war chest has strengthened to S$380m (+18% from Feb), forming 44.4% of investible fund. Its net cash position places it in a sweet spot to engage in opportunistic investment activities.

Our SOTP target price is remains unchanged at $3.90. SPH looks on track to deliver our full year revenue and earnings estimates. With the divestment of the loss-making TOM Outdoor Media Group in May, the Group is focused on positioning itself for the next growth phase which in our opinion may include property development. Prospective PER of 11.3x for its core publishing business does not look expensive. Maintain BUY.

Ezra - Sell: Too Early to Get Excited

Ezra’s management officially unveiled the firm’s growth strategy in an analyst briefing this afternoon. The new strategy involves expanding the suite of services offered so as to provide an integrated service offering to add better value to customers, exploit synergies between its various assets, and enhance market competitiveness. Growth into 2012 will be driven by:

1) Focus on subsea services: A new division, “Deepwater Subsea Services” has been created to provide services such as subsea construction support, system installation, well interventions, maintenance and repair. This new division will deploy the 2 Multi-Functional Support Vessels and 1 heavy-lift construction vessel, all of which will be delivered over the next 12 months. Management says no additional capex is required as the growth strategy involves re-aligning existing assets and enhancing the group’s engineering expertise.

2) Asset-light fleet management — Ezra will also provide management services to asset owners with no operating experience (e.g. hedge funds), with an option to purchase the vessels after a few years of operation. Management revealed that it has been approached by an owner to operate 4 offshore support vessels. Management is also eyeing 2 attractively-priced accommodation barges and is currently exploring off-balance-sheet financing options.

Our view — We believe the growth strategy unveiled today was widely expected by the market and largely conceptual in nature. We think execution risks are high given the relative inexperience of the group in the subsea business, poorer than expected execution record in its first FPSO contract, and keen competition in the subsea business segment.

Not unexpected — We believe Ezra’s new growth strategy had been widely expected by the market. Management had spoken about integrating assets with services in previous analyst briefings. We had also written about this growth direction in our initiation report (see Page 33-34 – Ezra Holdings: Initiate at Buy: Valuation Gaps in this “Good-to-Great” Story dated 22 May 2008).

Challenges — Ezra has limited presence in the target markets for its deepwater services (South America, Africa). Also, competition is intense in these markets. Given the lack of operating experience, initial subsea projects are likely to be bite-sized, low-margin, or with smaller customers, e.g. its maiden US$40+mn Energy Services project with STP Energy at ~13% gross margin.

SMRT - Purchase of Shenzhen transport company is long-term positive

SMRT’s S$68m purchase of Shenzhen Zona Transport gives the company a foothold in mainland China that should provide significant upside in the long term. However, although the deal is marginally positive, it won’t have any significant impact on medium-term earnings. Meanwhile, passenger numbers continue to grow on SMRT’s domestic rail business, as people choose cheaper travel, resulting in a highly defensible 5% yield. We maintain our Outperform call to a S$2.10 target.

Foothold on the mainland. SMRT (MRT SP - S$1.76 - O-PF) has entered in to asale-and-purchase agreement for the acquisition of a 49% stake in Shenzhen Zona Transport Group for S$68m. The deal should close by September 2009. Zona is currently engaged in taxi and public-bus services, as well as repair and maintenance, car leasing and tour coaches in Shenzhen and Huizhou. We see longer-term potential here through SMRT’s partner in this transaction, National Express Transportation Group, which is a state-linked company with a national franchise. This should provide SMRT with a platform for wider geographic growth in mainland China.

Marginal positive. The purchase price represents 1.7x FY08 PB of Shenzhen Zona and will be funded by all cash. SMRT has S$245m cash on its balance sheet. On completion, management says, the company will be earnings accretive from day one, which is an incremental positive. However. We expect earnings contribution to be less than 5% of the total for FY3/10.

