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CWT Limited (BUY; Target Price: S$2.01)

1Q12 results were beyond all expectations, with the company registering a recurring net profit of S$24.9 million in this quarter. Following the 4Q11 results, we had foretold that CWT will be entering a new era of sustainable profitability. We believe this set of numbers affirms this and more. To put the transformation in perspective, CWT’s recurring net profit had hovered around the S$25 million-S$30 million level for the past four years before FY2011. The variance came largely from MRI commodity trading, which we believe has significantly outperformed earlier expectations. In its first six months of consolidation, MRI numbers were affected by shipment adjustment costs which were incurred prior to the acquisition. With these wound down, we think MRI may contribute about S$50 million to bottomline in FY12 vs earlier expectations of S$30 million. The company also announced the sale-leaseback of Pandan Logistics Hub to Cache REIT for S$66 million. This will result in a gain of S$34 million of which S$22.5 million will be recorded in FY12 with the rest deferred. The transaction price was 12 per cent higher than our earlier estimated RNAV, which shows our valuations are conservative. This will strengthen an already net cash balance sheet (excluding MRI) and provide even more opportunities for warehouse investments/ M&A activities. The profit growth traction for CWT has been beyond all expectations but is still not reflected in the share price performance. We are now expect recurring net profit to hit at least S$90 million this year which was consensus’s earlier estimate for 2014F. With all cylinders firing, any variance would likely only come from business development start-up costs. We adjust our earnings upwards by 24-28 per cent and maintain BUY with a higher target price of S$2.01. – Maybank Kim Eng Research

 

Hyflux Limited (BUY; Target Price: S$1.66)

Sales gained 60 per cent YoY to S$138.9 million but net profit grew only 4 per cent to S$7.7 million. Gross margin dropped to 38 per cent from 50 per cent due to lower margin profile of Asia projects vs MENA and higher staff/ material costs. 1Q11 was also partly boosted by disposal gains, which was absent this quarter. Management expects margin to improve in the following quarters. Higher EPC for Tuaspring has pushed Singapore to account for 65 per cent of sales from 21 per cent previously while MENA’s contribution has declined to just 9 per cent of turnover. Seasonally slower 1Q profit formed 12 per cent of FY12F, compared to 14 per cent in FY11 and 7 per cent in FY10. 
Tuaspring investment raised by 18 per cent to improve efficiency. The project cost will be revised up from S$890 million to S$1.05 billion due to selection of higher efficiency Siemens turbines that is expected to lower operating costs and provide a better return on investment. The cost revision has been submitted to PUB for approval. Hyflux is confident the higher capex can be funded internally and from potential divestment of its China assets (which has not been factored in our estimates yet). Near term, higher project costs imply higher EPC recognition. As Hitachi is outsourcing the bulk of Dahej’s EPC to Hyflux, the portion of EPC services to Hyflux is US$420 million, significantly above our forecast of US$60-90 million. This contract alone would have hit our FY12F new win assumption of S$500 million. However, we believe recognition will start a quarter later in FY13 because it takes a year after financial close (still a few more quarters needed) to hit peak recognition levels. Elsewhere, the bidding pipeline remains robust with activities centred on MENA. – DBS Vickers

 

Marco Polo Marine (HOLD; Target Price: S$0.43)

Marco Polo Marine (MPM) reported a 40 per cent YoY rise in revenue to S$31.0 million but saw a 22 per cent fall in net profit to S$4.2 million in 2QFY12, such that 1HFY12 figures accounted for 53 per cent and 49 per cent of our full year estimates, respectively. However, 1HFY12 net profit accounted for 44 per cent of the street’s expectations. Revenue was boosted by the group’s shipbuilding and repair operations, but a drop in other operating income, higher admin expenses and share of loss of associated companies led to a lower bottomline. 
MPM saw a S$0.8 million share of loss from BBR in 2QFY12 and this was mainly due to unrealised foreign exchange losses of S$2.5 million that resulted from the weakening of the Indonesian rupiah against the USD in the last quarter. The foreign exchange movements had negatively impacted BBR’s vessel loans which were mainly denominated in USD and SGD. Stripping away the forex loss, BBR would have posted a profit of S$2.5 million (instead of a S$2.2 million loss) and MPM’s share of BBR profit would have been S$1.2 million. 
Going forward, MPM expects the shipyard operations to continue to drive the group’s overall revenue for 2HFY12, mainly from the ship repair side – management mentioned that there has been more enquiries for ship repair, outfitting and conversion services. The group will also set up a JV (operational from July 2012) with Marine Tankers Holdings Pte Ltd to own and manage bunkering vessels. – OCBC Investment Research

 

OCBC (BUY; Target Price: S$10.20)

Great Eastern Holdings’ (GEH) 1Q12 net profit came in at S$263 million largely from a recovery in capital markets. Non-par fund profits rebounded to S$160 million from S$14 million loss in 4Q11. Overall profit from insurance operations was significantly stronger QoQ and YoY. GEH’s earnings were further lifted by higher profit from investments in shareholders’ funds. Mark-to-market gains improved to S$40 million. Note that tax rate was low at 9 per cent (similar trend to 1Q10 and 1Q11). No dividends were declared during the quarter. Gross premiums were flat YoY corresponding to flattish total new weighted sales. There was a noticeable shift to regular premium products (from single premium) in Singapore leveraging from the bancassurance channel. Meanwhile, in Malaysia, sales came mainly from investment-linked products. New sales from the emerging markets segment were weaker YoY. New business embedded value grew strongly at 14 per cent YoY to S$84 million. We expect OCBC to record strong profits in the upcoming 1Q12 results after imputing GEH’s numbers. On its own, we believe OCBC could surprise with NIM improvements and sustained low provisions. Trading income could surprise on the upside. Insurance contribution may be volatile in the short-term but new business embedded value seals long-term trends. We keep our bet on OCBC (over UOB) for stronger asset quality indicators and surprises in its insurance operations. We believe OCBC’s focus on non-interest income (insurance and wealth management) remains a positive factor, which will drive ROEs quicker over the longer term without utilising too much capital. – DBS Vickers

