Last Updated: 1:40am BST 26/05/2008
George Soros, 'the man who broke the Bank of England', tells Edmund Conway of his fears for the economy
'This is a period of wealth destruction. The people who make money will be few and far between. There will be a lot more money lost than made." When George Soros - the phenomenally successful hedge fund manager - says this, you know something is wrong, very wrong. And indeed it is. The 77-year-old billionaire sinks back into the sofa in his Chelsea townhouse and exhales.
He has managed to make money almost consistently for over half a century - from his early days as one of the world's first major hedge fund traders to his involvement in Black Wednesday as the man who "broke the Bank of England", and in the latter years generating multi-billion-dollar annual profits throughout the 1990s. The conditions today are almost uniquely dismal, however.
"I think this is probably more serious than anything in our lifetime," he says. In short, his feeling is that the United States and Britain are facing a recession of a scale greater than the early-1990s, greater even than the 1970s.
"I think the dislocations will be greater because you also have the implications of the house price decline, which you didn't have in the 1970s - so you had stagflation and transfer of purchasing power to the oil producing countries, but here you also have the housing crisis in addition to that."
· The financial crisis in full
Such apocalypticisms would be less worrying were it not that Soros was among the few prominent experts who warned of the dire consequences facing the American economy years ago, when the housing bubble was still inflating.
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But even cottoning on to the big economic story early on hasn't meant guaranteed success. He returned from retirement last summer, and no sooner had he started trading than he pulled hundreds of millions of dollars of investment out of the US and the UK. It was enough to help him to a 32pc return last year. But amid the turbulence of 2008, he admits he is barely breaking even.
One of the problems is that leverage, the juice that has driven the hedge fund and finance trade in recent years, has all but dried up; the other is that the impending economic slump will be far-reaching and painful.
In the UK, the economic clouds are particularly dark, he says. "House prices have risen over the years and are further away from sustainable than in practically any other country, in terms of household indebtedness and the relationship of house prices to incomes." The slump may be more gentle than in the US, he adds, but it will be more drawn out.
"This is going to be compounded by the fact that the financial industry weighs more heavily on the economy than in other countries, because London is the centre of the global financial system, and you have the unfortunate condition that the Bank of England is bound into inflation targeting, and is not in a position to lower interest rates until you have an economic slowdown."
The nice decade, he says, borrowing a phrase from Bank Governor Mervyn King, is over and now the Bank has struck a "Faustian bargain between economic slowdown and inflation".
Ah, the Bank of England. There can be few more eventful relationships between one man and a bank than this one. There is no doubt he remains proud of his central role in Black Wednesday, when he helped drive Britain out of the Exchange Rate Mechanism, making around a billion dollars in the process. He is reminded of it by the fact that sterling has recently fallen some 20pc against the euro.
"It's much better than the straitjacket sterling was in when I broke the Bank of England."
For which, by the way, he is, rightly, unapologetic: "The ERM would have been abandoned even if I had never been born."
The son of the ERM, meanwhile, the euro, looks unbreakable in comparison - by speculators, at least.
But as hedge funds and other speculators pile in to the current crude oil boom, the Hungarian-born investor instead focuses on the wider picture - maintaining his estimated $8.5bn (£4.3bn) fortune, much of which he spends on his philanthropic and political ventures - most notably his Open Society Institute, which has a particular focus on Eastern Europe. However, don't try to read any of his politics into his trades, he insists.
"As a hedge fund manager, I do not claim to be serving the public interest. I am in the business to make money," he says. "It's a difficult point for people to understand and there's a general attitude when they see people profiting to say that markets are immoral, or making money by speculating is immoral.
"It's really the job of the authorities to set the rules, and there are times when some people break the rules or engage in improper activities, like the sub-prime mortgages. The impact fell particularly heavily on black and Hispanic minorities.
"It is a scandal, and I think you can blame [former Federal Reserve chairman Alan] Greenspan for not regulating the mortgage industry. But that's very different from speculating in government bonds or financial instruments, and that's a difficult point to get across, but I feel very strongly.
"Markets play a very useful role and they are amoral, not immoral."
Comments
Interesting Reading but probably over dramatic. Soros is after all a speculator himself and wants to see the markets move. He probably is already hedged in the direction he wants to lead us.
Personally, the UK housing markets needs to come down drastically, maybe, as bad as the US but probably not as fast so Soros may be right about timing.
Oil and commodities (including food) will fall as nothing goes up forever (basic logic "what goes up, must come down").
If Food prices keep rising, people will start dieing and "Speculation" should have no part in Global Famines surely.
I would not be surpised to see Oil at,or below, $60 this year or early next so hedge Funds should be careful.
The financial system DOES need regulation and Goverments have a responsibility in this. Free markets are good in theory but in practice they leave a lot to be desired.
All this from an ex Natwest Banker, now an entrepreneur in North America who is looking to a brighter future when these clouds pass as they surely will!
Posted by John on May 26, 2008 6:42 AM
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I wonder if Soros is gambling on revaluation of the Gulf currencies? It will be interesting to see what brings them down, revaluation or an oil price crash. But Soros is usually a bit early with his forecasts, and maybe on oil too.
George is of course correct, but it is too easy to blame the B of E. Their brief is to keep inflation in check using an indicator that strips out rises in house prices. The cost of housing makes up about 30% - 40% of most people's budget. If the cost of housing rises it is of course inflationary but the CPI didn't show it.
Had the BoE raised interest rates 5 years ago to burst the bubble we would not be in this predicament now. Gordon Brown claimed all the credit for giving them independence but the mistake was to give them the wrong target.
Don't blame the B of E, they just did their job.
KC Yoon
Mobile : +852-6074-0811/+86-13068404682
Monday, May 26, 2008
Friday, May 9, 2008
Mercator to raise debt, expand fleet
SINGAPORE - Singapore-listed dry bulk shipper Mercator Lines (Singapore) Ltd wants to raise more debt to fund an aggressive fleet expansion plan, but at the same time maintain a high cash flow to pay its shareholders well.
The Indian-owned firm, which has bought two ships since its December 2007 listing in Singapore, plans to spend about US$240 million to buy four more ships in the financial year ending March 2009 and might spend a similar amount the year after.
To fund the expansion, the company, which has shareholder's equity of about US$259 million, would take its debt-to-equity ratio of 1.2 times to around 2 times, chief executive officer Shalabh Mittal told Reuters in an interview on Friday.
'We will be comfortable at 2 times (debt-to-equity ratio),' Mr Mittal said adding that the company so far had seen no problems in funding its requirements despite the stress in global credit markets due to the US sub-prime mortgage crisis.
Mr Mittal said the company, which has a market value of about US$374 million, now owns seven vessels and plans to keep about 70 per cent of its fleet on longer-term, fixed-rate contracts and the rest on the spot market.
'Because 70 per cent of our fleet is on fixed contracts we have a far greater cash flow visibility and banks are happy to lend,' he said.
Despite the aggressive expansion plan, Mr Mittal said he would still want to maintain a payout ratio of 18 per cent, announced to be paid as cash dividend earlier this week when the company reported a four-fold rise in annual net profit.
'We are a company focused on good returns to our shareholders,' said Mr Mittal, son of Harish Mittal who is the chairman of the company and its Indian parent Mercator Lines Ltd, which owns 70 per cent of the Singapore firm.
Mercator reported a 303 per cent surge in net profit to US$52.2 million for the financial year ended March 31, 2008 on Wednesday, sparking a rally in its shares. The stock ended 13.4 per cent higher on Friday at 46.5 Singapore cents.
But the counter is still down about 40 per cent from its IPO price of 76 Singapore cents (US$0.556) amid worries about a global economic slowdown.
Mr Mittal said if the world avoids a full blown recession he expects dry bulk rates to rise from current levels, helped by surging demand, mainly for coal in India and iron ore in China.
The company mostly ships coal, iron ore and grain between India, China and Indonesia, and serves customers like Cargill, Glencore, China's Cosco Group, ArcelorMittal, and India's Reliance Energy and Tata Power.
'Mercator Lines Singapore's profit growth looks higher than the three bulk shipping companies we cover,' Deutsche Bank's Hong Kong-based analyst Joe Liew said who also covers China's Pacific Basin Shipping, Korea's STX Pan Ocean and Thailand's Theorising Thai.
'We expect the company's net profit to double in fiscal 2009 and grow 80 per cent in 2010 due to freight rate increases and capacity addition. The stock provides exposure to India's increasing coal imports for the power sector,' said Mr Liew, who has a buy rating on Mercator and a target price of 65 Singapore cents. -- REUTERS
The Indian-owned firm, which has bought two ships since its December 2007 listing in Singapore, plans to spend about US$240 million to buy four more ships in the financial year ending March 2009 and might spend a similar amount the year after.
To fund the expansion, the company, which has shareholder's equity of about US$259 million, would take its debt-to-equity ratio of 1.2 times to around 2 times, chief executive officer Shalabh Mittal told Reuters in an interview on Friday.
'We will be comfortable at 2 times (debt-to-equity ratio),' Mr Mittal said adding that the company so far had seen no problems in funding its requirements despite the stress in global credit markets due to the US sub-prime mortgage crisis.
Mr Mittal said the company, which has a market value of about US$374 million, now owns seven vessels and plans to keep about 70 per cent of its fleet on longer-term, fixed-rate contracts and the rest on the spot market.
'Because 70 per cent of our fleet is on fixed contracts we have a far greater cash flow visibility and banks are happy to lend,' he said.
Despite the aggressive expansion plan, Mr Mittal said he would still want to maintain a payout ratio of 18 per cent, announced to be paid as cash dividend earlier this week when the company reported a four-fold rise in annual net profit.
'We are a company focused on good returns to our shareholders,' said Mr Mittal, son of Harish Mittal who is the chairman of the company and its Indian parent Mercator Lines Ltd, which owns 70 per cent of the Singapore firm.
Mercator reported a 303 per cent surge in net profit to US$52.2 million for the financial year ended March 31, 2008 on Wednesday, sparking a rally in its shares. The stock ended 13.4 per cent higher on Friday at 46.5 Singapore cents.
But the counter is still down about 40 per cent from its IPO price of 76 Singapore cents (US$0.556) amid worries about a global economic slowdown.
Mr Mittal said if the world avoids a full blown recession he expects dry bulk rates to rise from current levels, helped by surging demand, mainly for coal in India and iron ore in China.
The company mostly ships coal, iron ore and grain between India, China and Indonesia, and serves customers like Cargill, Glencore, China's Cosco Group, ArcelorMittal, and India's Reliance Energy and Tata Power.
'Mercator Lines Singapore's profit growth looks higher than the three bulk shipping companies we cover,' Deutsche Bank's Hong Kong-based analyst Joe Liew said who also covers China's Pacific Basin Shipping, Korea's STX Pan Ocean and Thailand's Theorising Thai.
'We expect the company's net profit to double in fiscal 2009 and grow 80 per cent in 2010 due to freight rate increases and capacity addition. The stock provides exposure to India's increasing coal imports for the power sector,' said Mr Liew, who has a buy rating on Mercator and a target price of 65 Singapore cents. -- REUTERS
Noble Group - Nomura
1Q08: better than expectations
Noble’s 1Q08 numbers were well above our expectations, with the
improved operating performance evident in a sequential gain in
momentum into the usually quieter first quarter. Revenue rose
132% y-y to US$9.5bn, with gross profit up 167% y-y, to
US$355mn. Net profit grew 281.3% y-y to US$167.1mn. Excluding
an exceptional gain of US$47.9mn, net profit rose by 192% y-y to
US$119mn (about 40% of our full-year forecast). We are revising
our earnings with an upward bias.
Underpinning the results was: 1) strong volume in tonnage carried;
2) continued improvement in gross margins on the roll-out of the
group’s pipeline strategy, and; 3) effective working capital
management.
Tonnage of commodities carried by the group increase 77.1% y-y
to 27.1mn MT. Tonnage carried for third parties (categorised under
logistics) rose 24.0% to 11.9mn MT.
Gross margins rose to 3.74% in 1Q08 from 3.25% in 1Q07 with
gross margins in the metals & minerals division at 5.1% (vs 2.1%
in 1Q07) and agricultural division margins at 4.5% (vs 1.2%).
Noble demonstrated effective working capital management,
evident in improvement in the cash conversion cycle to 14 days (vs
19 days in 4Q07 and 21 days in 1Q07) and lower inventory days
on hand at 18 days (vs 24 days in 4Q07 and 22 days in 1Q07).
While we have flagged in past notes that management’s ROE
target of 20% “will be challenging as it builds out the supply
pipeline”, the group delivered (on our numbers) annualised ROE of
28.5% (vs 15.8% in 1Q07).
Gearing (adjusted for inventory) remains low at 0.32x (vs 0.54x in
1Q07), with interest cover improving to 3.3x (vs 1.8x in 1Q07).
