STX Pan Ocean: Sink with BDI (Fully Valued; S$8.26)

STX Pan Ocean’s FY08 earnings of RMB494m came in 15% below our expectation and 26% below consensus, hit by unexpected crash in BDI in 4Q08. We are concerned that STX could gear up sharply to almost 100% by 2010 to fund its huge capex of US$1.8bn. We believe share price is vulnerable to downside risk as BDI is expected to retreat from current level. Maintain Fully Valued. We have trimmed our earnings and cut our TP to S$6.00, still pegged to 0.4 FY09 P/NTA.

4Q08 swung into losses of US$94.2m. In line with its own profit guidance on 11 Feb 2009, STX reported a net loss of US$94.2m in 4Q08, down from net profit of US$131m a quarter ago. We believe the losses came from unprofitable owned and short-term charter-in vessels that were placed on spot market. The operating cost exceeded revenue earned by these open vessels as BDI crashed from 3000 to 800 points in the quarter. Gross margin plummeted 8.2ppt qoq to a mere 0.6%. A significant forex loss of >US$40m as a result of KRW depreciation also dragged on earnings in 4Q08.

High capex, high gearing. We expect STX to gear up sharply in the coming two years, from net gearing of 20% currently to almost 100% by 2010 to fund its huge capex of US$1.8bn during 2009-10 periods. The group is expected to take delivery of 30 bulkcarriers by 2011, which represents 65% of its own dry bulk fleet currently. While most of the 12 Capesize deliveries are already covered by profitable long-term COA, the remaining deliveries are likely to be unprofitable in 2009-2010 based on our forecast of depressed BDI level averaging 900-1100.

Maintain Fully Valued; TP reduced to S$6.00. 4Q08’s lower profitability of owned vessels and more aggressive cutback in short-term charter-in fleet led us to revise down our earnings assumptions. We now expect STX to slide into marginal loss in 2009 and incur higher losses of US$117 in 2010. We believe BDI has approached its near term peak and will retreat from 2000 currently to our forecast of 1100 level. As such, we see downside risk to STXPO’s share price, which is highly correlated to BDI (>0.9). Maintain Fully Valued. TP reduced to S$6.00, still pegged to trough valuation of 0.4x FY09 P/NTA.

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Indo Agri – Numbers still good, despite price declines

Indofood Agri Resources (IFAR) reported a 10% decline in FY08 net earnings to Rp. 795bn, which included the anticipated non-cash loss of Rp. 947 for the revaluation of biological assets, as well as an unrealized Rp. 247bn forex revaluation on its US dollar loan portfolio. Excluding these items, net earnings would have been Rp. 1,487bn, just 4% below our expectation of Rp. 1,551 bn. On a Year on Year basis, net profit excluding biological assets rose 72% to Rp. 1,240 bn.

IFAR’s operational results itself were solid, growing its gross profit by 110% and its turnover by 82%, with increased palm oil sales volume following the full year consolidation of London Sumatra, as well as higher average CPO prices. Gross margin improved to 34.5% from 30.2% in FY07. However, general and administrative expenses grew by a disproportionate 164% to Rp. 659.3bn. This was due to a harmonization of accounting policies between London Sumatra and IFAR, with some items previously recorded under COGS now booked in under general expenses.

IFAR increased its internal supply of CPO to its refineries to 69% of its total requirements, up from 50% last year, with the aim of achieving self sufficiency in the next few years. IFAR expects to increase its CPO production from 714,000 tonnes in FY08 to 800,000 tonnes in the current financial year. This increase is expected to come from its maturing plantations. As for its new planting program, IFAR is taking a more measured approach given the soft CPO prices, with only 5,000 hectares expected to be planted in the earlier part of the year.

IFAR has so far this year reduced its cooking oil prices by 10%, and has also absorbed half of a 10% re-instatement of value added tax for cooking oil, indicating that IFAR’s pricing power remains strong, and continues to enjoy the market leading position for branded cooking oil in Indonesia. However, our FY09 forecast still assumes a 35% reduction in cooking oil average selling prices, in tandem with lower CPO prices. Similarly, we are assuming CPO prices at Rm 1,800 per tonne in FY09, versus the average of around Rm. 2,300 per tonne in FY08. Plantation cost of production is also expected to decline to around US$230 per tonne, versus US$250 per tonne in FY08, primarily from lower fertilizer and fuel prices.

We are maintaining our FY09 forecast of Rp. 1,071.8bn, or a YoY 28% decline in core earnings, primarily on the back of lower CPO and cooking oil prices. IFAR did not declare dividends for FY08. IFAR has maintain ed its gearing at 0.5x, whil interest coverage is a manageable 4.4x. Valuations still look compelling, at a 50% discount to its peer basket, with Price to Book at 0.7x versus its regional peer average at 1.5x. Similarly, IFAR is trading at an FY09 PER of 5.3x versus 10x for its peers. We maintain our Buy recommendation, and have assumed fair value just at IFAR’s book value of S$0.72 per share (which includes its writedown on biological assets).

Parkway - Sell: Profit Let Down by Exceptional Losses

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

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

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

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

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