 

OSIM International (BUY; Target Price: S$1.61)

OSIM International Ltd reported 1Q12 PATMI (net profit) of S$22.2 million (+10.3 per cent YoY), strongly exceeding our estimates by 19.4 per cent due to better-than-expected margins. Revenue inched up 0.8 per cent YoY to S$150.1 million, just 0.5 per cent above our forecast. The flat YoY sales was attributed largely to a high base effect in 1Q11, as delays in shipment for its newly launched uDivine massage chair in 4Q10 spilled-over to 1Q11. 
Management’s focus on innovation resulted in a better product mix, while the rationalisation of non-performing outlets and push for higher productivity helped to boost its net margin from 13.5 per cent in 1Q11 and 12.0 per cent in 4Q11 to 14.8 per cent in 1Q12. We expect continued earnings traction for OSIM moving forward, underpinned by new innovative product launches with different price points and improvement in productivity per store and staff. Regarding its RichLife business, management anticipates losses to be significantly smaller this year, with breakeven or profitability expected in FY13. Given the better-than-expected 1Q12 performance, we raise our FY12 and FY13 EPS (earnings per share) forecasts by 7.5 per cent and 4.9 per cent, respectively. We also ascribe a higher valuation peg of 14.3x (previously 12.9x) to our projected FY12F EPS, representing half a standard deviation above its 2-year average forward PER (price earnings ratio). We believe this is justifiable as OSIM has demonstrated its resilience and strong execution capabilities by improving its operational efficiencies in light of the challenging macroeconomic conditions. In addition, we opine that OSIM is steadily raising its profile as a luxury specialty retailer, comprising an amalgamation of strong brands, thus deserving a higher brand premium on its valuation. – OCBC Investment Research

 

Sarin Technologies (BUY; Target Price: S$2.28)

Sarin’s 1Q12 results surprised on the upside with revenue coming in at US$19.7 million (+61 per cent YoY) and net profit at US$7.8 million (+137 per cent YoY). The stellar performance was driven by accelerated sales of GalaxyTM-related products, as well as higher demand for traditional planning systems in India due to capacity expansions to cope with an increased supply of Zimbabwean rough diamonds. GalaxyTM-related sales accounted for one-third of overall sales and recurring revenue made up about 20 per cent of total revenue. Sales to India increased by 77 per cent YoY. We expect the sales momentum to be sustained in the next two quarters as the market bumps up capacity to deal with the supply of Zimbabwean diamonds. The fourth-quarter may see some seasonal decline due to the Diwali holiday in India, but we expect sales from Sarin’s new polished diamond products to mitigate the drop. Sarin deployed an additional 14 GalaxyTM machines in 1Q12, including four to its service centres in Surat, Israel and Botswana. Its current installed base is now 69. Based on its sales traction, the target deployment of 100 machines by year- end looks very achievable. In order to drive trading liquidity, Sarin has proposed a bonus share issue of 1 bonus share for every 4 existing shares. The listing is subject to approval by the Singapore Exchange. We increase our FY12F-14F net profit forecasts by 15-33 per cent in view of the strong 1Q results. Consequently, our target price goes up to S$2.28, pegged at 16x FY12F PER (price earnings ratio). After the bonus share issue, our target price would be adjusted to S$1.82. We believe that the average EPS (earnings per share) growth expectation of 39 per cent pa over FY12F-14F justifies the valuation multiple. – Maybank Kim Eng Research

 

Viz Branz (HOLD; Target Price: S$0.52)

Although Viz Branz’s (VB) 3Q12 revenue fell marginally by S$0.2 million (-0.4 per cent YoY) to S$43.0 million, its gross profit margin improved by 2.3 percentage points to 34 per cent following an easing of raw material prices and better inventory control while operating profit rose S$1.9 million (+38.3 per cent YoY) on the back of a reduction in operating expenses. As a result, 3Q12 net profit jumped 50.9 per cent YoY to S$4.6 million. On a YTD basis (9M12), its revenue climbed 6.5 per cent YoY to S$134 million (forming 74 per cent of our initial FY12 estimates), and its bottomline gained 34.6 per cent YoY to S$14.3 million (93 per cent of initial FY12 estimates). We deem the reduction in administrative, distribution and selling costs as a representation of increased efficiencies in VB’s operations, derived from economies of scale and scope. As VB’s financial performance continues to achieve record numbers, which validates the success of its marketing efforts and acceptance of its products into its target markets, we can expect operating expenses to continue coming off as well. 
VB is already an established brand name in Myanmar with a loyal customer base given its foray into the country several years ago, and is currently the market leader in the cereal segment with a management estimated 30 per cent market share. When economic and trade sanctions on the country get lifted eventually, VB is well placed to benefit from Myanmar’s growth and increase in domestic consumption. 
With this encouraging set of results and adjustment to its cost structure, we adjust our cost estimates for VB going forward. We lowered our operating expenses by 9.4 per cent and 7.5 per cent for FY12F and FY13F respectively whilst leaving our revenue and gross profit projections unchanged. This raised our net profit by 14 per cent and 18 per cent respectively for FY12F and FY13F (record levels for VB), which caused our discounted cash-flow-to-equity valuation to increase to S$0.52 (S$0.37 previously). – OCBC Investment Research