Noble’s 1Q08 numbers were well above our expectations, with the
improved operating performance evident in a sequential gain in
momentum into the usually quieter first quarter. Revenue rose
132% y-y to US$9.5bn, with gross profit up 167% y-y, to
US$355mn. Net profit grew 281.3% y-y to US$167.1mn. Excluding
an exceptional gain of US$47.9mn, net profit rose by 192% y-y to
US$119mn (about 40% of our full-year forecast). We are revising
our earnings with an upward bias.
Underpinning the results was: 1) strong volume in tonnage carried;
2) continued improvement in gross margins on the roll-out of the
group’s pipeline strategy, and; 3) effective working capital
management.
Tonnage of commodities carried by the group increase 77.1% y-y
to 27.1mn MT. Tonnage carried for third parties (categorised under
logistics) rose 24.0% to 11.9mn MT.
Gross margins rose to 3.74% in 1Q08 from 3.25% in 1Q07 with
gross margins in the metals & minerals division at 5.1% (vs 2.1%
in 1Q07) and agricultural division margins at 4.5% (vs 1.2%).
Noble demonstrated effective working capital management,
evident in improvement in the cash conversion cycle to 14 days (vs
19 days in 4Q07 and 21 days in 1Q07) and lower inventory days
on hand at 18 days (vs 24 days in 4Q07 and 22 days in 1Q07).
While we have flagged in past notes that management’s ROE
target of 20% “will be challenging as it builds out the supply
pipeline”, the group delivered (on our numbers) annualised ROE of
28.5% (vs 15.8% in 1Q07).
Gearing (adjusted for inventory) remains low at 0.32x (vs 0.54x in
1Q07), with interest cover improving to 3.3x (vs 1.8x in 1Q07).
Starhub - Phillip Capital
StarHub Limited
Strong results; within expectations
1Q FY08 results. StarHub reported 1Q operating revenue of S$534.9m (+13.2% yoy) and net profit of S$80.1m (+14.5% yoy). Moreover, EBITDA increased to S$167.7m (+6.3% yoy). It also declared an interim dividend of S$0.045 per ordinary share, which was higher than the dividend of S$0.035 last year.
Strong results; within expectations
1Q FY08 results. StarHub reported 1Q operating revenue of S$534.9m (+13.2% yoy) and net profit of S$80.1m (+14.5% yoy). Moreover, EBITDA increased to S$167.7m (+6.3% yoy). It also declared an interim dividend of S$0.045 per ordinary share, which was higher than the dividend of S$0.035 last year.
JES - CIMB
China-based shipbuilder JES International Holdings, which was listed last December,
yesterday posted a 25.6% rise in first-quarter net profit to 30.1 million yuan (S$5.9
million) from 24 million yuan a year ago as its margin enhancement strategy kicked in.
The profit rise outpaced revenue growth, which increased 17.5% to 203.7 million yuan
from 173.4 million yuan in the previous corresponding period. This was due to the group
increasing production of larger vessels with higher contract prices, JES said. Gross
margin for the period under review also increased to 22.8% compared with 17.4%
previously due to the larger bulk carriers built by JES. Bulk carriers contributed 73.1% of
revenue compared with 57.4% previously. Contribution from containerships fell as the
group kept its focus on building bigger bulk carriers. The group also recorded a net
foreign exchange loss of 10.5 million yuan due to the erosion of contracted revenue in
US dollars because of the appreciation of the yuan. Diluted EPS was 0.0259 yuan, down
from 0.2844 yuan as the share base rose sharply from 84.3 million shares to about 1.16
billion shares. (BT)
yesterday posted a 25.6% rise in first-quarter net profit to 30.1 million yuan (S$5.9
million) from 24 million yuan a year ago as its margin enhancement strategy kicked in.
The profit rise outpaced revenue growth, which increased 17.5% to 203.7 million yuan
from 173.4 million yuan in the previous corresponding period. This was due to the group
increasing production of larger vessels with higher contract prices, JES said. Gross
margin for the period under review also increased to 22.8% compared with 17.4%
previously due to the larger bulk carriers built by JES. Bulk carriers contributed 73.1% of
revenue compared with 57.4% previously. Contribution from containerships fell as the
group kept its focus on building bigger bulk carriers. The group also recorded a net
foreign exchange loss of 10.5 million yuan due to the erosion of contracted revenue in
US dollars because of the appreciation of the yuan. Diluted EPS was 0.0259 yuan, down
from 0.2844 yuan as the share base rose sharply from 84.3 million shares to about 1.16
billion shares. (BT)
K-Reit - UBS
K-REIT Asia
F ree float market cap improves after rights
71% of minorities subscribed to right units, beating our expectations
KREIT has announced that 92.2% of the 396.9m rights have been taken up by its
unit-holders, 4.1% by minority unit-holders subscribing to excess rights, and the
remaining 3.7% will be taken up by Keppel Land and Keppel Corp. As a result,
Kepland and Kep Corp will own 43.6% and 31.5% of the REIT, respectively.
Free float market cap rose to US$170m, but still small and illiquid
While KREIT’s free float has improved, it still the lowest free float market cap
among SREITs with Singapore commercial assets. For office exposure, we prefer
Suntec and CapitaCommercial Trust (CCT), which are more liquid and have higher
organic DPU CAGRs of 6.6% and 10% respectively, compared to KREIT’s 4.9%.
SREIT top picks are defensives: Suntec, FCT and Parkway Life REIT
We continue to expect investors to favour large-cap liquid SREITs and believe
interest in KREIT will be limited. There is potential uncertainty about the
refinancing of its remaining bridging loan of S$390m, which expires in September
2008, and how Keppel Corp and/or Keppel Land will seek to increase liquidity and
free float.
Valuation: upgrade from Sell to Neutral, raise PT from S$1.20 to S$1.45
We adjust our DPU estimates to account for lower office rent assumptions for One
Raffles Quay. We base our price target on a DCF analysis, using a beta of 1.2,
market risk premium of 5%, and terminal growth rate of 2.3%.
F ree float market cap improves after rights
71% of minorities subscribed to right units, beating our expectations
KREIT has announced that 92.2% of the 396.9m rights have been taken up by its
unit-holders, 4.1% by minority unit-holders subscribing to excess rights, and the
remaining 3.7% will be taken up by Keppel Land and Keppel Corp. As a result,
Kepland and Kep Corp will own 43.6% and 31.5% of the REIT, respectively.
Free float market cap rose to US$170m, but still small and illiquid
While KREIT’s free float has improved, it still the lowest free float market cap
among SREITs with Singapore commercial assets. For office exposure, we prefer
Suntec and CapitaCommercial Trust (CCT), which are more liquid and have higher
organic DPU CAGRs of 6.6% and 10% respectively, compared to KREIT’s 4.9%.
SREIT top picks are defensives: Suntec, FCT and Parkway Life REIT
We continue to expect investors to favour large-cap liquid SREITs and believe
interest in KREIT will be limited. There is potential uncertainty about the
refinancing of its remaining bridging loan of S$390m, which expires in September
2008, and how Keppel Corp and/or Keppel Land will seek to increase liquidity and
free float.
Valuation: upgrade from Sell to Neutral, raise PT from S$1.20 to S$1.45
We adjust our DPU estimates to account for lower office rent assumptions for One
Raffles Quay. We base our price target on a DCF analysis, using a beta of 1.2,
market risk premium of 5%, and terminal growth rate of 2.3%.
Singapore Banks - UBS
Lack near-term catalyst
Downgrade OCBC and UOB to Neutral
Singapore bank share prices have rebounded by an average of 26% from the lows
of Q108 and are now trading near their 10-year average PE and P/book valuations.
This rebound, together with little room for earnings forecast upgrades post the
result season and the lack of near term catalysts, leads us to believe that it will be
difficult to command a valuation premium, and thus we are downgrading our
ratings for OCBC and United Overseas Bank (UOB) from Buy to Neutral. We
maintain our Buy rating for DBS Bank.
Moderation in second half
Core earnings in Q108 met market expectations, but it was also clear that the very
strong loan growth recorded in the past few quarters is likely to moderate, an
outcome of slower global economic growth and the banks themselves exercising
caution in this environment.
Interest rate will be the key
We think the key to further upside potential to earnings rests with the direction of
interest rates, which have fallen 100bp YTD. We are assuming no recovery in 2008
but, should they rebound, it would mean better margins and earnings.
Buy DBS
We believe the market has been cautious towards DBS as it is the prime casualty of
falling rates and also because of concerns over the performance of its large
Treasury division in these tough markets. We believe the lower rates are fully
priced in and that there is scope for improvement with loan spreads widening while
the improvement in the capital markets in recent weeks suggests the worst is over
for Treasury earnings.
Downgrade OCBC and UOB to Neutral
Singapore bank share prices have rebounded by an average of 26% from the lows
of Q108 and are now trading near their 10-year average PE and P/book valuations.
This rebound, together with little room for earnings forecast upgrades post the
result season and the lack of near term catalysts, leads us to believe that it will be
difficult to command a valuation premium, and thus we are downgrading our
ratings for OCBC and United Overseas Bank (UOB) from Buy to Neutral. We
maintain our Buy rating for DBS Bank.
Moderation in second half
Core earnings in Q108 met market expectations, but it was also clear that the very
strong loan growth recorded in the past few quarters is likely to moderate, an
outcome of slower global economic growth and the banks themselves exercising
caution in this environment.
Interest rate will be the key
We think the key to further upside potential to earnings rests with the direction of
interest rates, which have fallen 100bp YTD. We are assuming no recovery in 2008
but, should they rebound, it would mean better margins and earnings.
Buy DBS
We believe the market has been cautious towards DBS as it is the prime casualty of
falling rates and also because of concerns over the performance of its large
Treasury division in these tough markets. We believe the lower rates are fully
priced in and that there is scope for improvement with loan spreads widening while
the improvement in the capital markets in recent weeks suggests the worst is over
for Treasury earnings.
Keppel Corp - DMG & partners
Keppel Corp : S$10.64 BUY (TP: S$12.76)
A true conglomerate
We re-initiate coverage on Keppel Corp with a BUY rating. We like Keppel
for its diversified portfolio that spans across Offshore & Marine,
Property, Infrastructure and Investments business segments. The diverse
business mix should protect its earnings from a drastic slowdown in any one
market and reduce overall earnings volatility. While we still believe that
Keppel would continue to enjoy strong earnings from Offshore & Marine in
this favourable oil and gas sector climate, the Infrastructure arm is
slated to be the next defensive recurring income stream in the years to
come. We value Keppel based on sum-of-the-parts valuation metric, deriving
a target price of S$12.76. This implies a forward FY08F PE of 19.5x, in
line with the regional conglomerate peers.
A true conglomerate
We re-initiate coverage on Keppel Corp with a BUY rating. We like Keppel
for its diversified portfolio that spans across Offshore & Marine,
Property, Infrastructure and Investments business segments. The diverse
business mix should protect its earnings from a drastic slowdown in any one
market and reduce overall earnings volatility. While we still believe that
Keppel would continue to enjoy strong earnings from Offshore & Marine in
this favourable oil and gas sector climate, the Infrastructure arm is
slated to be the next defensive recurring income stream in the years to
come. We value Keppel based on sum-of-the-parts valuation metric, deriving
a target price of S$12.76. This implies a forward FY08F PE of 19.5x, in
line with the regional conglomerate peers.
Thursday, May 8, 2008
China Milk - CIMB
Description: China Milk Products Group supplies raw milk, pedigree bull semen, and
pedigree dairy cow embryos for embryo transfer.
Immediate outlook: The stock is now facing some major resistances. Technical indicators
have flattened out earlier but they are starting to inch up again. If the stock is able to
overcome the trend line resistance (at S$0.83) and its 100-day SMA (at S$0.85) then it
could rally further from here. Technical Buy now ahead of the breakout. Buy at S$0.79-
0.82. Put a tight stop below the S$0.765 level, just in case the trade turns sour. Upside
target is S$0.97-1.00.
Medium term outlook (2-6 months): The stock is now testing its long term trend line
support turned resistance and its trend line resistance at S$0.83. Again, the stock has to
overcome both of these resistances before an uptrend can ensue. Looking at its indicators,
the momentum still appears strong. Hence it is still a good possibility that the stock can
overcome the tough resistance in the coming week. LT investors could either choose to
buy half now and buy the rest on breakout or wait for the breakout before jumping in. If the
stock is able to breach the resistances, it could be heading towards S$1.16-1.20 in the
medium term. However, trade cautiously and keep a tight stop.
pedigree dairy cow embryos for embryo transfer.
Immediate outlook: The stock is now facing some major resistances. Technical indicators
have flattened out earlier but they are starting to inch up again. If the stock is able to
overcome the trend line resistance (at S$0.83) and its 100-day SMA (at S$0.85) then it
could rally further from here. Technical Buy now ahead of the breakout. Buy at S$0.79-
0.82. Put a tight stop below the S$0.765 level, just in case the trade turns sour. Upside
target is S$0.97-1.00.
Medium term outlook (2-6 months): The stock is now testing its long term trend line
support turned resistance and its trend line resistance at S$0.83. Again, the stock has to
overcome both of these resistances before an uptrend can ensue. Looking at its indicators,
the momentum still appears strong. Hence it is still a good possibility that the stock can
overcome the tough resistance in the coming week. LT investors could either choose to
buy half now and buy the rest on breakout or wait for the breakout before jumping in. If the
stock is able to breach the resistances, it could be heading towards S$1.16-1.20 in the
medium term. However, trade cautiously and keep a tight stop.