Parkway Holdings - High gearing relative to peers

As the largest private healthcare provider in Singapore, Parkway is likely to be the most affected in the economic downturn, with fewer medical tourists. This is expected to be offset by an increase in outpatient treatments and growth at its International hospitals. Its recently-launched 34 fixed-fee packages are expected to help mitigate the decline from in-patient admissions. We are maintaining our SELL recommendation on Parkway as its net gearing of 0.5x is relatively high, compared with its peers and current share price is rich.

Fewer medical tourists. A weak economy, coupled with the H1N1 outbreak is likely to result in foreign patients postponing seeking medical treatments in Singapore. The weak economy would deter discretionary spending on elective procedures, while other patients put off travelling to Singapore over flu fears. This would negatively impact foreign patient loads at its hospitals.

Rise in outpatient cases to partly offset decline in in-patient. In-patient admissions are expected to decline, given the weak economy and fewer medical tourists. However, this is likely to be offset by an increase in outpatient treatments (day cases) and growth from Parkway’s International hospitals. Patients tend to opt for outpatient treatment, if they can, during an economic downturn.

Overseas operations expected to grow. Parkway expanded the capacity and added new facilities at its regional operations. With a bigger capacity and more medical facilities, it would be able to meet the growing demand for its services. It is also currently carrying out construction works for its Mumbai hospital. Fixed-fee packages to help mitigate decline in Singapore hospitals in-patient admissions. Parkway has recently launched 34 fixed-fee packages that cover various surgical procedures.

Maintain SELL. Although operating cash flows are stable, Parkway’s net gearing of 0.5x at end 1Q09 is high, compared with its peers. Both Raffles Medical and Thomson Medical are in net cash positions. Current valuation for Parkway is also rich, with the stock trading at 23.6x forward P/E.

Ezra Holdings Ltd: Stable 3Q09 despite stormy environment

Stable 3Q09. Ezra Holdings (Ezra) reported topline growth of 9% YoY to US$59.9m while core bottomline also inched ahead 8% YoY to US$18.8m. On a 9M09 basis, core PATMI (excluding 3Q08 US$136.3m divestment) did better, rising 33% to US$43m. On the whole, Ezra met our expectations and we think that this is a credible performance in view of the overall difficult operating environment.

Lift boats from Ezion gives flexibility. Ezion will be delivering two first-in-class multi purpose self propelled jack up rigs (liftboats) to Ezra from Oct 09 to Mar 10. It will be going into Ezra's Energy Division. We understand that the liftboats are able to substitute the use of 2-3 vessels when providing well intervention services and maintenance of offshore platforms. We expect the liftboats to give Ezra greater deployment flexibility with its current fleet, potentially requiring less in-chartering of vessels on spot rates, which in turn stabilises its gross margin.

Pre-emptive S$89.6m. We understand that Ezra has no concrete plans for the proceeds from the 21 May 09 fund raising exercise. Long-term financing has been secured for its previous capex plans and we think the cash will go towards growing the company through other avenues. With the three divisions growing well, we opine that it would take the route to increase efficiencies intra-group prior to taking a risk with external opportunities at this juncture. With credit markets still frozen, we think that the funds could also be used to participate in future bond/equity raising exercises by other companies that are unable to pay/refinance its debt.

EOC still draggy. EOC's Lewek Arunothai failed to meet our expectations of starting earnings accretion in May 09. We understand that the FPSO has now achieved adequate gas "export pressure" and have formally requested to start billing. We have pushed the FPSO contribution back to start in Jul 09. For EOC's pursuance to provide an FPSO for the Chim Sao field, we view "no news as good news", meaning that it is still in the front running for the project.

Maintain BUY. Ezra remains one of our favourites for the sector with its relatively defensive earnings. In addition, we think its recent placement puts it in good stead to capitalise on any distressed asset situation. We have tweaked our SOTP to S$1.46 (prev. S$1.42) as we see margin improvements for the group as it drives for internal efficiency.

