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CSE Global (HOLD; Target Price: S$0.80)

Hitachi Limited’s takeover offer for eBworx has turned wholly unconditional effective Tuesday after the former had received more than 85 per cent acceptance. CSE Global (CSE) will sell its entire 30.94 per cent stake in eBworx for M$0.90 per share and book a one-off divestment gain of S$10.3 million in 2Q12. The net consideration received of S$21.4 million will be used to repay its bank loan. We estimate this will improve its net gearing ratio by at least 10 percentage points.  While we like the latest development, we think that investors will be more keen to see operational improvements in its core business. Recall that the group has encountered serious cost over-run issues in FY11 that hurt investor’s confidence. We adjusted our model for the transaction, but we remain cautious and keep our HOLD rating and S$0.80 fair value estimate ahead of its 1Q12 results later this week (even though there is an technical upside of 11 per cent). Excluding the one-off gain of S$10.3 million, CSE’s shares are currently trading at 8.4x FY12F EPS (earnings per share). – OCBC Investment Research

 

COSCO Corp (HOLD; Target Price: S$0.98)

COSCO Corp Singapore (COSCO)’s 1Q12 results were largely within our expectations but below the street’s. Revenue decreased by 3 per cent YoY to S$979 million, while net profit attributable to shareholders fell 21 per cent YoY to S$27.8 million. Gross margin declined by one percentage point to 10.1 per cent on stiffer competition but operating costs remains largely stable. Finance cost increased by 168 per cent YoY to S$21.8 million due to higher gearing and increased borrowing costs. 1Q revenue from shipyard operations fell by 2.5 per cent YoY to S$965.9 million mainly due to weaker contributions from the ship repair and shipbuilding segments (but partially offset by growth in the offshore segment). COSCO explained that more Chinese yards are now taking on repair work to compensate for the lack of shipbuilding orders. Consequently, pricing has become very competitive. We estimate that gross margin for repair work has now fallen to 8-9 per cent (from 10-15 per cent previously). Although COSCO had booked S$13.8 million of expected losses mainly from offshore construction contracts, the group appears to be more optimistic about the offshore segment. Management said that there are a number of orders in the market, but it would only want to focus on those contracts that will enable them to earn a good margin in the future. In addition, COSCO is now able to negotiate for better payment terms, i.e. 30 per cent downpayment / 70 per cent on delivery. – OCBC Investment Research

 

FJ Benjamin (BUY; Target Price: S$0.425)

Despite a slowdown in consumer spending, the strong appeal of FJ Benjamin’s (FJB) brands and sustainability in tourist retail spending in Southeast Asia have helped the group report in-line 3QFY6/12 results. Revenue came in at S$95.8 million (+7.5 per cent YoY) and net profit was S$3.5 million (+8.4 per cent YoY). FJB’s healthy topline growth was driven by selected markets in Southeast Asia – the fashion segment in Malaysia and the timepiece segment in Hong Kong both achieved double-digit growth rates. Operating costs were in line with the topline expansion, attributed to the increase in number of hire, new store rentals and additional expenses incurred in starting new stores. In March, FJB opened a new logistics centre in China to consolidate the dual processes of sampling and distribution. The centre is expected to spend S$0.8-1 million p.a. The move is in line with the group’s cost containment strategy as it lowers distribution cost. Inventories rose by S$4.5 million to S$111 million and payables of S$10.4 million were settled due to festive period stocking. We expect this to lower during next quarter’s low season and smooth out its operating cash flow. Though net gearing has risen from 6 per cent to 46 per cent due to higher borrowing for store expansion, we note that the dividend payout has been consistent at S$0.02 since 2008, except during the financial crisis, where the group paid out S$0.05. The dividend yield is 5.6 per cent. – Maybank Kim Eng Research

 

Hutchison Port Holdings Trust (NEUTRAL; Target Price: US$0.78)

HPH Trust (HPHT) reported 1Q12 EPU (earnings per unit) of 5.31 HK-cents, 20 per cent of our forecast and 22 per cent of consensus estimates, as margins were squeezed on higher costs. Following the results, we lower FY12/13F EPU by 3 per cent (on higher costs) but maintain DPU estimates on lower capex. Management painted a more robust demand outlook for April and May, with volume growth likely to hit the 5-7 per cent range. In our view, the stronger volume has been priced in given the weaker 1Q12 demand in Yantian. Europe demand remains uncertain but the shortfall will be compensated with higher international transshipment. Management may defer some of the capex planned for 2014/15 berths. We cut HPHT to Neutral with a lower target price of US$0.78, which reflects our revised estimates and 23.4 HK-cents distribution in March 2012. With growth concerns emerging in Europe and inflationary pressures, we see downside risk to management’s forecasts. We expect FY12 distribution to come in 8 per cent below HPHT’s IPO target of 51.24 HK-cents. Based on our DPU estimate, the stock is yielding 8 per cent for FY12. – OSK-DMG