Tuesday, May 6, 2008
Keppel Corp
SINGAPORE, May 6 - Singapore's Keppel Corp , the world's top offshore oil rig-maker, said on Tuesday its unit Keppel FELS has won a contract to build a $512 million drilling rig.
The contract with a subsidiary of ENSCO International is due for delivery in the second half of 2011, Keppel said in a statement.
The contract with a subsidiary of ENSCO International is due for delivery in the second half of 2011, Keppel said in a statement.
Thursday, May 1, 2008
Fed cuts key interest rate by 1/4 point
WASHINGTON, April 30 (Reuters) - The Federal Reserve lowered a key U.S. interest rate by a modest quarter percentage point on Wednesday in what may be the last of a series of cuts aimed at aiding an economy hit hard by a housing slump and credit market turmoil.
The Fed's action takes the bellwether federal funds rate to 2 percent, the lowest since December 2004. It was the seventh reduction in a campaign that has brought rates down by 3.25 percentage points since mid-September.
President George W. Bush on Tuesday said the U.S. economy faced a "tough time," a point underscored on Wednesday by a report that showed U.S. gross domestic product expanded at a slim 0.6 percent annual rate in the first quarter.
While the growth rate was a bit stronger than economists had expected, it reflected a buildup in inventories that may weigh on the economy in coming months.
Other details in the report were decidedly weak.
Consumer spending, which accounts for two-thirds of U.S. output, grew at the slowest pace since 2001, business investment fell and homebuilding continued to nosedive, recording the biggest drop in 26 years.
Fed Chairman Ben Bernanke told Congress on April 2 that "recession is possible," adding that the Fed believed there might be a "slight contraction" in the economy in the first six months of the year.
At the same time, with gasoline prices heading toward $4 dollars a gallon and strong global demand pushing up food prices, some Fed officials have worried that a desire to bolster the economy could divert the central bank's attention from inflation pressures.
In addition to rate cuts, the Fed has taken a number of emergency steps to ease credit strains that have threatened to make the economy's ills worse, pumping billions of dollars into markets to keep them from choking on mortgage-related bets.
At their meeting on Wednesday, Fed officials discussed a new measure -- paying interest on commercial bank reserves held at the central bank -- that could improve their ability to provide liquid funds to the market.
The Fed has also mulled whether expanding the size of its term auction facility cash auctions for banks and extending the duration of those loans beyond 28 days could help ease still-tight credit conditions.
The Fed's action takes the bellwether federal funds rate to 2 percent, the lowest since December 2004. It was the seventh reduction in a campaign that has brought rates down by 3.25 percentage points since mid-September.
President George W. Bush on Tuesday said the U.S. economy faced a "tough time," a point underscored on Wednesday by a report that showed U.S. gross domestic product expanded at a slim 0.6 percent annual rate in the first quarter.
While the growth rate was a bit stronger than economists had expected, it reflected a buildup in inventories that may weigh on the economy in coming months.
Other details in the report were decidedly weak.
Consumer spending, which accounts for two-thirds of U.S. output, grew at the slowest pace since 2001, business investment fell and homebuilding continued to nosedive, recording the biggest drop in 26 years.
Fed Chairman Ben Bernanke told Congress on April 2 that "recession is possible," adding that the Fed believed there might be a "slight contraction" in the economy in the first six months of the year.
At the same time, with gasoline prices heading toward $4 dollars a gallon and strong global demand pushing up food prices, some Fed officials have worried that a desire to bolster the economy could divert the central bank's attention from inflation pressures.
In addition to rate cuts, the Fed has taken a number of emergency steps to ease credit strains that have threatened to make the economy's ills worse, pumping billions of dollars into markets to keep them from choking on mortgage-related bets.
At their meeting on Wednesday, Fed officials discussed a new measure -- paying interest on commercial bank reserves held at the central bank -- that could improve their ability to provide liquid funds to the market.
The Fed has also mulled whether expanding the size of its term auction facility cash auctions for banks and extending the duration of those loans beyond 28 days could help ease still-tight credit conditions.
Friday, April 11, 2008
United Fiber System (Unifiber)
SINGAPORE, April 10 (Reuters) - Singapore-listed United Fiber System (Unifiber) (UFSL.SI: Quote, Profile, Research) plans to raise about $225 million for expansion by selling convertible bonds and shares in its Indonesian unit, a source close to the deal said on Thursday.
The source, speaking to Reuters on condition of anonymity, said the funds raised would cover 25 percent of the cost of building a pulp mill in Indonesia.
The source did not give details on the convertible bonds issue and share sale.
Unifiber, which does construction and forestry, said in February it had entered into an agreement with China MCC20 Construction (MCC20), a unit of state-owned investment firm China Metallurgical Group Corp, to build a $863 million pulp mill in Indonesia.
But the cost of the mill has increased to $900 million, due to the euro's appreciation against the U.S. dollar, as most of the equipment was purchased from Europe, the source said.
Unifiber would obtain the remaining $675 million from MCC20 in the form of a cash loan to be repaid over 10 years, the source added.
The proposed bleached hardwood kraft pulp mill in South Kalimantan has a production capacity of 600,000 air dry tonnes per year, the company said. (Editing by Jennifer Tan)
The source, speaking to Reuters on condition of anonymity, said the funds raised would cover 25 percent of the cost of building a pulp mill in Indonesia.
The source did not give details on the convertible bonds issue and share sale.
Unifiber, which does construction and forestry, said in February it had entered into an agreement with China MCC20 Construction (MCC20), a unit of state-owned investment firm China Metallurgical Group Corp, to build a $863 million pulp mill in Indonesia.
But the cost of the mill has increased to $900 million, due to the euro's appreciation against the U.S. dollar, as most of the equipment was purchased from Europe, the source said.
Unifiber would obtain the remaining $675 million from MCC20 in the form of a cash loan to be repaid over 10 years, the source added.
The proposed bleached hardwood kraft pulp mill in South Kalimantan has a production capacity of 600,000 air dry tonnes per year, the company said. (Editing by Jennifer Tan)
Thursday, April 10, 2008
Cosco Corporation (S) Ltd - The good and the bad : CIMB
10 April 2008
Cosco Corporation (S) Ltd (COS SP / COSC.SI, OUTPERFORM - Maintained,
S$3.36, Target: S$5.55)
Quick takes - The good and the bad
by LIM Siew Khee
Cosco has won contracts worth US$292.3m, comprising a US$131.8m
semi-submersible production unit hull and two 59,000dwt shuttle tankers
(US$160.5m). The contracts are scheduled for delivery in 2010 and June 2011
respectively. However, the above is countered by the lapse of a GM5000
semi-submersible rig hull contract awarded in May 07 worth US$202m, due to
the failure of deposit payment. No work has been done for this project. We
believe work on the other offshore projects for which deposits have been
paid has begun, including the GM4000 (US$200m), which is planned for
delivery in 4Q09. Maintain Outperform and target price of S$5.55, based on
sum-of-the-parts valuation.
Cosco Corporation (S) Ltd (COS SP / COSC.SI, OUTPERFORM - Maintained,
S$3.36, Target: S$5.55)
Quick takes - The good and the bad
by LIM Siew Khee
Cosco has won contracts worth US$292.3m, comprising a US$131.8m
semi-submersible production unit hull and two 59,000dwt shuttle tankers
(US$160.5m). The contracts are scheduled for delivery in 2010 and June 2011
respectively. However, the above is countered by the lapse of a GM5000
semi-submersible rig hull contract awarded in May 07 worth US$202m, due to
the failure of deposit payment. No work has been done for this project. We
believe work on the other offshore projects for which deposits have been
paid has begun, including the GM4000 (US$200m), which is planned for
delivery in 4Q09. Maintain Outperform and target price of S$5.55, based on
sum-of-the-parts valuation.
Wednesday, April 9, 2008
Make The Most Of The Best And The Least Of The Worst....
What’s the difference between reckless gambling and professional trading? For many, the answer is risk management. Many traders view risk management as critical to long-term success. You can have a crummy trading strategy, but if you have good money management, you can make money. If you have poor money management, it doesn't matter how good the trading strategy is. You're going to lose in the end. Similarly, You must have a survivability element so that if you literally wished to select stocks by throwing darts at a board, you would continue to survive market to market.
Tuesday, April 8, 2008
United Fiber surges as stalled mill gets going
New Chinese partner set to sign turnkey contract for pulp mill
SHARES in United Fiber System surged as much as 15 per cent in trading yesterday as a long held-up billion-dollar pulp-mill project looks set to start taking shape with the expected signing this week of a turnkey contract with a new Chinese partner.
The stock of the forestry, pulp and construction company closed trading at 29.5 cents, up 13.5 per cent or 3.5 cents, after hitting an intra-day high of 30 cents. Some 153.7 million shares changed hands for the day.
Since end-February, the counter has been on an upward trajectory on the back of record order books for its wholly owned subsidiary Poh Lian Construction. The unit saw a 58 per cent surge in its order books to $550 million after winning a $202 million building contract from UOL, which was expected to contribute positively to group revenue this year.
United Fiber has also seen a substantial shareholder gradually raising its stake in the company. On Thursday last week, Lee Pineapple Co - through wholly owned subsidiary Paramount Assets Investments Pte Ltd - raised its holding to 7.14 per cent.
'I believe the Lee family will continue to buy after becoming a substantial shareholder (in March). They are not the only ones who look like they'll be increasing their stake. I suspect there will be more,' a local house trader was quoted as saying by Dow Jones Newswire yesterday.
This stake increase also came ahead of the finalisation this week of the turnkey contract to build a US$863 million (S$1.19 billion) greenfield pulp mill in South Kalimantan in Indonesia - a tie-up between United Fiber's unit PT Marga Buana Bumi Mulia and China MCC20 Construction Co Ltd.
China MCC20 will be responsible for the design, procurement and supply of all machinery and equipment, civil work, and the installation work as well as providing supplier's credit for the project.
The contract with the new Chinese partner, which was announced on Feb 24, helped allay investor concerns about the project which was long held-up over regulatory clearance by both the Indonesian and the Chinese governments.
The delay led to the earlier contract with China National Machinery & Equipment Import & Export Corp being aborted and the new contract with China MCC20.
United Fiber and China MCC20 have targeted to execute the engineering, procurement and construction contract and the supplier's credit agreement before Friday this week.
SHARES in United Fiber System surged as much as 15 per cent in trading yesterday as a long held-up billion-dollar pulp-mill project looks set to start taking shape with the expected signing this week of a turnkey contract with a new Chinese partner.
The stock of the forestry, pulp and construction company closed trading at 29.5 cents, up 13.5 per cent or 3.5 cents, after hitting an intra-day high of 30 cents. Some 153.7 million shares changed hands for the day.
Since end-February, the counter has been on an upward trajectory on the back of record order books for its wholly owned subsidiary Poh Lian Construction. The unit saw a 58 per cent surge in its order books to $550 million after winning a $202 million building contract from UOL, which was expected to contribute positively to group revenue this year.
United Fiber has also seen a substantial shareholder gradually raising its stake in the company. On Thursday last week, Lee Pineapple Co - through wholly owned subsidiary Paramount Assets Investments Pte Ltd - raised its holding to 7.14 per cent.
'I believe the Lee family will continue to buy after becoming a substantial shareholder (in March). They are not the only ones who look like they'll be increasing their stake. I suspect there will be more,' a local house trader was quoted as saying by Dow Jones Newswire yesterday.
This stake increase also came ahead of the finalisation this week of the turnkey contract to build a US$863 million (S$1.19 billion) greenfield pulp mill in South Kalimantan in Indonesia - a tie-up between United Fiber's unit PT Marga Buana Bumi Mulia and China MCC20 Construction Co Ltd.
China MCC20 will be responsible for the design, procurement and supply of all machinery and equipment, civil work, and the installation work as well as providing supplier's credit for the project.
The contract with the new Chinese partner, which was announced on Feb 24, helped allay investor concerns about the project which was long held-up over regulatory clearance by both the Indonesian and the Chinese governments.
The delay led to the earlier contract with China National Machinery & Equipment Import & Export Corp being aborted and the new contract with China MCC20.
United Fiber and China MCC20 have targeted to execute the engineering, procurement and construction contract and the supplier's credit agreement before Friday this week.
Straits Asia Resources - DBS Vickers
BUY S$3.07 FSSTI : 3,046.54
(Initiating Coverage)
Price Target : 12-Month S$ 3.89
Reason for Report : Initiating Coverage
Potential Catalyst: Mining license to exploit norther part and extension
of Sebuku mining concession area, acquisition of coal mining
Sizing up
Story: Straits Asia’s aggressive expansion has paid off.
