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DBS (SELL; Target Price: S$11.50)

DBS will be announcing its 1Q12 results on the morning of April 27. We expect no major surprises, unless net interest margins (NIM)/treasury income prove to be more robust than expected. Our 1Q12 net profit estimate of S$776 million implies a 4 per cent YoY dip in earnings. Earnings could surprise on the upside if: NIM recovers at a faster pace. Our forecasts assume an average NIM of 1.74 per cent for the year which implies a stable outlook for now. Better-than-expected NIM recovery, particularly in Hong Kong, could provide the impetus for improved prospects. 4Q11 saw a blip up in NPLs but this has been attributed to a specific shipping loan. We do nevertheless expect a pick-up in credit charge this year to about 43 bps from 39 bps in 2011 and lower rates here would be positive to earnings. Our 2012 net profit forecast of S$3.08 billion is broadly in line with consensus expectations and this translates to relatively flat earnings for the year. One of the key growth drivers for DBS in 2011 was the ramp-up in asset utilisation, with its loan/deposit ratio rising to 89 per cent from 81 per cent end- 2010 – further improvements here are likely capped. Nevertheless, with more stable margins, we do expect net interest income to expand by about 14 per cent YoY this year. Moreover, we expect overheads to expand at a slower pace. The dampener to our growth expectations as such emanates from lower non-interest income amid capital market volatility and higher credit charge rates. Our SELL call continues to be premised on the greater susceptibility of DBS’s earnings to exogenous factors, which thus warrants a discount to peers in this environment. Separately, we expect the potential acquisition of Bank Danamon and Alliance Financial Group to be slightly dilutive to 2013 earnings (-5 per cent) and ROE (from 10.5 per cent to 9.9 per cent). – Maybank Kim Eng Research


Dyna-Mac Holdings (Not Rated)

Dyna-Mac recently announced contract wins worth about US$31.6 million from SBM Offshore and Bumi Armada. This came after Keppel Corp’s contract win to refurbish and upgrade an FPSO for the same two customers. However, Dyna-Mac’s 1Q12 results were disappointing with net profit registering a 51 per cent YoY fall. Note that its fiscal year-end has been changed from May to December. Dyna-Mac’s 1Q12 results again fell below consensus expectations. The weak performance was due to slower revenue recognition as most contracts are in the early stages. This was the second quarterly results that disappointed. In the previous quarter, after the release of the results, share price tumbled from S$0.55 to the current level over two days. However, we see several positive signs ahead. Dyna-Mac’s orderbook stood at a record S$201 million as at 1Q12, with the bulk expected to be recognised in FY12. The company has also rented additional yard space of 100,000 sq ft to cope with its orderbook. On the macro front, there are reasons to be optimistic given the positive outlook for deepwater oil exploration and production, which would increase the demand for FPSOs and FSOs. This trend could be confirmed by more FPSO and FSO orders for Keppel and Sembcorp Marine in the months ahead. Compared to Technics Oil & Gas and Hiap Seng, Dyna-Mac’s valuation looks rich but it has been able to command a premium over these peers. Perhaps its association with Keppel helps or could there be some corporate actions of which we are unaware? – Maybank Kim Eng Research



Frasers Commercial Trust (BUY; Target Price: S$1.14)

Gross revenue and NPI each grew by about 4 per cent YoY. Performance was largely driven by higher contribution from Central Park as well as China Square Central (CSC). Taking into account lower interest expenses, distributable income grew by 8 per cent to S$15.9 million. CSC outperforms master lease rent for the first time. This quarter marks the first time that CSC NOI crossed the master lease tenant rent, allowing the trust to reap an additional S$0.4 million. Occupancy is currently at 91.2 per cent with another 31.3 per cent of leases (by gross revenue) expiring this year. Improving rents should provide some buffer to downside occupancy risk. As the master lease expired in 2Q12, we see more opportunities for earnings quality to improve by revamping retail offerings and possibly rejuvenating the asset to capitalise on the opening of the nearby Telok Ayer MRT station in 2013. Meanwhile, rents remain firm with Singapore buildings seeing positive rental reversion, except for 55 Market Street. FCOT acquired the remaining 50 per cent interest in Caroline Chisholm Centre (CTL) in February this year. The entire property is leased to the Commonwealth Government of Australia at A$8.5 million per year with 3 per cent annual rent increment. The transaction was completed in April and we should see an increase in contribution from 2H. The trust is in discussions to refinance its S$500 million loan due in November this year and the interest rate is expected to be more attractive than the current all-in interest rate of 3.9 per cent. More importantly, the refinancing could be made in two tranches hence making its debt profile less lumpy. Gearing is expected to head up to 40 per cent from its current 36.1 per cent after taking into account the acquisition of CTL in April. – DBS Vickers