Starhub - Best upside among telcos

BUY on sound fundamentals, high yield. National Broadband Network (NBN) and English Premier League (EPL) are two key issues pressurising StarHub’s share price, but we believe the impact may not be as bad as expected. Its core operations continue to generate good cash flows, and yields are estimated to top the industry at 8.7%. Maintain BUY, with DCF-backed price target of S$2.39.

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.

Retail segment may not be as hard hit. Consumers may be salivating at theprospect of having high speed internet at a fraction of today’s prices with the launch of NBN, but think again. CEO Terry Clontz believes that the pricing may be as much as S$75 per residential line, only 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 term downward 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, and we estimate that StarHub’s winning bid will be 50% more than the reported US$160m it paid previously. However, Media Development Authority of Singapore (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.

Keppel Corp - Outlook excites

Keppel remains our top pick in the O&M sector. We believe SPC’s divestment has not only benefited Keppel materially, but also created other new opportunities: (1) becoming PetroChina’s preferred yard and (2) entering into joint collaborations to acquire upstream assets or build midstream/downstream (gas) infrastructure. Furthermore, we think the cash proceeds will strengthen Keppel’s balance sheet and allow it to explore M&A interests, particularly for expansion of Brazilian presence, integration of O&M expertise with upstream assets and pursuit of new infrastructure ventures. The strategic significance and outlook appears exciting, in our view. As such, we reiterate our BUY call on Keppel with a target price of S$8.60, based on sum-of-the-parts valuation.

SPC’s sale brings future benefits. We think the divestment of Keppel’s SPC stake to PetroChina represents a win-win partnership for both parties. For one, Petrochina could utilise Keppel’s shipyard when it expands and/or upgrades its offshore facilities for deepwater exploration and production purposes. In addition, we expect more synergistic activities to occur in the medium to long term, such as joint collaborations to secure potential upstream assets. In addition, we think Keppel could leverage on PetroChina’s extensive platform to build up the former’s infrastructure/energy/utilities business in China, given PetroChina’s dominance in China’s gas transmission network.

Entrenching Brazilian presence with possible yard expansion. Upstream reported last week that Brazilian construction group WTorre and Keppel were closing in on an agreement that would give Keppel a 70% stake in the Estaleiro Rio Grande (ERG) yard in southern Brazil. As the ERG facility was initially established by Petrobras, we believe its acquisition would bolster Keppel-WTorre’s bid to clinch Petrobras’ tender for the hull construction of eight floating production, storage offloading (FPSO) vessels.

Value creation in the Upstream business? As SPC’s Chairman and Keppel’s current CEO, Mr Choo Chiau Beng spearheaded SPC’s maiden venture into the upstream oil and gas business in 2000. Given the business’s steady stream of revenue, we do not rule out Keppel acquiring new upstream assets. We also see potential synergies with Keppel’s rig building capabilities, as well as strong relationships with international drillers and oil field operators.

City Development - Residential titan

Best proxy to improving domestic residential sector. City Developments’ (CDL) massive yet broad-based residential exposure (37% of RNAV) makes it the best proxy to the improving domestic residential market. Going forward, we expect CDL to ride on the mass-mid market buoyancy and clear inventory. An expected return of interest in prime properties should also benefit the company. While the commercial property sector continues to weaken, we draw comfort from healthy occupancies (>90%), recent rent reversions still higher than passing rents and zero devaluation risks given its prudent accounting policy. Our target price of S$12.00 (previously S$12.34) is pegged at 20% premium to end-FY10 base case RNAV of S$10.00 (previously S$10.28) and incorporates latest market prices for its listed subsidiaries. Reiterate BUY.