The acquisition of Jembayan mine and expansion of
Sebuku mine boosted Straits Asia’s volume of resources
by almost three-fold to 387m tonnes, from 103m
previously. Accordingly, production is set to surge to
record levels of 9.5m tonnes in FY08, 10m tonnes in
FY09, then 11m tonnes by FY10. The recent rally in
international spot price for coal will directly benefit the
company’s performance. Supply constraints and growing
demand will keep prices at high levels. We foresee that
by 2009, infrastructure problems occurred in some
major coal exporting countries will be alleviated, hence
we might see spot prices eased but robust demand will
keep it at high levels above its historical average. We
estimate coal prices of US$100/tonne for FY08,
US$90/tonne for FY09, and US$80/tonne for FY10.
Point: Increasing expenditures on new infrastructure to
achieve its production target and strong international
coal spot prices would translate to buoyant performance
for the company in the coming years. We expect
revenue to grow 143% and 42% and bottom-line by
541% and 95% for FY08 and FY09 respectively.
Exploiting resources will be key, as a large portion of the
resources (over 80%) is located on mining concession
area where the mining licence is still being processed.
Relevance: Our DCF-based valuation is premised on
WACC of 9.35%, debt-to-equity ratio of 35% and
terminal growth of 0%. Our target price of S$3.89
implies PEs of 16.7x and 8.6x for FY08 and FY09
respectively. We initiate coverage on the counter with a
BUY call.
(Initiating Coverage)
Price Target : 12-Month S$ 3.89
Reason for Report : Initiating Coverage
Potential Catalyst: Mining license to exploit norther part and extension
of Sebuku mining concession area, acquisition of coal mining
Sizing up
Story: Straits Asia’s aggressive expansion has paid off.
The acquisition of Jembayan mine and expansion of
Sebuku mine boosted Straits Asia’s volume of resources
by almost three-fold to 387m tonnes, from 103m
previously. Accordingly, production is set to surge to
record levels of 9.5m tonnes in FY08, 10m tonnes in
FY09, then 11m tonnes by FY10. The recent rally in
international spot price for coal will directly benefit the
company’s performance. Supply constraints and growing
demand will keep prices at high levels. We foresee that
by 2009, infrastructure problems occurred in some
major coal exporting countries will be alleviated, hence
we might see spot prices eased but robust demand will
keep it at high levels above its historical average. We
estimate coal prices of US$100/tonne for FY08,
US$90/tonne for FY09, and US$80/tonne for FY10.
Point: Increasing expenditures on new infrastructure to
achieve its production target and strong international
coal spot prices would translate to buoyant performance
for the company in the coming years. We expect
revenue to grow 143% and 42% and bottom-line by
541% and 95% for FY08 and FY09 respectively.
Exploiting resources will be key, as a large portion of the
resources (over 80%) is located on mining concession
area where the mining licence is still being processed.
Relevance: Our DCF-based valuation is premised on
WACC of 9.35%, debt-to-equity ratio of 35% and
terminal growth of 0%. Our target price of S$3.89
implies PEs of 16.7x and 8.6x for FY08 and FY09
respectively. We initiate coverage on the counter with a
BUY call.
Thursday, March 27, 2008
China Hongxing Sports (S$0.49) - Growth after the Olympics
China Hongxing Sports (S$0.49) - Growth after the Olympics
We spoke to management recently regarding its growth strategy
post-Olympics. Hongxing plans to continue its retail network expansion and
A&P to raise brand visibility as it believes that China's sporting market
will continue to grow, buttressed by other sporting events like the 16th
Asian Games in 2010 and rising sports participation. In addition, Hongxing
has secured indicative orders worth Rm1bn during its March trade fair. We
have made no changes to our earnings estimates and maintain our target
price of S$0.86, based on 16.5x CY09 earnings, or a 20% premium to average
valuations for the sports shoe sector. Reiterate Outperform on the back
of robust industry prospects.
CIMB
We spoke to management recently regarding its growth strategy
post-Olympics. Hongxing plans to continue its retail network expansion and
A&P to raise brand visibility as it believes that China's sporting market
will continue to grow, buttressed by other sporting events like the 16th
Asian Games in 2010 and rising sports participation. In addition, Hongxing
has secured indicative orders worth Rm1bn during its March trade fair. We
have made no changes to our earnings estimates and maintain our target
price of S$0.86, based on 16.5x CY09 earnings, or a 20% premium to average
valuations for the sports shoe sector. Reiterate Outperform on the back
of robust industry prospects.
CIMB
Singapore Exchange: Time for a relook
Singapore Exchange (SGX) has also been hit by the recent
volatility in the market. Its share price has fallen in line with its
regional peers, down about 57% from its 52-week high. This is reflective of
the generally weak sentiment in the market where trading volume has fallen
in Feb and Mar this year. Taking these factors into account, we have
imputed the drop in trading activities into our 2H FY08 estimates, and
lowered FY08 earnings by 11.7% to S$428.6m and FY09 earnings by 12.4% to
S$434.5m. Using lower valuation of 21x (versus 19x for its regional peers
and 23x for its global peers), we are lowering our fair value estimate to
S$8.20 (previous: $11.20). As SGX’s stable revenue (terminal, listing,
price information and other fees) is fairly secured, we believe that
together with the attractive yield of 4.9% at current price level, the
stock is starting to look attractive again, especially for medium to longer
term holders as SGX continues to grow its suite of products and services to
buoy its long term income. With recent volatile market conditions and on
price weakness, SGX is a BUY. (Carmen Lee - Head, OCBC Investment Research)
volatility in the market. Its share price has fallen in line with its
regional peers, down about 57% from its 52-week high. This is reflective of
the generally weak sentiment in the market where trading volume has fallen
in Feb and Mar this year. Taking these factors into account, we have
imputed the drop in trading activities into our 2H FY08 estimates, and
lowered FY08 earnings by 11.7% to S$428.6m and FY09 earnings by 12.4% to
S$434.5m. Using lower valuation of 21x (versus 19x for its regional peers
and 23x for its global peers), we are lowering our fair value estimate to
S$8.20 (previous: $11.20). As SGX’s stable revenue (terminal, listing,
price information and other fees) is fairly secured, we believe that
together with the attractive yield of 4.9% at current price level, the
stock is starting to look attractive again, especially for medium to longer
term holders as SGX continues to grow its suite of products and services to
buoy its long term income. With recent volatile market conditions and on
price weakness, SGX is a BUY. (Carmen Lee - Head, OCBC Investment Research)
Wednesday, March 26, 2008
COSCO - Pricing in potential headwinds - valuations remain
(JP Morgan - Overwgt $4.20) 24 Mar 08
• Pricing in higher raw materials and labor costs: On the back of
potential headwinds – rising steel prices and labor costs, we are
moving away from our previously assumed blue-sky scenario and
pricing in more realistic assumptions.
• Raising steel prices remain a major concern: According to
management, its steel input cost has increased by 20% Y/Y in
FY07. While management has budgeted 20% increase in steel
input prices for all its contracts secured since Oct-07, it remains
exposed to any further increase in steel plate prices beyond the
budgeted level and margins could be impacted on further price
increases. YTD, medium steel plates prices have already increased
19% which signifies that Cosco is likely to suffer from margin
pressure for its outstanding orders as it has yet to procure its steel
supply for projects slated for FY09 delivery and beyond.
• Price catalysts going forward: Possible share price catalysts
include (1) stronger offshore contract momentum; (2) completion
of the acquisition of 19% stake in Cosco Shipyard Group at
attractive valuations; and (3) clearer management strategy on
input cost management.
• Revising Dec-08 PT to S$4.20: We are reducing our SOTP price
target to S$4.20 factoring in more conservative net margin
estimates of 10% for newbuilding, 21% for ship repair, 16% for
conversion and 19% for offshore projects secured from FY07.
• Pricing in higher raw materials and labor costs: On the back of
potential headwinds – rising steel prices and labor costs, we are
moving away from our previously assumed blue-sky scenario and
pricing in more realistic assumptions.
• Raising steel prices remain a major concern: According to
management, its steel input cost has increased by 20% Y/Y in
FY07. While management has budgeted 20% increase in steel
input prices for all its contracts secured since Oct-07, it remains
exposed to any further increase in steel plate prices beyond the
budgeted level and margins could be impacted on further price
increases. YTD, medium steel plates prices have already increased
19% which signifies that Cosco is likely to suffer from margin
pressure for its outstanding orders as it has yet to procure its steel
supply for projects slated for FY09 delivery and beyond.
• Price catalysts going forward: Possible share price catalysts
include (1) stronger offshore contract momentum; (2) completion
of the acquisition of 19% stake in Cosco Shipyard Group at
attractive valuations; and (3) clearer management strategy on
input cost management.
• Revising Dec-08 PT to S$4.20: We are reducing our SOTP price
target to S$4.20 factoring in more conservative net margin
estimates of 10% for newbuilding, 21% for ship repair, 16% for
conversion and 19% for offshore projects secured from FY07.
Monday, March 24, 2008
Singapore - A to K - March 24 : Various Brokers
ALLCO COMMERCIAL REIT, csfb downgrade to UNDERPERFORM with target price
$0.78($1.00)
- ALLC has attempted and failed to prevent a Moody.s downgrade of its
corporate credit rating from Ba1 to Ba2. Moody.s is currently keeping
ALLC.s rating under review, which could mean a further possible downgrade.
- This is negative for ALLC, as it could imply a potential refinancing
cost. In the event that ALLC cannot get full refinancing, we believe ALLC.s
potential sale of its A$483 (~S$617) worth of AU assets could also end up
in a fire sale, as potential acquirers may take advantage of the situation
or find difficulty in funding. Our analysis suggests a significant dilution
of to our TP and DPU in a fire sale scenario.
- ALLC has outperformed since last Nov. At this level, we see more
potential downside risk given the uncertain outlook. We have raised our
refinancing costs to 4.5% accordingly, and in turn revised our TP to S$0.78
and downgrade the stock to an UNDERPERFORM. On the back of the cut, our 08
DPU has decreased from 9.17 Scts to 7.10 Scts. ALLC is currently trading at
0.49 P/B, and 9.9% yield.
ASCENDAS REITS, daiwa upgrade to BUY with target price $2.75
- Investment case: Largest industrial-property S-REIT and arguably one of
the most defensive, with a diversified and highquality portfolio and a
highly-disciplined (in our opinion) acquisition strategy. AREIT faces
unique opportunities, such as its ideal position to capture CBD spill-over
demand at its multitenanted properties and an inside track in the
development of several potentially highly DPU-accretive properties at the
Changi Business Park site. The stock market has largely ignored these
positive factors, in our view.
- Asset profile: 100% industrial properties (business and science park,
hi-tech industrial, light industrial, logistics and distribution centres,
and warehouse retail facilities); 100% in Singapore.
- Risk profile/major risk factor: Singapore industrial properties are
better insulated from potential peak property-market risks (residential and
office), though future supply will always be a perennial risk. The only
possible risk we see for AREIT is earnings disappointment from
lower-than-expected contributions from development properties and rental
reversions.
- Daiwa RNG valuation assumptions for target price: A weighted-average
leasehold period of 55 years, an effective cap rate of 5.9% (an un-levered
opportunity cost of capital of 7.9% and an assumed growth rate of 2.0%), a
target debt-to-asset ratio of 40%, and a WACC of 6.1%.
ASCOTT RESIDENCE TRUST, daiwa maintain BUY with target price $1.80
- Investment case: Diversified overseas exposure to the relatively stable
Asian serviced-residence industry with strong long-term growth potential;
an attractive balance of DPU yield (12-month forward yield of 7.6%) and DPU
growth (2008-10 CAGR of 14.3%), based on our forecasts; ART has an
investment-property portfolio target of S$2bn by the end of 2008, but the
manager has clarified that it has no intention of raising new equity in
2008 and can comfortably finance up to S$500m in new acquisitions entirely
with debt, and still keep the leverage ratio below 50%.
- Asset profile: 100% serviced-residence properties, including
rental-housing units across Asia; 27% by portfolio value in Singapore, 26%
in China, 20% in Japan, 11% in Vietnam, 9% in The Philippines, 6% in
Indonesia and 1% in Australia (as at 31 December 2007, a total portfolio
value of S$1.49bn).
- Risk profile/major risk factor: Local market-specific and
property-specific risks could surface from time to time (such as Jakarta
and Shanghai properties in 2007), and the portfolio could be severely
affected if a global crisis chokes off FDI flows to Asia.
- Daiwa RNG valuation assumptions for target price: A weighted-average
leasehold period of 75 years, an effective cap rate of 6.05% (an un-levered
opportunity cost of capital of 8.55% and an assumed growth rate of 2.5%), a
target debt-to-asset ratio of 40%, and a WACC of 6.57%.
ASCOTT RESIDENCE TRUST, jpm downgrade to NEUTRAL with target price $1.28
- We downgrade ART to N from OW with a Dec-08 price target of S$1.28/unit:
Over the past year ART has been one of the beneficiaries of strong demand
for serviced apartments in the region. However, as about 60% of the leases
in the portfolio are of shorter than a one-year stay, we see some
vulnerability in ART's earnings going forward. We downgrade ART to Neutral
as we reduce our previously robust assumptions.
