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Cache Logistics Trust (BUY; Target Price: S$1.11)

Cache Logistics Trust had recently announced the close of its private placement of 60 million new units. The issue price was fixed slightly north of the midpoint of the initial price range at S$0.985 apiece and represented a 5.2 per cent discount to its volume weighted average price of S$1.0387. While the issue was somewhat unexpected, given its already healthy financial position and lack of new acquisition drive, we note that the placement saw strong participation from Asian and European investors (1.24x subscribed). The net proceeds from this exercise are expected to amount to S$57.1 million, and will likely be used to fund the acquisition of 21 Changi North Way and partially repay debt. We estimate CACHE’s aggregate leverage to drop to 26 per cent post placement. This provides the REIT with additional debt headroom of S$120 million (possibly secured at more favourable terms) before it reaches the regulatory leverage limit of 35 per cent, which is strong enough to capitalise on any attractive growth opportunities as they arise. In relation to the placement, CACHE also announced an advanced distribution of its distributable income for the period from 1 January to 29 March 2012, just two days before 1Q12 ends. The quantum was initially guided at 2 S-cents, and is in line with the DPU of 1.95 S-cents and 2.10 S-cents seen in 1Q11 and 4Q11 respectively. Assuming that CACHE distributes 100 per cent of its income for the quarter, this is consistent with our expectation that the REIT is likely to showcase another set of stable performance in 1Q12. – OCBC Investment Research

 

Midas Holdings (HOLD; Target Price: S$0.375)

We believe that Midas Holdings could report a lacklustre set of results during the upcoming 1Q12 reporting season, given the challenging conditions still present in China’s railway sector. China’s Ministry of Railways (MOR) has suspended the procurement of high-speed trains since the Wenzhou accident in July 2011. The supply of aluminium alloy extrusion products for the manufacture of high-speed trains forms an integral part of Midas’ operations. Thus we believe that MOR holds the key to a turnaround in the industry and Midas’ fortunes. We estimate that Midas’ current orderbook of RMB800 million could sustain the group’s operations for approximately another three quarters (including 1Q12), but subsequently Midas would have to replenish its order book with new contract wins. While the timing of new high-speed rail contract tenders by MOR is not within the control of Midas, we believe that management would seek to mitigate this by actively sourcing for new metro contracts, both in China and overseas. We see the need to lower our FY12 and FY13 PATMI (net profit) projections by 4.7 per cent and 2.5 per cent, respectively, on higher financial costs and operating expenses assumptions. Consequently, our fair value estimate declines from S$0.39 to S$0.375, still based on 11x FY12F EPS (earnings per share). – OCBC Investment Research

 

Neptune Orient Lines (SELL; Target Price: S$1.20)

Just three days after announcing on 27 March 2012 a proposal to issue SGD-denominated perpetual securities (or perps), Neptune Orient Lines (NOL) backpedalled. It cited unfavourable market conditions as the reason for postponing the issuance, which was intended to raise funds for general corporate purposes and investments, possibly in the logistics sector. If the need for capital remains, we think NOL will have little choice but to hold a rights issue. We had highlighted in our recent results review that we are not ruling out the possibility of equity capital raising by NOL, considering its increasingly stretched balance sheet and financial losses. The announcement of the perps had reaffirmed our  assessment of the need for funds. Bloomberg had reported last month that 13 of the world’s largest 19 shipping banks have stopped new lending to the industry in view of the vessel glut plaguing the sector. NOL, with its FY2012 balance sheet estimated to be at 1.2x net gearing after funding its 32 newbuilds, will unlikely be able to tap efficiently on these markets. Although container freight appears to be bottoming out, bunker costs have continued to climb up and sentiment towards the shipping industry remains poor overall. Perhaps this was why NOL’s perp offering saw lukewarm interest. In contrast, Genting Singapore is preparing a second tranche of perpetual securities to raise S$500 million after the success of its first offering of S$1.8 billion. The new tranche may be raised by another S$200 million depending on demand, and proves that the market for perps is still strong, albeit heavily dependent on the type of company and the sector it is in. The perp postponement and frozen debt market all serve to heighten the risk of NOL undertaking a rights issue. Against the backdrop of poor industry sentiment, we believe a call for new capital injection would further depress its share price. – Maybank Kim Eng Research

 

Singapore Exchange (SELL; Target Price: S$5.40)

SGX will release its 3QFY12 results on 17 April 2012. We estimate 3QFY12 net profit of S$71 million, up 9 per cent QoQ. We noted sequentially stronger securities ADT (average daily turnover), with a February 2012 peak ADT of S$1.73 billion, and both January & March recording only S$1.2 billion. This is an improvement over 2QFY12’s S$1.1 billion securities ADT. The derivatives market turnover was also stronger sequentially – with 3QFY12’s 18.1 million contracts being 12 per cent higher QoQ. SGX’s P/E (price earnings) is rich relative to its growth prospects. Based on our forecasts, SGX currently trades at a FY13 P/E of 22.6x. This is close to HKEx’s 23.6x and Bursa Msia’s 22.1x. Given the better long-term earnings growth prospects for HKEx arising from its China hinterland and deeper and more liquid equity market, we would prefer HKEx to SGX. We see a pair trade of going long HKEx and shorting SGX offering good returns. – OSK-DMG

 

Sino Grandness (Not Rated)

Earlier in the year, Sino Grandness signed up a second external supplier, thereby doubling its production capacity for bottled juices from 70,000 tonnes to 140,000 tonnes. The group is also in the process of building a factory each in the provinces of Sichuan and Hubei. The Sichuan factory is scheduled to start operations this month. This will boost capacity by another 70,000 tonnes per annum, in effect, raising total capacity by threefold. Last October, through its Hong Kong subsidiary, Garden Fresh HK, Sino Grandness issued RMB100 million zero-coupon rate convertible bonds due 2014. It raised net proceeds of RMB80m and will use RMB70 million to purchase equipment for the expanded production capacity of bottled juices and the rest on advertising and promotional activities. The group has set performance targets for its beverage segment and has indicated net profit of RMB140 million for FY12 and RMB200 million for FY13. To-date, it has provided an indicative net profit of RMB70 million for FY11. With the capacity ramp-up, we estimate that the beverage segment alone would be able to chalk up sales of more than RMB1 billion pa, allowing the group to comfortably meet its profit targets. Sino Grandness saw its share price decline following the release of its 4Q11 results. Net profit fell by 46 per cent YoY to RMB22 million due in part to the one-off expenses for the issuance of convertible bonds, taxation of land use rights and payment of employee benefits. Operating and promotional costs are expected to stay high to support growth of the beverage segment. After paying out 20 per cent of its net profits in FY09-10, Sino Grandness did not declare any dividends for FY11. As its cash pile will begin to dwindle under high working capital usage and free cash flow remains in negative territory, the group may have to take on additional financing. Valuations are cheap, with historical PER (price earnings ratio) of 3.7x and P/BV (price to book value) of 1.0x. – Maybank Kim Eng Research