Mass-mid market buoyancy mitigates hospitality weakness. For the Mar – May 09 period, CDL sold 426 units from four mass-mid projects (i.e. Botannia, Ferraria Park, Livia and The Arte), exceeding the 368 units transacted for 2008. Progressive revenue recognition from these projects within the next two years should mitigate a drop in contribution from its Hotel segment. We expect CDL to leverage on the sustainable mass-mid market buoyancy, through clearing its unsold inventory for Livia and The Arte, as well as launching new projects such as the Albany and Hong Leong Garden sites within the next six months.

Prime projects to gather interest. Management is seeing increased enquiries and demand for its prime projects, evidenced by the sale of four units of St. Regis Residences over the past three weeks. We expect interest here to pick up along with the mass-mid market, which should benefit CDL given its healthy stable of prime projects, i.e. Cliveden, One Shenton and Shelford Suites.

Ammunition behind peers, but landbank ahead. While CDL’s S$577.1m cash lags the post-rights position of KepLand and CapLand, we believe its landbank of 7.4m sqf in GFA (Mass: 73%, Mid: 5% and Prime: 22%) does not warrant a salient need for further replenishments. Risks of provisions also appear low given low land acquisition costs. Current net gearing of 0.49x should be sufficient to tide through the current period, sweetened by recent refinancing secured for South Beach project.

Hyflux - Searching for growth in Libya

Hyflux’s fast-growing gearing had been a market concern, which may counter future growth ahead. Net debt-to-equity rose 28pp q-q to 82% in 1Q09, approaching our expected 113% for end-FY09. However, management reiterated that: 1) it can repay trade payables by cash from EPC revenue generated by the Algerian projects on percentage of completion, 2) Algeria has no restriction in capital repatriation, so liquidity is not a concern despite aggressive capex, and 3) the Middle East projects, the main growth driver going forward, are less capital intensive than China’s projects.

While building the world’s largest membrane-based desalination plant in Algeria, Hyflux entered into a MOU to build two desalination plants in Libya, in Tripoli and Benghazi. The plants would cost S$1bn, with a combined capacity of 900k m3, and planned to be financed by an 80:20 debt-to-equity ratio. The signing of these projects would substantially lift the orderbook and operational income from current levels.

China’s water market is still at a development stage and existing capacity is far behind the government’s target as per the Eleventh Five-Year Plan. Management indicated Hyflux’s revenue contribution from the Middle East and North Africa would continue to expand beyond its current proportion of 40% in FY08, due to the upcoming Tlemcen and Magtaa projects in Algeria, but it believes Hyflux remains a major beneficiary of China’s growing water market. Given that Hyflux has already shown a successful record of penetrating into the Chinese water market (China accounts for 54% of total revenue in FY08), with its proprietary membrane technology as a competitive edge, growth in China can be a potential surprise on the upside, in our view.

The orderbook looks healthy (S$1.15bn in end-FY08). Hyflux would focus its attention in delivering projects already in the pipeline, which would continue to deliver strong growth in FY09-10F.

Neil Montefiore to succeed Terry Clontz as CEO of Starhub

Starhub (STH) has announced that Mr Terry Clontz will retire as CEO in Jan 2010 and will be succeeded by Mr Neil Montefiore, who left M1 as CEO in Feb 09.

STH has benefitted significantly from Mr Clontz's leadership but his retirement is not a particular surprise. After being with STH for more than ten years, his departure was not a matter of "if", but "when". In fact, we had often thought that Mr Clontz might have left earlier but believe the Jul 08 departure of Mike Reynolds (the previous President) complicated the succession plan. After his departure, however, STH will have a new CEO and (a relatively new) COO.

But while Mr Clontz's retirement is not particularly surprising, the appointment of Mr Neil Montefiore is interesting in several respects. Mr Montefiore comes with substantial experience of the Singapore telco market having been CEO of M1 for more than 12 years (which he left rather abruptly earlier this year) and is considered to be one of the leading strategic thinkers in Asian telcos (at least in our opinion). He had for example plans to develop M1 into a fully integrated operator across fixed and mobile but was unable to achieve his vision there. As such, his appointment as STH's CEO now offers him the platform to develop this objective / vision and we look forward to watching STH's development under his leadership.