- Calibrate our earnings estimates: We have reduced our RevPAU forecast for
FY08 onwards to reflect a less exuberant outlook for the sector and have
also incorporated in the newly acquired Somerset St George in Perth. Our
FY08E-10E DPU estimates have been reduced by 0%-10%.
- Slower long-term growth expected: With the latest inclusion of Japan
rental housing and increasing exposure towards developed markets like
Australia and Japan, we expect lower growth from the current portfolio.
Coupled with considerably less certainties on the growth outlook in
emerging markets, we reduce our assumption of ART's long-term growth to 1%
(2% previously).
- We reduce our Dec-08 price target to S$1.28/unit, based on our DDM model
using a discount rate of 9.39%, increased from 8.49% previously, as a
result of increasing foreign currency exposures. Key risks to our rating
and price target include an unexpected movement in RevPAR and an
improvement in the trust's long-term growth prospects.
AVAPLAS, dmg downgrade to SELL with target price $0.07
-Topline in 1H08 increased 8.1% toS$34.3m as Avaplas experienced revenue
growth in all of its business segments. While the company did manage to
recover from the red from 1H07, the S$0.02m net profit seen in 1H08 was
actually achieved through a tax write-back of S$0.145m. Avaplas also
announced that it is expecting to incur a loss for FY08. Downgrade to SELL
with target price of S$0.07 based on a 15% discount to the industry average
of 0.6x FY08 P/B.
-Hit by high operating costs. Topline in 1H08 increased 8.1% to S$34.3m as
Avaplas experienced revenue growth in all of its business segments. SG&A,
however, served as a drag attributed to the expansion of the company's
operations in Malaysia while higher oil prices which resulted in higher
energy costs was also a factor. While the company did manage to recover
from the red from 1H07, the S$0.02m net profit seen in 1H08 was actually
achieved through a tax write-back of S$0.145m.
-Higher gearing. Balance sheet of Avaplas is looking stretched with net
gearing deteriorating slightly from 11.5% in FY07 to 14.9% in 1H08. The
company also continued to experience negative operating cashflows, as with
the case during 1H07. Going forward, we expect its balance sheet to remain
strained in 2H08.
-Unfavourable near-term outlook. The dismal performance by Avaplas in 1H08
was due mainly to the declining US dollar and the lower-than-expected
demand from its China operations. It was also announced that the expected
loss in FY08 would be further impacted by a one-time charge relating to the
relocation of its Singapore operations to overseas. We expect this one-off
charge to be in the range of S$0.4 – 0.5m.
CAMBRIDGE INDUSTRIAL TRUST, daiwa maintain OUTPERFORM with target price
$0.80
- Investment case: Niche acquisition-growth strategy leveraging on the
manager's independence; 12-month forward yield of 11.9% (based on Daiwa
forecasts) is one of the highest in the sector. Long average lease terms
(6.7 years) and security deposits (16.5 months) are well above the industry
average. We believe CREIT can ride out 2008 without further EFR, with
enough capacity to fund comfortably about S$350m of acquisitions with debt.
- Asset profile: 100% industrial properties (logistics and warehousing,
light industrial, industrial and warehouse, industrial, self storage, and
car showrooms); 100% in Singapore.
- Risk profile/major risk factor: Even though we are comfortable with
low-cost debt funding of acquisitions for the rest of the year, future
acquisitions might not be accretive for CREIT if the unit price languishes
and its cost of equity remains sky high.
- Daiwa RNG valuation assumptions for target price: A weighted average
leasehold period of 45 years, an effective cap rate of 8.1% (an un-levered
opportunity cost of capital of 9.6% and an assumed growth rate of 1.5%), a
target debt-to-asset ratio of 45%, and a WACC of 6.86%.
CAPITACOMMERCIAL TRUST, daiwa upgrade to BUY with target price $2.70
- Investment case: Exposure to a portfolio of arguably the highest quality
office-property assets in the sector; riding the momentum of positive
rental reversions, CCT's FY08-10 DPU growth of 23.3% (based on our
estimates) is the fastest among the SREITs. We believe CCT's
office-portfolio valuation, and hence NAV, is the most conservatively
valued among its peers, at a cap rate (using our FY09 NPI estimate for
net-operating income) of 4.9% (versus 4.2% for the other office S-REITs,
and 4.0% for Singapore office properties).
- Asset profile: Predominant exposure to Singapore (98.6%, with the
remainder in Malaysia through a 30% stake in Quill Capita Trust and
Malaysia Commercial Development Fund) and the office-property (including
two car-park properties) segment with an estimated 77% exposure, with the
remainder in the non-office (retail-mall, convention and hotel) segments of
Raffles City.
- Risk profile/major risk factor: The Singapore office-property sector has
already exceeded its all-time highs in terms of both rentals and capital
values, with new office supply to remain tight up to at least 2010; we
expect at least two more years of robust rental reversions, but the
supply-demand dynamics in four years is still unclear.
- Daiwa RNG valuation assumptions for target price: A weighted-average
leasehold period of 99 years, an effective cap rate of 5.5%, a target
debt-to-asset ratio of 30%, and a WACC of 6.1%.
CAPITACOMMERCIAL TRUST, jpm upgrade to OVERWEIGHT with target price $2.27
- Upgrading CCT to Overweight: We are upgrading our rating on
CapitaCommercial Trust (CCT) to Overweight (previously Neutral) with the
stock having fallen to what we consider to be attractive floor valuations.
The stock has underperformed the FTSE ST REIT Index by 5.4% over the last
year, and underperformed the FTSE ST Index by 39% over the same period.
- CCT's characteristics fit the bill for a REIT investment today: CCT's
income stream is very low risk, supported by a highquality portfolio of
generally under-rented office properties in Singapore's CBD. Gearing is low
at just 24.4%, while the trust has no short-term debt refinancing issues.
- Alleviation of the sectoral short-term debt refinancing overhang could
lead to a re-rating of this stock: CCT's stock has been held back, in our
view, because of the market's worries of the substantial S$3.37 billion
short-term debt refinancing requirements for the S-REIT sector as a whole.
Alleviation of these debt re-financing concerns could reduce CCT's risk
premium and refocus the market's attention on the stock's attractive
fundamentals and reward-risk payoff.
- Our end-Dec-08 target price of S$2.27/unit is based on DDM (up from
S$1.97 previously). We expect CCT to deliver a total return of 20% through
end-Dec-08. Key risks to our price target are an unexpected increase in cap
rates beyond the levels we have already assumed, or a reduction in
equilibrium office rents in Singapore below the S$10psf pm mark, which we
believe is a sustainable through-the-cycle base.
CAPITACOMMERCIAL TRUST, uob maintain BUY with target price $2.45($3.04)
-CapitaCommercial Trust (CCT) invests in income-producing real estate used
for commercial purposes. It owns nine properties in Singapore with 2.3m sf
of office space, which accounts for 7% of private office stock within
Downtown Core. CCT has a 30% stake in Quill Capita Trust (QCT), a
commercial REIT listed on Bursa Malaysia. It has a 7.4% stake in Malaysia
Commercial Development Fund (MCDF), the largest private real estate fund in
Malaysia focusing on investments in Kuala Lumpur and the Klang Valley. CCT
was assigned a corporate rating of A3 with stable outlook by Moody's
Investors Services.
-Huge room for rental reversions. Rentals for prime office space within
Raffles Place and Marina Bay area has shot up from S$8.60 in 1Q07 to
S$15.00psf pm in 4Q07, a result of a supply crunch coupled with strong
demand from financial institutions and oil & gas companies. Rental for
Grade A office space was even higher at S$17.15psf pm in 4Q07. According to
CB Richard Ellis, rentals for Grade A office space could average S$18.50psf
pm by end-08, a further increase of 7.9%. CCT is well positioned to benefit
from positive rental reversion as 56.9% of its leases for office space are
up for renewal in 2008 and 2009, when supply coming onstream is fairly
limited. Some 54% of office space at 6 Battery Road are up for renewal in
2008 and 2009. We understand that in Jan 08, Standard Chartered has renewed
leases for 130,000sf at an average of S$14.95psf pm for three years vs the
previous rate of S$7.00psf pm. About 53% of office space are up for renewal
in 2008 at Robinson Point with existing rent of only S$4.00psf pm. Another
53% of office space are up for renewal in 2009 at Raffles City Tower with
existing rent of only S$3.40psf pm. Positive rental reversion from these
prime office buildings provides revenue growth of 14.8% in FY08 and 12.4%
FY09.
-Redevelopment for Market Street Car Park. CCT has secured Outline Planning
Permission for the redevelopment of Market Street Car Park into a premium
Grade A office tower with estimated net lettable area (NLA) of 680,000sf.
Management estimated the development cost at S$1b-1.5b, depending on the
amount of development premium imposed. Construction is likely to commence
in late-08/early-09 and completion by 1H12. The project is likely to be
undertaken by a JV with an option for CCT to repurchase at a later stage
when rentals have stabilised. Sponsor CapitaLand is the most likely JV
partner. We believe a 50:50 JV is possible, particularly if the project is
developed in phases.
-No risk from refinancing. CCT's current gearing is a low 24% in Dec 07.
The company issued S$150m 3-year medium term note with attractive fixed
interest rate of 3.05% in Mar 08. This has largely satisfied its funding
requirements for refinancing short-term borrowings and the acquisition of
Wilkie Edge, a mixed development project at Selegie Road. CCT plans to
expand its asset size from the current S$5.3b to S$6b by 2009. Potential
pipeline of acquisitions from sponsor CapitaLand includes One George Street
with NLA of 448,000sf and a possible re-development of Golden Shoe Car
Park. CCT provides FY08 distribution yield of 5.12%, a healthy spread of
3.04% over 10-year Singapore government bond yield at 2.08%.
CAPITAMALL TRUST, daiwa maintain BUY with target price $3.61
- Investment case: Multiple DPU-growth drivers, including asset
enhancement, active leasing, acquisitions, and property redevelopment
(Funan DigitaLife Mall with significant office development potential);
proven ability to increase DPU even on enlarged equity base; the largest
S-REIT and best proxy for the sector; asset-size target of S$8bn by 2010;
clear and high-profile acquisition pipeline from sponsor. Moreover, we do
not expect the major DPU drivers to diminish, even if 2008 turns out to be
a challenging year for property landlords and retailers.
- Asset profile: Predominantly in Singapore (98%, with the remainder in
China through a 20% stake in sister S-REIT, CRCT) with retail-mall exposure
(estimated at 90.2%, with the remainder in the non-retail (office,
convention, and hotel) segments of Raffles City, in which it has a 40%
stake).
- Risk profile/major risk factor: New Singapore retail-property supply
(roughly one-third of existing stock over the next four years) creates some
uncertainty. Quality and strong fundamentals do not come cheap, as CMT
trades at the highest premium (P/NAV) in the sector. In times of
indiscriminate heavy market selling, CMT, by far the most liquid S-REIT,
could underperform, in our view.
- Daiwa RNG valuation assumptions for target price: A weighted average
leasehold period of 97 years, an effective cap rate of 5.5%, a target
debt-to-asset ratio of 40%, and a WACC of 6.2 %.
CAPITARETAIL CHINA TRUST, daiwa maintain HOLD with target price $1.43
- Investment case: Exposure to a rapidly expanding portfolio of eight
shopping malls in China; ambitious and assured pipeline of about 70 malls
from sponsor; high DPU-growth outlook (Daiwa forecast's a three-year CAGR
of 22.7%) from accretive acquisitions and asset-enhancement activities.
- Asset profile: Focused solely on shopping malls (100%) throughout China
(100%).
- Risk profile/major risk factor: CRCT faces country, city and
property-specific risks; foreign business culture presents a unique
challenge for the sponsor, a blue-chip Singapore-listed company and paragon
of corporate governance; significant operating inefficiencies for those
malls not developed by the sponsor, creating opportunities for improvement.
With some difficulty (we believe) in raising equity for its maiden Xizhimen
Mall acquisition in Beijing, one of the most attractive assets in its
portfolio, future EFR could be even more challenging if market conditions
and investor appetites remain weak.
- Daiwa RNG valuation assumptions for target price: A weighted-average
leasehold period of 35 years, an effective cap rate of 5.0% (un-levered
opportunity cost of capital of 10.0% and an assumed growth rate of 5.0%), a
target debt-to-asset ratio of 35%, and a WACC of 7.55%.
CDL HOSPITALITY TRUSTS, jpm downgrade to UNDERWEIGHT with target price
$1.51
- We downgrade CDREIT to UW from OW: CDREIT has outperformed JPMorgan's
S-REITs index by 5% over the last six months on the back of robust RevPAR
growth and strong operating leverage. Given the REIT's low visibility on
top-line growth and the significant vulnerability to reduced demand for
business and leisure travel, we downgrade CDREIT to Underweight (previously
Overweight).
- We reduce our FY08-FY10 estimates by about 15%-35%, as we have lowered
our occupancy rate assumptions to 80% and flattening our assumed growth in
room rates for FY09 and FY10. Given the operating leverage, we estimate
that every 10% drop in RevPAR reduces CDREIT's DPU by about 15%.