Keppel Corp (BUY; Target Price: S$13.20)

Property was the largest contributor accounting for 56 per cent of PBT, boosted by lumpy earnings recognition from sale of units at Reflections at Keppel Bay. About half were sold under a deferred payment scheme, the bulk of which was recognised in 1Q12 upon completion. Profit momentum will slow in the coming quarters, with only 100 units (about 10 per cent) to be booked in 2Q12. Gains from investments contributed S$83 million – 8 per cent of PBT. EBIT margin normalised to 15.1 per cent, down 6 per cent from 4Q11 due to projects being secured at lower pricings (post GFC crisis) and several projects being at start up phase. These factors had resulted in conservative margins. However, this was offset by a 66 per cent rise in revenue, from the record orderbook it built up over the past 12 months. Infrastructure disappointed with lower margins at 5.4 per cent due to lower contributions from Keppel Energy and KIE. YTD order win of S$688 million excludes LOIs from Petrobras (US$4.1 billion) and Floatel (US$315 million). Once confirmed, this will bring YTD wins to S$6.2 billion. Current orderbook of S$8.4 billion will rise to S$14b, raising earnings visibility to 2.7x. Outlook remains robust, backed by rising day rates and utilisation rates with jack-up demand remaining strong, and the return of semi-subs. – DBS Vickers


Stamford Land (BUY; Target Price: S$0.73)


We recently met up with management and came away with the following takeaways. 1) The group’s Australian hotels continue to benefit from strong domestic demand with occupancies hovering above 80 per cent, while room rates have inched up in tandem. 2) Management allowed the MOU for the sale-and-leaseback of three of its hotels to lapse recently as it wanted to maintain flexibility to pursue other monetisation options. 3) Revenue of its 87 per cent-sold development project in Sydney was booked upon completion in 3QFY12, bringing in S$195 million of proceeds. Management continues to pursue re-development opportunities for selected hotel sites and is hopeful of obtaining approval to convert its North Ryde hotel into a residential project by mid-2012. 4) Property investment continues to perform well, underpinned by lease income in excess of A$9 million p.a. for its Perth office property. While we view the lapsing of the MOU for the sale-and-leaseback of its three hotels (in Melbourne, Sydney and Adelaide) as a setback to efforts to unlock value from its hotel assets, management highlighted that the buyer had asked for additional terms over that originally agreed in the MOU and the deal was also contingent on the funding availability through an IPO. Under the circumstances, management opt to maintain flexibility to explore other monetisation options by allowing the MOU to lapse. STL’s hotels continued to perform well with improved occupancies and rates on the back of a buoyant Australian economy and strengthening of demand from the domestic corporate segment. STL acquired its hotels in the mid-1990s at depressed prices when the Japanese corporates beat a retreat from Asia to repatriate funds back to Japan. Today, its hotels are sitting on substantial surplus of S$365 million, or S$0.42/share, on our estimates. Management is seeking to further enhance land value through re-development opportunities, beginning with the conversion of its North Ryde hotel in Sydney. We revise our FY12-13 earnings by -24 per cent and +6 per cent respectively, to factor in slower residential sales going forward as the remaining units in its Sydney project are larger units with high absolute quantum of A$10 million each. –OSK-DMG


United Envirotech (BUY; Target Price: S$0.52)

United Envirotech Limited (UEL) has just secured two more projects in China. The first is a large RMB216 million EPC project to build a 100k m3/day drinking water plant in Yantai City, Shadong Province. The project will commence immediately and when completed by end-2013, it will be one of the largest drinking water plants using a dual membrane technology in China. However, UEL expects to only recognise the bulk of this project’s revenue in FY13. Earlier, UEL won the tender for a Transfer-Operate-Transfer (TOT) project in Shangzhi, Harbin city, Heilongjiang Province, which UEL is investing RMB70 million for a 30-year concession to operate the 40k m3/day treatment plant. The plant is one of the environmental protection projects initiated by China’s State Council to protect the water quality along the famous Song Hua River. The plant is expected to operate at full capacity in July 2012, up from the current 75 per cent utilisation. UEL plans to fund 40 per cent of the investment with proceeds from its KKR convertible bond (CB) issue, and the remaining 60 per cent with project financing. Going forward, UEL says it will continue to actively explore investment opportunities in China’s north-eastern region, especially around the Song Hua River. We understand that UEL has already identified several potential acquisitions which require very high Grade 1A discharge limits. Based on the usual 40 per cent equity funding ratio, we estimate that UEL’s remaining S$100 million of CB proceeds can finance up to another S$250 million worth of projects. With its latest TOT win, we bump up our FY13 revenue and earnings estimate by 2 per cent and 3 per cent respectively. – OCBC Investment Research