We expect Mr Clontz to oversee STH's bid for the English Premier League rights which is the key 2H09 event. Despite the management change and the EPL auction, given upside to our valuation and the sustainable and attractive yield, we maintain Buy.

Sembcorp Industries: Utilities — investing for growth

Management highlighted that the group remains focused on managing costs as well as maintaining operational excellence and good customer relations at its core business divisions in utilities and offshore & marine (through a 61% subsidiary, Sembcorp Marine). Management emphasised that the group’s multi-customer business model at its centralised utilities facilities in Singapore and the UK provides sustainable earnings, as contracts are on a relatively long-term basis. While 1Q09 had seen the UK business has been adversely affected by the expiration of previous electricity supply contracts, management assured investors that UK earnings decline has stabilised. Also, the closure of older plants at the facility has been mitigated by newer “green” investments.

The group’s 35MW Sembcorp Biomass Power Station will also see its first full year of operations this year. SCI is the leading integrated utilities and services provider to more than 45 global multinationals at the UK Teeside facility, with more than 50 years of operational experience. In Singapore, the group provides energy, water and on-site logistics and services to more than 40 multinationals at its Jurong Island facility, which it has operated for more than 11 years.

With its focus on longer-term growth, SCI remains on the lookout for growth opportunities in both the utilities and marine engineering divisions, either through organic growth or through potential M&A. As at 1Q09, the group had net cash of S$1.54bn, with Sembmarine in a net cash position of S$1.9bn, and the group’s utilities and other business in net debt of just S$341mn.

Our price target for SCI is S$3.38 (unchanged), based on a 5% discount to our SOTP valuation (method unchanged). For the other listed entities, we use Gallant Venture’s (GALV SP, not rated) market price. We value the utilities business on DCF (a WACC of 6.5%, growth of 2%), and its industrial parks and environmental engineering on an FY09F PE of 8x, in line with its peers. SCI now trades at FY10-11F PE of 9.9x and 9.9x, respectively, which remains at the lower end of its historical trading band of 6-21x, and compares to its eight-year average PE of 14.6x. The dividend yield at 3.8% is relatively attractive, in our view. Our rating is maintained at NEUTRAL. Our concerns are that weaker-than-expected UK utilities’ performance could pose an earnings drag in the short to medium term.

Singapore Airlines - The Cheap Ticket to SATS

Since the proposed divestment of SATS as a dividend in specie of 730 SATS shares for every 1,000 SIA shares held, SATS shares have surged by S$0.66, or 44%. This translates to S$0.48 per SIA share. Since then, SIA’s own share price has improved by 15% or S$1.70, based both on this factor as well as an improved fundamental outlook. However, we still see further upside to SIA’s share price, as SATS still remain undervalued, and the core airlines business looks to have bottomed out.

We have recently raised our target price on SATS to S$2.51, which translates to S$1.83 per SIA share. We remain sanguine on SATS prospects post the SFI acquisition, with other potential opportunities such as contracts for the integrated resorts, as well as unlocking value from properties held at cost. SIA remains an excellent proxy to get into SATS.

The current effective return for SATS as an in specie dividend is S$1.53 per share or 11.5%. This compares favourably to the expected EPS erosion to SIA of 11.5cts per share, based on our forecasts, while NTA will drop by S$1.4bn, or S$0.63 per share. Notably, SATS currently trades at 2.4x book, versus SIA's current PBR of 1.1x – this variance underscores our view of SIA as an excellent proxy into SATS.

Shareholder approval for the SATS distribution is pending, but we believe this is forthcoming. Assuming approval, the primary risk is the adjustment to SIA's share price when the distribution goes ex-rights. However, we believe that NTA erosion of just S$0.63 per share should limit downside.