- Valuation highly sensitive to changes in RevPAR: CDREIT's valuation is
highly sensitive towards changes in RevPAR as a result of operating
leverage. We estimate that every 10% drop in RevPAR assumption could reduce
our valuation by at least 16%.
- We set our Dec-08 price target at S$1.51/unit, based on our DDM. The key
risks to our rating and price target mainly stem from an unexpected
improvement in the RevPAR trend beyond our lowered assumptions and the
inherent difficulty in calculating the effects of operating leverage on the
REIT's distributions at a time of significant volatility in revenues and
expenses.
CHINA XLX, cimb downgrade to NEUTRAL with target price $0.57($1.20)
- Rising coal prices. Anthracite coal prices in China have surged 9% qoq in
1Q08, in part due to disruptions in transportation and shutdowns of smaller
mines during recent snow storms. We expect the tight supply to ease as
operations resume. Conservatively, we have assumed firm coal prices of
Rmb900/tonne for FY08-10.
- 1Q08 urea gross margins expected at 29% (-1.6% pts qoq). According to our
sensitivity analysis, every Rmb50/tonne increase in anthracite coal prices
could reduce CXLX's urea gross margins by 2% pts, while a corresponding
Rmb50/tonne increase in urea selling prices could increase its gross
margins by 2% pts.
- Potential increase in urea price ceiling in 2H08. We think that China's
price ceiling for urea will inevitably be raised, as the wide disparity
between international and domestic prices could more than offset higher
export taxes. However, we do not think the price increase would start in
the coming quarter due to sufficient urea inventories and the
reconstruction of snowstorm-hit farming areas.
- FY08-10 EPS forecasts cut by 15-39%, to account for higher coal and raw
material prices, a higher effective tax rate and lower compound fertiliser
ASP assumptions. We have not factored in potential increases in the urea
price ceiling.
- Downgrade from Outperform to Neutral; target price reduced to S$0.57 from
S$1.20. We have used a lower P/E target of 10x on CY09 earnings (12x
previously). This represents a larger discount to Hong Kong-listed peers
than previously, in view of CXLX's limited urea export exposure compared to
China BlueChemical (3983 HK) and CXLX's less diversified portfolio compared
to Sinofert Holdings (0297 HK).
CSC HOLDINGS, dbs initial coverage HOLD with target price $0.29
-CSC is a leading foundation and geotechnical engineering specialist in
Singapore with a large fleet size of c. 209 rigs and offers a complete
range of piling solutions.
-Acquisition growth strategy positive…. CSC has cemented its leading market
position through its acquisition strategy. The company has proven its
capabilities to pick earnings accretive acquisitions of between 5-10X PER.
Recent acquisitions of Wisescan and JV with IJM should contribute S$2.9m to
the Group's bottomline in FY09 and S$4.8m in FY10.
-… but CSC is unlikely to repeat record order wins of S$488m in FY08, order
wins to slow to S$300m pa in FY09 and FY10. CSC has a healthy order book of
S$435m (3.4x FY07 revenue) as of March 2008. Given the bullish outlook for
construction sector in 2008, driven by firm demand from both private and
public sectors, we expect CSC to achieve contract wins of S$300m in FY09
and FY10 each year. Projects such as the Sports Hub and Tuas' petrochemical
plants coming onstream will support its contract wins. However, CSC is
unlikely to exceed $488m contract wins attained in FY08, which was largely
attributed to the $190m Marina Sands contract.
-Expect decline in gross margins and net profit. We have assumed gross
margin compression from rising steel and RMC prices, which currently
account for c. 50% of CSC's COGS. Steel prices, which rose 23% since Dec
07, are expected to increase by a further 20% in 2Q08. RMC prices are
expected to rise in tandem with a 35% increase in demand in 2008. As such,
we have forecasted lower gross margins of 19.5% for FY09 versus HY08's
22.3%. Consequently, we expect net profit to decline 6% yoy from $41m to
$39m in FY09.
-CSC share price surged 25% to its peak of S$0.47 in July 07 sparked by the
announcement of its prized Marina Sands contracts in May-July 07. Since
then, share price has corrected to a 3-month average of S$0.28 despite new
contract wins in Jan 08. The share currently trades at a PE of 7.2x and
7.1x on FY09 and FY10 earnings respectively, compared to 8.4x for its peers
in the construction industry. Given its niche as a foundation specialist,
we believe it is fair to apply 9x PE on its FY09 earnings, which translates
to S$0.29, representing an upside of 14%. We are thus initiating coverage
on CSC with a HOLD rating.
-Re-rating opportunities could arise when (i) the proposed acquisition of a
60% stake in CLS Holdings, which specializes in earth excavation works, is
concluded; could add S$7.3m to CSC's PBT in FY09 and FY10 each year. (ii)
CSC announces more sizable contract wins, which could raise our contract
wins assumptions.
CSE GLOBAL, bnp maintain BUY with target price $1.57
-Oil and gas plays sold down on raw-materials fear. In recent weeks, almost
all oil-and-gas-related plays have been sold down heavily and have
underperformed the STI (Exhibit 1). We believe this may be due to fears of
rising steel costs (Exhibit 2), which are up about 30% y-y this year. CSE
was also not spared, with its share price correcting 16.0% to SGD0.84 in
just a matter of two weeks.
-CSE has minimal exposure to rising steel costs. During our recent visit to
CSE's premises in Singapore, we saw the assembly of some control and
telecom systems (Exhibits 4 and 5). The key component of these systems is
the microprocessor, which the group procures from third-party suppliers.
CSE has very minimal steel requirements, which are only in the form of
steel racks and cabinets. We understand from management that steel
constitutes less than 1% of its COGS. Furthermore, the group uses mainly
stainless steel, which has been on a downward trend due to the collapse of
the price of nickel (Exhibit 3). In addition, CSE procures the necessary
equipment only when it has gotten a firm order, which implies very low
inventory risk. This can be seen from the group's inventory of only SGD9.0m
as of end 2007.
-Order flow stays solid, 2008 earnings in the bag. We understand from
management that the group has racked up some SGD90m worth of new orders so
far and remains on track for orders of SGD120m-130m in 1Q08. Management
expects new orders for the full year to hit some SGD500m, an increase of
about 15.0% y-y. We believe there is a high level of certainty for 2008
earnings given the continued solid oil and gas flow and contribution from
government initiatives (UK health care, Singapore ERP), which should be
recession proof. As shown in Exhibit 6, our analysis of CSE's order backlog
suggests that the group should achieve revenue of SGD460m this year even
without any more new orders. This already constitutes 88.0% of our
forecast.
-Maintain BUY; TP of SGD1.57, based on 14x 2008E EPS. Our TP stays at
SGD1.57 based on 14x 2008E EPS. We deem this appropriate given a three-year
EPS CAGR of 26.3%, or PEG of 0.53x. The 2008 dividend yield is now an
attractive 4.8%. BUY.
FRASERS CENTREPOINT, daiwa maintain OUTPERFORM with target price $1.54
- Investment case: The only S-REIT with pure exposure to the defensive
suburban shopping-mall segment; visible, long-term acquisition pipeline of
Singapore suburban malls from its sponsor; positive rental reversions on
existing portfolio as 32.8% of leases (by gross rental income) are up for
renewal for FY08 and 30.5% for FY09.
- Asset profile: 100% retail malls predominantly in Singapore (95.5%, with
the remainder in its 27% stake in Hektar REIT (HEKT MK, RM1.40, Not rated),
a complementary suburbanmall REIT in Malaysia).
- Risk profile/major risk factor: We see limited risk from its mall
properties. However, FCT's balance sheet strength and capacity to finance
the Northpoint 2 acquisition (and possibly even the Yew Tee Point
acquisition) entirely with debt implies that its limited free float and
liquidity is likely to persist for some time, in our view.
- Daiwa RNG valuation assumptions for target price: A weighted-average
leasehold period of 88 years, effective cap rate of 5.75% (an un-levered
opportunity cost of capital of 8.25% and an assumed growth rate of 2.5%),
target debt-to-asset ratio of 35%, and WACC of 6.66%.
K-REIT, daiwa maintain BUY with target price $1.64
- Investment case: Small office-property S-REIT riding the positive
rental-reversion cycle and scaling up big through the acquisition of a
one-third stake in ORQ from its sponsor. The release of its proposed
rights-issue circular, dated 13 March 2008, suggested only modest dilution
from the impending rights issue, and not as severe as our earlier
expectations. We estimate attractive adjusted (ex-rights) yields of 8.2%
for 2009 and 9.7% for 2010. We estimate upside potential of 27.6% to our
target price on a theoretical ex-rights basis.
- Asset profile: Pure exposure to office properties (100%) and Singapore
(100%).
- Risk profile/major risk factor: KREIT's fortunes are highly dependent on
the Singapore office market, which we believe still looks positive, given
the tight supply situation and several more years of robust rental
reversions. The rights issue might alienate minority unitholders (and deter
investors from future EFRs) with its dilution, and might not improve free
float or liquidity if the sponsor ends up mopping up most of the new rights
units.
- Daiwa RNG valuation assumptions for target price: A weighted-average
leasehold period of 150 years, an effective cap rate of 3.65% (an
un-levered opportunity cost of capital of 5.15%, and an assumed growth rate
of 1.5%), a target debt-toassets ratio of 27%, and a WACC of 4.84%.
KEPPEL LAND, cl downgrade to UNDERPERFORM with target price $5.63
-We are downgrading Keppel Land from BUY to an Underperform with a revised
target price of S$5.63. We do not believe the tightening credit situation
will ease by 1H08 and more likely to worsen going into 2009. Our aggressive
cuts to assumptions on residential ASPs across key markets in Singapore and
China and a further delay of six to twelve months for upcoming projects has
led us to cut earnings for FY08 by 12%. Our target price of S$5.63 is
pegged to parity on forward FY09 RNAV.
-Bearish assumptions. Our aggressive downgrade in assumptions of fair spot
rents for Prime Grade A from S$15psf to S$12psf for FY08 and FY09 and a cap
rate expansion for commercial assets in 2009 is the reason for the massive
drop in FY09 RNAV. On the domestic residential segment, we have applied a
more bearish assumption of 10% to 15% decline in ASP from the already
negative outlook in mid high end and luxury segments. Similarly, in line
with our China property team, we have cut our china residential ASPs from
the previous 25% price increase to 8%. Apart from lowered ASP assumptions,
we have also factored in delay in residential launches and a lower target
price for listed entity K-Reit. We have bumped up our cap rate assumption
by 100bps to 6% in FY09 to reflect the increasing risk aversion stemming
from the external credit market crisis as well as the impending
supplycoming on stream in 2009. Over the past year in the office market
average
prime office yields have inched up since hitting a low of 4.1% in 2Q07 and
we believe it is not far from the two historical peaks at closer to 6%.
-Downgrade to Underperform. The downgrade shaved off earnings for FY08 by
12% and we have rolled forward our target price by pegging at parity to
FY09 RNAV of S$5.63 with an UPF recommendation from the previous BUY.
$0.78($1.00)
- ALLC has attempted and failed to prevent a Moody.s downgrade of its
corporate credit rating from Ba1 to Ba2. Moody.s is currently keeping
ALLC.s rating under review, which could mean a further possible downgrade.
- This is negative for ALLC, as it could imply a potential refinancing
cost. In the event that ALLC cannot get full refinancing, we believe ALLC.s
potential sale of its A$483 (~S$617) worth of AU assets could also end up
in a fire sale, as potential acquirers may take advantage of the situation
or find difficulty in funding. Our analysis suggests a significant dilution
of to our TP and DPU in a fire sale scenario.
- ALLC has outperformed since last Nov. At this level, we see more
potential downside risk given the uncertain outlook. We have raised our
refinancing costs to 4.5% accordingly, and in turn revised our TP to S$0.78
and downgrade the stock to an UNDERPERFORM. On the back of the cut, our 08
DPU has decreased from 9.17 Scts to 7.10 Scts. ALLC is currently trading at
0.49 P/B, and 9.9% yield.
ASCENDAS REITS, daiwa upgrade to BUY with target price $2.75
- Investment case: Largest industrial-property S-REIT and arguably one of
the most defensive, with a diversified and highquality portfolio and a
highly-disciplined (in our opinion) acquisition strategy. AREIT faces
unique opportunities, such as its ideal position to capture CBD spill-over
demand at its multitenanted properties and an inside track in the
development of several potentially highly DPU-accretive properties at the
Changi Business Park site. The stock market has largely ignored these
positive factors, in our view.
- Asset profile: 100% industrial properties (business and science park,
hi-tech industrial, light industrial, logistics and distribution centres,
and warehouse retail facilities); 100% in Singapore.
- Risk profile/major risk factor: Singapore industrial properties are
better insulated from potential peak property-market risks (residential and
office), though future supply will always be a perennial risk. The only
possible risk we see for AREIT is earnings disappointment from
lower-than-expected contributions from development properties and rental
reversions.
- Daiwa RNG valuation assumptions for target price: A weighted-average
leasehold period of 55 years, an effective cap rate of 5.9% (an un-levered
opportunity cost of capital of 7.9% and an assumed growth rate of 2.0%), a
target debt-to-asset ratio of 40%, and a WACC of 6.1%.
ASCOTT RESIDENCE TRUST, daiwa maintain BUY with target price $1.80
- Investment case: Diversified overseas exposure to the relatively stable
Asian serviced-residence industry with strong long-term growth potential;
an attractive balance of DPU yield (12-month forward yield of 7.6%) and DPU
growth (2008-10 CAGR of 14.3%), based on our forecasts; ART has an
investment-property portfolio target of S$2bn by the end of 2008, but the
manager has clarified that it has no intention of raising new equity in
2008 and can comfortably finance up to S$500m in new acquisitions entirely
with debt, and still keep the leverage ratio below 50%.
- Asset profile: 100% serviced-residence properties, including
rental-housing units across Asia; 27% by portfolio value in Singapore, 26%
in China, 20% in Japan, 11% in Vietnam, 9% in The Philippines, 6% in
Indonesia and 1% in Australia (as at 31 December 2007, a total portfolio
value of S$1.49bn).
- Risk profile/major risk factor: Local market-specific and
property-specific risks could surface from time to time (such as Jakarta
and Shanghai properties in 2007), and the portfolio could be severely
affected if a global crisis chokes off FDI flows to Asia.
- Daiwa RNG valuation assumptions for target price: A weighted-average
leasehold period of 75 years, an effective cap rate of 6.05% (an un-levered
opportunity cost of capital of 8.55% and an assumed growth rate of 2.5%), a
target debt-to-asset ratio of 40%, and a WACC of 6.57%.
ASCOTT RESIDENCE TRUST, jpm downgrade to NEUTRAL with target price $1.28
- We downgrade ART to N from OW with a Dec-08 price target of S$1.28/unit:
Over the past year ART has been one of the beneficiaries of strong demand
for serviced apartments in the region. However, as about 60% of the leases
in the portfolio are of shorter than a one-year stay, we see some
vulnerability in ART's earnings going forward. We downgrade ART to Neutral
as we reduce our previously robust assumptions.
- Calibrate our earnings estimates: We have reduced our RevPAU forecast for
FY08 onwards to reflect a less exuberant outlook for the sector and have
also incorporated in the newly acquired Somerset St George in Perth. Our
FY08E-10E DPU estimates have been reduced by 0%-10%.
- Slower long-term growth expected: With the latest inclusion of Japan
rental housing and increasing exposure towards developed markets like
Australia and Japan, we expect lower growth from the current portfolio.
Coupled with considerably less certainties on the growth outlook in
emerging markets, we reduce our assumption of ART's long-term growth to 1%
(2% previously).
- We reduce our Dec-08 price target to S$1.28/unit, based on our DDM model
using a discount rate of 9.39%, increased from 8.49% previously, as a
result of increasing foreign currency exposures. Key risks to our rating
and price target include an unexpected movement in RevPAR and an
improvement in the trust's long-term growth prospects.
AVAPLAS, dmg downgrade to SELL with target price $0.07
-Topline in 1H08 increased 8.1% toS$34.3m as Avaplas experienced revenue
growth in all of its business segments. While the company did manage to
recover from the red from 1H07, the S$0.02m net profit seen in 1H08 was
actually achieved through a tax write-back of S$0.145m. Avaplas also
announced that it is expecting to incur a loss for FY08. Downgrade to SELL
with target price of S$0.07 based on a 15% discount to the industry average
of 0.6x FY08 P/B.
-Hit by high operating costs. Topline in 1H08 increased 8.1% to S$34.3m as
Avaplas experienced revenue growth in all of its business segments. SG&A,
however, served as a drag attributed to the expansion of the company's
operations in Malaysia while higher oil prices which resulted in higher
energy costs was also a factor. While the company did manage to recover
from the red from 1H07, the S$0.02m net profit seen in 1H08 was actually
achieved through a tax write-back of S$0.145m.
-Higher gearing. Balance sheet of Avaplas is looking stretched with net
gearing deteriorating slightly from 11.5% in FY07 to 14.9% in 1H08. The
company also continued to experience negative operating cashflows, as with
the case during 1H07. Going forward, we expect its balance sheet to remain
strained in 2H08.
-Unfavourable near-term outlook. The dismal performance by Avaplas in 1H08
was due mainly to the declining US dollar and the lower-than-expected
demand from its China operations. It was also announced that the expected
loss in FY08 would be further impacted by a one-time charge relating to the
relocation of its Singapore operations to overseas. We expect this one-off
charge to be in the range of S$0.4 – 0.5m.
CAMBRIDGE INDUSTRIAL TRUST, daiwa maintain OUTPERFORM with target price
$0.80
- Investment case: Niche acquisition-growth strategy leveraging on the
manager's independence; 12-month forward yield of 11.9% (based on Daiwa
forecasts) is one of the highest in the sector. Long average lease terms
(6.7 years) and security deposits (16.5 months) are well above the industry
average. We believe CREIT can ride out 2008 without further EFR, with
enough capacity to fund comfortably about S$350m of acquisitions with debt.
- Asset profile: 100% industrial properties (logistics and warehousing,
light industrial, industrial and warehouse, industrial, self storage, and
car showrooms); 100% in Singapore.
- Risk profile/major risk factor: Even though we are comfortable with
low-cost debt funding of acquisitions for the rest of the year, future
acquisitions might not be accretive for CREIT if the unit price languishes
and its cost of equity remains sky high.
- Daiwa RNG valuation assumptions for target price: A weighted average
leasehold period of 45 years, an effective cap rate of 8.1% (an un-levered
opportunity cost of capital of 9.6% and an assumed growth rate of 1.5%), a
target debt-to-asset ratio of 45%, and a WACC of 6.86%.
CAPITACOMMERCIAL TRUST, daiwa upgrade to BUY with target price $2.70
- Investment case: Exposure to a portfolio of arguably the highest quality
office-property assets in the sector; riding the momentum of positive
rental reversions, CCT's FY08-10 DPU growth of 23.3% (based on our
estimates) is the fastest among the SREITs. We believe CCT's
office-portfolio valuation, and hence NAV, is the most conservatively
valued among its peers, at a cap rate (using our FY09 NPI estimate for
net-operating income) of 4.9% (versus 4.2% for the other office S-REITs,
and 4.0% for Singapore office properties).
- Asset profile: Predominant exposure to Singapore (98.6%, with the
remainder in Malaysia through a 30% stake in Quill Capita Trust and
Malaysia Commercial Development Fund) and the office-property (including
two car-park properties) segment with an estimated 77% exposure, with the
remainder in the non-office (retail-mall, convention and hotel) segments of
Raffles City.
- Risk profile/major risk factor: The Singapore office-property sector has
already exceeded its all-time highs in terms of both rentals and capital
values, with new office supply to remain tight up to at least 2010; we
expect at least two more years of robust rental reversions, but the
supply-demand dynamics in four years is still unclear.
- Daiwa RNG valuation assumptions for target price: A weighted-average
leasehold period of 99 years, an effective cap rate of 5.5%, a target
debt-to-asset ratio of 30%, and a WACC of 6.1%.
CAPITACOMMERCIAL TRUST, jpm upgrade to OVERWEIGHT with target price $2.27
- Upgrading CCT to Overweight: We are upgrading our rating on
CapitaCommercial Trust (CCT) to Overweight (previously Neutral) with the
stock having fallen to what we consider to be attractive floor valuations.
The stock has underperformed the FTSE ST REIT Index by 5.4% over the last
year, and underperformed the FTSE ST Index by 39% over the same period.
- CCT's characteristics fit the bill for a REIT investment today: CCT's
income stream is very low risk, supported by a highquality portfolio of
generally under-rented office properties in Singapore's CBD. Gearing is low
at just 24.4%, while the trust has no short-term debt refinancing issues.
- Alleviation of the sectoral short-term debt refinancing overhang could
lead to a re-rating of this stock: CCT's stock has been held back, in our
view, because of the market's worries of the substantial S$3.37 billion
short-term debt refinancing requirements for the S-REIT sector as a whole.
Alleviation of these debt re-financing concerns could reduce CCT's risk
premium and refocus the market's attention on the stock's attractive
fundamentals and reward-risk payoff.
- Our end-Dec-08 target price of S$2.27/unit is based on DDM (up from
S$1.97 previously). We expect CCT to deliver a total return of 20% through
end-Dec-08. Key risks to our price target are an unexpected increase in cap
rates beyond the levels we have already assumed, or a reduction in
equilibrium office rents in Singapore below the S$10psf pm mark, which we
believe is a sustainable through-the-cycle base.
CAPITACOMMERCIAL TRUST, uob maintain BUY with target price $2.45($3.04)
-CapitaCommercial Trust (CCT) invests in income-producing real estate used
for commercial purposes. It owns nine properties in Singapore with 2.3m sf
of office space, which accounts for 7% of private office stock within
Downtown Core. CCT has a 30% stake in Quill Capita Trust (QCT), a
commercial REIT listed on Bursa Malaysia. It has a 7.4% stake in Malaysia
Commercial Development Fund (MCDF), the largest private real estate fund in
Malaysia focusing on investments in Kuala Lumpur and the Klang Valley. CCT
was assigned a corporate rating of A3 with stable outlook by Moody's
Investors Services.
-Huge room for rental reversions. Rentals for prime office space within
Raffles Place and Marina Bay area has shot up from S$8.60 in 1Q07 to
S$15.00psf pm in 4Q07, a result of a supply crunch coupled with strong
demand from financial institutions and oil & gas companies. Rental for
Grade A office space was even higher at S$17.15psf pm in 4Q07. According to
CB Richard Ellis, rentals for Grade A office space could average S$18.50psf
pm by end-08, a further increase of 7.9%. CCT is well positioned to benefit
from positive rental reversion as 56.9% of its leases for office space are
up for renewal in 2008 and 2009, when supply coming onstream is fairly
limited. Some 54% of office space at 6 Battery Road are up for renewal in
2008 and 2009. We understand that in Jan 08, Standard Chartered has renewed
leases for 130,000sf at an average of S$14.95psf pm for three years vs the
previous rate of S$7.00psf pm. About 53% of office space are up for renewal
in 2008 at Robinson Point with existing rent of only S$4.00psf pm. Another
53% of office space are up for renewal in 2009 at Raffles City Tower with
existing rent of only S$3.40psf pm. Positive rental reversion from these
prime office buildings provides revenue growth of 14.8% in FY08 and 12.4%
FY09.
-Redevelopment for Market Street Car Park. CCT has secured Outline Planning
Permission for the redevelopment of Market Street Car Park into a premium
Grade A office tower with estimated net lettable area (NLA) of 680,000sf.
Management estimated the development cost at S$1b-1.5b, depending on the
amount of development premium imposed. Construction is likely to commence
in late-08/early-09 and completion by 1H12. The project is likely to be
undertaken by a JV with an option for CCT to repurchase at a later stage
when rentals have stabilised. Sponsor CapitaLand is the most likely JV
partner. We believe a 50:50 JV is possible, particularly if the project is
developed in phases.
-No risk from refinancing. CCT's current gearing is a low 24% in Dec 07.
The company issued S$150m 3-year medium term note with attractive fixed
interest rate of 3.05% in Mar 08. This has largely satisfied its funding
requirements for refinancing short-term borrowings and the acquisition of
Wilkie Edge, a mixed development project at Selegie Road. CCT plans to
expand its asset size from the current S$5.3b to S$6b by 2009. Potential
pipeline of acquisitions from sponsor CapitaLand includes One George Street
with NLA of 448,000sf and a possible re-development of Golden Shoe Car
Park. CCT provides FY08 distribution yield of 5.12%, a healthy spread of
3.04% over 10-year Singapore government bond yield at 2.08%.
CAPITAMALL TRUST, daiwa maintain BUY with target price $3.61
- Investment case: Multiple DPU-growth drivers, including asset
enhancement, active leasing, acquisitions, and property redevelopment
(Funan DigitaLife Mall with significant office development potential);
proven ability to increase DPU even on enlarged equity base; the largest
S-REIT and best proxy for the sector; asset-size target of S$8bn by 2010;
clear and high-profile acquisition pipeline from sponsor. Moreover, we do
not expect the major DPU drivers to diminish, even if 2008 turns out to be
a challenging year for property landlords and retailers.
- Asset profile: Predominantly in Singapore (98%, with the remainder in
China through a 20% stake in sister S-REIT, CRCT) with retail-mall exposure
(estimated at 90.2%, with the remainder in the non-retail (office,
convention, and hotel) segments of Raffles City, in which it has a 40%
stake).
- Risk profile/major risk factor: New Singapore retail-property supply
(roughly one-third of existing stock over the next four years) creates some
uncertainty. Quality and strong fundamentals do not come cheap, as CMT
trades at the highest premium (P/NAV) in the sector. In times of
indiscriminate heavy market selling, CMT, by far the most liquid S-REIT,
could underperform, in our view.
- Daiwa RNG valuation assumptions for target price: A weighted average
leasehold period of 97 years, an effective cap rate of 5.5%, a target
debt-to-asset ratio of 40%, and a WACC of 6.2 %.