We are raising our target price for SIA to S$14.70, based on 1.2x price to book on the back of improving fundamentals. Recent load factors show signs of a bottoming out, while SIA’s adjustment of capacity to match demand will yield costs savings. Despite the recent rise in jet fuel prices to US$76 per barrel, this is still below our full year assumption of US$90.

SMRT - Defensive earnings amid slow economy

We initiate coverage of SMRT Corp Ltd (SMRT) with a BUY rating. Fair Value of S$2.11 presents a 19% upside to current price. We have applied a DCF approach to SMRT’s steady cash flows, with terminal growth at 1% and netting off S$1bil for the 30-year licence extension and transfer of assets for the new Circle Line.

Amid a slow economy, SMRT’s earnings are defensive with 80% revenue derived from the public transport fare business. We expect ridership growth on trains and buses to be supported, as costs of private vehicle usage continues to increase, while its rail and bus network continues to improve in terms of convenience (connectivity, shorter travel times and shorter headways) and affordability. We project 12% growth in mass rapid transport (MRT) ridership for SMRT to 572mil in FY10 and 9% to 623mil in FY11. This will offset average fare cut of 4.6% implemented from 1 April 2009 until end-June 2010.

With the progressive opening of SMRT’s new Circle Line - first phase having started in May 2009 with 2nd phase in 2010 and 3rd phase in 2011 - we would expect some new comers to public transport. But the impact will be some-what muted on incremental ridership as some rides on Circle Line may cannibalise rides from SMRT’s other two MRT lines. Early estimates put ridership on Circle Line’s first phase at 55,000 per day, rising to 0.5 million at a steady state upon full operations of the entire line.

Lacklustre taxi operations will be offset by growth in rental and engineering/other services segments. SMRT will continue to redevelop its MRT stations into lettable commercial space, which are in high demand for its location in high pedestrian traffic areas. So far, SMRT has renovated about half of its stations.

With oil prices off last year’s peak, SMRT stands to benefit as about 20% of its costs are energy-related items. As such we expect an improvement in EBITDA margins from 33% in FY09 to 34% in FY10. But we expect margins to revert to 33% in FY11 with increasing costs from further phases of the fully underground Circle Line.

Steady cash flows can comfortably support capex of S$150mil per annum for continual upgrading and expansion of transport fleet, station renovations and other system and service improvements. This leaves enough room to maintain DPS at 7.75 cents Singapore per annum. In addition, we estimate a potential for paying out a special dividend of 1.5 cents in FY11 if management wishes to.

SGX - Diversifying the platform

As anticipated in our upgrade note on 3 April (SGX: Setting sail), SGX’s 4Q FY09F results due to be released on 5 August are expected to reflect sharply improved q-q revenue momentum, chiefly underpinned by a sharp pick-up in securities market trading activity over April-June, which should take the full-year average daily value traded (DVT) above our forecast S$1.2bn (S$1.08bn to end-3Q FY09). Derivatives revenues are also expected to show recovery after trending lower over the first three financial quarters as large market shares in the MSCI Taiwan and CNX Nifty futures contracts reflect the underlying spike in trading interest in these respective markets.

SGX continues to expand upon its product base, though at a progressive pace with management noting that many products have a substantial gestation period, eg the Nifty contract was nurtured for almost seven years before trading in it took off. On the equity side, while IPO interest remains lacklustre, the number of ETFs (Exchange Traded Funds) on the market has reached 35 while SGX boasts the second-largest REIT market capitalisation after Japan. On the derivatives side, single stock futures launched in February 2009 are showing a steady increase in open interest while AsiaClear, the rapidly-growing OTC clearing business, recently added iron ore contracts to its existing freight and fuel oil contracts. Areas for future development include the options market and the commodities derivatives business via commodities exchange SICOM (SGX acquired this platform last year).

SGX’s capex plans have not been derailed by more difficult operating conditions — two new trading engines were switched on within the space of six months over FY09 (for equities and derivatives, respectively) and a new clearing system will go live at end-FY09F. For FY10F, a new data engine will be put in place, boosting the emerging growth business of algorithmic trading, which is now between 10% and 20% of trades on SGX as compared to around 40% in US-Europe.