CAPITARETAIL CHINA TRUST, daiwa maintain HOLD with target price $1.43
- Investment case: Exposure to a rapidly expanding portfolio of eight
shopping malls in China; ambitious and assured pipeline of about 70 malls
from sponsor; high DPU-growth outlook (Daiwa forecast's a three-year CAGR
of 22.7%) from accretive acquisitions and asset-enhancement activities.
- Asset profile: Focused solely on shopping malls (100%) throughout China
(100%).
- Risk profile/major risk factor: CRCT faces country, city and
property-specific risks; foreign business culture presents a unique
challenge for the sponsor, a blue-chip Singapore-listed company and paragon
of corporate governance; significant operating inefficiencies for those
malls not developed by the sponsor, creating opportunities for improvement.
With some difficulty (we believe) in raising equity for its maiden Xizhimen
Mall acquisition in Beijing, one of the most attractive assets in its
portfolio, future EFR could be even more challenging if market conditions
and investor appetites remain weak.
- Daiwa RNG valuation assumptions for target price: A weighted-average
leasehold period of 35 years, an effective cap rate of 5.0% (un-levered
opportunity cost of capital of 10.0% and an assumed growth rate of 5.0%), a
target debt-to-asset ratio of 35%, and a WACC of 7.55%.
CDL HOSPITALITY TRUSTS, jpm downgrade to UNDERWEIGHT with target price
$1.51
- We downgrade CDREIT to UW from OW: CDREIT has outperformed JPMorgan's
S-REITs index by 5% over the last six months on the back of robust RevPAR
growth and strong operating leverage. Given the REIT's low visibility on
top-line growth and the significant vulnerability to reduced demand for
business and leisure travel, we downgrade CDREIT to Underweight (previously
Overweight).
- We reduce our FY08-FY10 estimates by about 15%-35%, as we have lowered
our occupancy rate assumptions to 80% and flattening our assumed growth in
room rates for FY09 and FY10. Given the operating leverage, we estimate
that every 10% drop in RevPAR reduces CDREIT's DPU by about 15%.
- Valuation highly sensitive to changes in RevPAR: CDREIT's valuation is
highly sensitive towards changes in RevPAR as a result of operating
leverage. We estimate that every 10% drop in RevPAR assumption could reduce
our valuation by at least 16%.
- We set our Dec-08 price target at S$1.51/unit, based on our DDM. The key
risks to our rating and price target mainly stem from an unexpected
improvement in the RevPAR trend beyond our lowered assumptions and the
inherent difficulty in calculating the effects of operating leverage on the
REIT's distributions at a time of significant volatility in revenues and
expenses.
CHINA XLX, cimb downgrade to NEUTRAL with target price $0.57($1.20)
- Rising coal prices. Anthracite coal prices in China have surged 9% qoq in
1Q08, in part due to disruptions in transportation and shutdowns of smaller
mines during recent snow storms. We expect the tight supply to ease as
operations resume. Conservatively, we have assumed firm coal prices of
Rmb900/tonne for FY08-10.
- 1Q08 urea gross margins expected at 29% (-1.6% pts qoq). According to our
sensitivity analysis, every Rmb50/tonne increase in anthracite coal prices
could reduce CXLX's urea gross margins by 2% pts, while a corresponding
Rmb50/tonne increase in urea selling prices could increase its gross
margins by 2% pts.
- Potential increase in urea price ceiling in 2H08. We think that China's
price ceiling for urea will inevitably be raised, as the wide disparity
between international and domestic prices could more than offset higher
export taxes. However, we do not think the price increase would start in
the coming quarter due to sufficient urea inventories and the
reconstruction of snowstorm-hit farming areas.
- FY08-10 EPS forecasts cut by 15-39%, to account for higher coal and raw
material prices, a higher effective tax rate and lower compound fertiliser
ASP assumptions. We have not factored in potential increases in the urea
price ceiling.
- Downgrade from Outperform to Neutral; target price reduced to S$0.57 from
S$1.20. We have used a lower P/E target of 10x on CY09 earnings (12x
previously). This represents a larger discount to Hong Kong-listed peers
than previously, in view of CXLX's limited urea export exposure compared to
China BlueChemical (3983 HK) and CXLX's less diversified portfolio compared
to Sinofert Holdings (0297 HK).
CSC HOLDINGS, dbs initial coverage HOLD with target price $0.29
-CSC is a leading foundation and geotechnical engineering specialist in
Singapore with a large fleet size of c. 209 rigs and offers a complete
range of piling solutions.
-Acquisition growth strategy positive…. CSC has cemented its leading market
position through its acquisition strategy. The company has proven its
capabilities to pick earnings accretive acquisitions of between 5-10X PER.
Recent acquisitions of Wisescan and JV with IJM should contribute S$2.9m to
the Group's bottomline in FY09 and S$4.8m in FY10.
-… but CSC is unlikely to repeat record order wins of S$488m in FY08, order
wins to slow to S$300m pa in FY09 and FY10. CSC has a healthy order book of
S$435m (3.4x FY07 revenue) as of March 2008. Given the bullish outlook for
construction sector in 2008, driven by firm demand from both private and
public sectors, we expect CSC to achieve contract wins of S$300m in FY09
and FY10 each year. Projects such as the Sports Hub and Tuas' petrochemical
plants coming onstream will support its contract wins. However, CSC is
unlikely to exceed $488m contract wins attained in FY08, which was largely
attributed to the $190m Marina Sands contract.
-Expect decline in gross margins and net profit. We have assumed gross
margin compression from rising steel and RMC prices, which currently
account for c. 50% of CSC's COGS. Steel prices, which rose 23% since Dec
07, are expected to increase by a further 20% in 2Q08. RMC prices are
expected to rise in tandem with a 35% increase in demand in 2008. As such,
we have forecasted lower gross margins of 19.5% for FY09 versus HY08's
22.3%. Consequently, we expect net profit to decline 6% yoy from $41m to
$39m in FY09.
-CSC share price surged 25% to its peak of S$0.47 in July 07 sparked by the
announcement of its prized Marina Sands contracts in May-July 07. Since
then, share price has corrected to a 3-month average of S$0.28 despite new
contract wins in Jan 08. The share currently trades at a PE of 7.2x and
7.1x on FY09 and FY10 earnings respectively, compared to 8.4x for its peers
in the construction industry. Given its niche as a foundation specialist,
we believe it is fair to apply 9x PE on its FY09 earnings, which translates
to S$0.29, representing an upside of 14%. We are thus initiating coverage
on CSC with a HOLD rating.
-Re-rating opportunities could arise when (i) the proposed acquisition of a
60% stake in CLS Holdings, which specializes in earth excavation works, is
concluded; could add S$7.3m to CSC's PBT in FY09 and FY10 each year. (ii)
CSC announces more sizable contract wins, which could raise our contract
wins assumptions.
CSE GLOBAL, bnp maintain BUY with target price $1.57
-Oil and gas plays sold down on raw-materials fear. In recent weeks, almost
all oil-and-gas-related plays have been sold down heavily and have
underperformed the STI (Exhibit 1). We believe this may be due to fears of
rising steel costs (Exhibit 2), which are up about 30% y-y this year. CSE
was also not spared, with its share price correcting 16.0% to SGD0.84 in
just a matter of two weeks.
-CSE has minimal exposure to rising steel costs. During our recent visit to
CSE's premises in Singapore, we saw the assembly of some control and
telecom systems (Exhibits 4 and 5). The key component of these systems is
the microprocessor, which the group procures from third-party suppliers.
CSE has very minimal steel requirements, which are only in the form of
steel racks and cabinets. We understand from management that steel
constitutes less than 1% of its COGS. Furthermore, the group uses mainly
stainless steel, which has been on a downward trend due to the collapse of
the price of nickel (Exhibit 3). In addition, CSE procures the necessary
equipment only when it has gotten a firm order, which implies very low
inventory risk. This can be seen from the group's inventory of only SGD9.0m
as of end 2007.
-Order flow stays solid, 2008 earnings in the bag. We understand from
management that the group has racked up some SGD90m worth of new orders so
far and remains on track for orders of SGD120m-130m in 1Q08. Management
expects new orders for the full year to hit some SGD500m, an increase of
about 15.0% y-y. We believe there is a high level of certainty for 2008
earnings given the continued solid oil and gas flow and contribution from
government initiatives (UK health care, Singapore ERP), which should be
recession proof. As shown in Exhibit 6, our analysis of CSE's order backlog
suggests that the group should achieve revenue of SGD460m this year even
without any more new orders. This already constitutes 88.0% of our
forecast.
-Maintain BUY; TP of SGD1.57, based on 14x 2008E EPS. Our TP stays at
SGD1.57 based on 14x 2008E EPS. We deem this appropriate given a three-year
EPS CAGR of 26.3%, or PEG of 0.53x. The 2008 dividend yield is now an
attractive 4.8%. BUY.
FRASERS CENTREPOINT, daiwa maintain OUTPERFORM with target price $1.54
- Investment case: The only S-REIT with pure exposure to the defensive
suburban shopping-mall segment; visible, long-term acquisition pipeline of
Singapore suburban malls from its sponsor; positive rental reversions on
existing portfolio as 32.8% of leases (by gross rental income) are up for
renewal for FY08 and 30.5% for FY09.
- Asset profile: 100% retail malls predominantly in Singapore (95.5%, with
the remainder in its 27% stake in Hektar REIT (HEKT MK, RM1.40, Not rated),
a complementary suburbanmall REIT in Malaysia).
- Risk profile/major risk factor: We see limited risk from its mall
properties. However, FCT's balance sheet strength and capacity to finance
the Northpoint 2 acquisition (and possibly even the Yew Tee Point
acquisition) entirely with debt implies that its limited free float and
liquidity is likely to persist for some time, in our view.
- Daiwa RNG valuation assumptions for target price: A weighted-average
leasehold period of 88 years, effective cap rate of 5.75% (an un-levered
opportunity cost of capital of 8.25% and an assumed growth rate of 2.5%),
target debt-to-asset ratio of 35%, and WACC of 6.66%.
K-REIT, daiwa maintain BUY with target price $1.64
- Investment case: Small office-property S-REIT riding the positive
rental-reversion cycle and scaling up big through the acquisition of a
one-third stake in ORQ from its sponsor. The release of its proposed
rights-issue circular, dated 13 March 2008, suggested only modest dilution
from the impending rights issue, and not as severe as our earlier
expectations. We estimate attractive adjusted (ex-rights) yields of 8.2%
for 2009 and 9.7% for 2010. We estimate upside potential of 27.6% to our
target price on a theoretical ex-rights basis.
- Asset profile: Pure exposure to office properties (100%) and Singapore
(100%).
- Risk profile/major risk factor: KREIT's fortunes are highly dependent on
the Singapore office market, which we believe still looks positive, given
the tight supply situation and several more years of robust rental
reversions. The rights issue might alienate minority unitholders (and deter
investors from future EFRs) with its dilution, and might not improve free
float or liquidity if the sponsor ends up mopping up most of the new rights
units.
- Daiwa RNG valuation assumptions for target price: A weighted-average
leasehold period of 150 years, an effective cap rate of 3.65% (an
un-levered opportunity cost of capital of 5.15%, and an assumed growth rate
of 1.5%), a target debt-toassets ratio of 27%, and a WACC of 4.84%.
KEPPEL LAND, cl downgrade to UNDERPERFORM with target price $5.63
-We are downgrading Keppel Land from BUY to an Underperform with a revised
target price of S$5.63. We do not believe the tightening credit situation
will ease by 1H08 and more likely to worsen going into 2009. Our aggressive
cuts to assumptions on residential ASPs across key markets in Singapore and
China and a further delay of six to twelve months for upcoming projects has
led us to cut earnings for FY08 by 12%. Our target price of S$5.63 is
pegged to parity on forward FY09 RNAV.
-Bearish assumptions. Our aggressive downgrade in assumptions of fair spot
rents for Prime Grade A from S$15psf to S$12psf for FY08 and FY09 and a cap
rate expansion for commercial assets in 2009 is the reason for the massive
drop in FY09 RNAV. On the domestic residential segment, we have applied a
more bearish assumption of 10% to 15% decline in ASP from the already
negative outlook in mid high end and luxury segments. Similarly, in line
with our China property team, we have cut our china residential ASPs from
the previous 25% price increase to 8%. Apart from lowered ASP assumptions,
we have also factored in delay in residential launches and a lower target
price for listed entity K-Reit. We have bumped up our cap rate assumption
by 100bps to 6% in FY09 to reflect the increasing risk aversion stemming
from the external credit market crisis as well as the impending
supplycoming on stream in 2009. Over the past year in the office market
average
prime office yields have inched up since hitting a low of 4.1% in 2Q07 and
we believe it is not far from the two historical peaks at closer to 6%.
-Downgrade to Underperform. The downgrade shaved off earnings for FY08 by
12% and we have rolled forward our target price by pegging at parity to
FY09 RNAV of S$5.63 with an UPF recommendation from the previous BUY.
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