Our Gordon growth-based price target (methodology unchanged: 11.5% cost of equity, long-term annual dividend payout of 85%, long-term growth of 7%) is S$7.40, or 19x FY10F (June year end) earnings. Dividend payout is likely to remain above the 80% minimum policy as capex (S$20mn-S$40mn annually) can comfortably be funded from ex-dividend cashflow — hence, yield is comfortably supported above 4%. We note that SGX’s mean historical P/E is 10% higher at 21x, and during periods of market bullishness, when DVT tends to rapidly expand, the P/E ratio commanded by a stock exchange like SGX will expand with similar speed. Continued infrastructure upgrades and a responsive regulatory environment underpin our view that SGX is well- positioned to capture a recovery in capital market sentiment which, apart from the direct beneficial impact of rising DVT, should also benefit revenue drivers such as IPO and corporate activity fees. In short, we see SGX as a high-quality leverage play on the recovering market with an attractive dividend.

The most immediate risk to revenues would be another slump in market sentiment which would depress trading interest and hence, clearing fees. The crystallisation of direct competition for SGX within Singapore is, we think, a low-probability event, still. Even should rival electronic trading platforms establish themselves (eg, Chi-X), they would remain primarily low-margin trade matching services for institutional flows, steering clear of the high-margin businesses of clearing and depository. However, a pick-up in regional competition for listings and derivatives contracts would stunt SGX’s growth appeal, given its drive to become the region’s primary pan-Asian listing and derivatives market.

SPH: a bellwether of the Singapore economy

Singapore Press Holdings (SPH) is a Singapore-based media and property conglomerate, publishing nearly all of the island- nation’s newspapers and owning Orchard Road’s iconic Paragon Shopping Centre (Paragon).

With a near-monopoly on a major industry sector in Singapore, SPH’s revenue and earnings are directly affected by the country’s economic conditions. However, while the company is near the average in terms of revenue and earnings volatility out of all Straits Times Index (FSSTI) constituent companies, its stock price is one of the least volatile (ie, SPH has a low beta). Since 1 October 1986, there have been 34 periods when the share price has either outperformed or underperformed the FSSTI by at least 15%. Twenty-eight (82.4%) of those periods were due primarily to the low beta of SPH’s stock.

We forecasts the FSSTI to decline over the next six months to 1,932. We expect SPH’s stock to continue to have a low beta and expect it to outperform in a falling stock-market environment. We initiate coverage of the company with a 2 (Outperform) rating and a six-month target price of S$2.84 based on a quantitative analysis.

CapitaMall Trust - Not quite a safe haven

We maintain our (Underperform) rating for CMT, and believe there is still a high degree of uncertainty over how the trend for retail sales (down 11.7% YoY for April) will play out over the remainder of the year (we are not so sure that the worst is over), or how the rollout of new retail supply would affect the operations or pricing power of existing malls.

We see CMT’s two major earnings-related risks as: 1) falling market rents and the start of a negative rental-reversion phase, and 2) the implementation of concessionary rent cuts to keep retailers afloat under a prolonged retail-sales slump.

Suburban malls make up the core of CMT’s portfolio, but it also owns The Atrium (an office property on Orchard Road acquired at the peak of the market and with considerable asset-value downside, in our view), a 40% stake in Raffles City, and Plaza Singapura. Even though Plaza Singapura is not high-end, we see a considerable amount of new retail space on Orchard Road catering to a similar (youth and lifestyle) market, especially at Orchard Central.

We maintain our six-month target price, based on our RNG-valuation method, of S$1.32, obtained from capitalising the estimated FY09 core operating distribution at an effective cap-rate assumption of 7.0%. CMT’s target price to latest (March 2009) book, adjusted for the rights issue, of S$1.66, is 0.80x.