 

OKP Holdings (HOLD; Target Price: S$0.53)

OKP Holdings last night reported that its 1Q12 revenue declined 24 per cent YoY to S$25.0 million and PATMI (net profit) plunged 42 per cent YoY to S$3.1 million. Management said construction revenue fell 26 per cent YoY to S$20.7 million because there was lower revenue recognition from a few newly-awarded construction projects. Furthermore, maintenance revenue slid 13 per cent YoY to S$4.3 million also due to slower revenue recognition, caused by a number of maintenance projects which were reaching completion and the lack of new business wins during 1Q12. Management believes outlook for the construction sector will remain healthy over the next twelve months. However, management also highlighted that competition is likely to intensify and pricing is likely to turn aggressive, resulting in downward pressure on OKP’s profit margins. OKP’s 1Q12 revenue and PATMI have respectively only met 17 per cent and 12 per cent of consensus full-year estimates, which by any account, is a disappointing set of results. Despite OKP’s winning a S$75.3 million design-and-build project to expand the CTE/TPE/SLE interchanges from the Land Transport Authority, there is a lack of clarity in OKP’s ramping up of revenue recognition of projects. Coupled with management’s warning on possible margin pressure, we reduce our FY12F revenue and PATMI estimates of OKP by 39 per cent and 35 per cent respectively to S$120.5 million and S$19.8 million. – OCBC Investment Research

 

SC Global (SELL; Target Price: S$0.87)

We have previously highlighted lacklustre earnings as a key negative for the stock and SC Global reported a net loss in 1Q12. 1Q12 revenue of S$49.8 million was mainly supported by development contributions from Sentosa project Seven Palms. However this was a sharp fall of -78 per cent YoY due to the loss of contributions from the trio of projects namely The Marq at Paterson Hill, Hilltops and Martin No.38 with corresponding project TOPs in 1Q11, 2Q11 and 4Q11 respectively. As a result of the contraction in revenue coupled with higher admin expenses, 1Q12 net profit fell to a net loss of –S$10 million versus S$72.8 million in 1Q11. Moving forward, we continue to expect earnings weakness for SC Global, low asset turnover coupled with high gearing remains a concern as well as a challenging land banking environment. FY12 earnings are likely to be contributed by the Kairong project in Shenyang on expected completion in 2H12. However, we note that currently approximately half of SC Global’s inventories of S$2.34 billion consist of completed units, and development earnings for these completed units would only be recognized on sales. We are less sanguine on sales volume in the high-end segment. As such we foresee another weak earnings performance in 2Q12 with a lack of progressive recognition from development projects under construction. – OSK-DMG

 

Sembcorp Industries (BUY; Target Price: 6.20)

Sembcorp Industries (SCI) announced that they have signed an agreement to acquire power assets in China for US$85.5 million from The AES Corporation (AES), a power company listed on the New York Stock Exchange. AES is a global power company with total assets of US$45 billion. Under the deal, SCI will acquire: 49 per cent stake in four wind power assets in China with a total gross power capacity of 247.5MW. Three plants are located in Inner Mongolia and one plant is in Hebei; 25 per cent stake in Cooperative Joint Venture, which owns, operates and manages a 2,100MW coal-fired power plant in Shanxi. The Cooperative Joint Venture expires in 2016. According to the press release, SCI’s share of net assets of the operating joint venture companies is RMB1.27 billion. Following a teleconference with management, we gathered that: the acquisition is expected to be completed in 3Q12 or 4Q12; the projects are profitable. Management expects the acquisition to yield mid-teens IRR and to be EPS accretive from the first year of acquisition; the stake in the coal-fired power plant is part of a bundled deal as AES intends to exit China; while the concession for the power plant is going to expire soon (in 2016), the wind power assets will only expire between 2032 and 2048. While the deal appears to imply a 56 per cent discount to net asset value, AES is carrying these assets at US$101 million, which implies a lower acquisition discount of 12 per cent. In 3Q11, AES wrote down its value in Yangcheng power plant from US$100 million to US$26 million due to downward revision on earnings and cash flow from Yangcheng. We still view the deal positively. We expect minimal impact on FY12 EPS (earnings per share) given the acquisition will only be completed in 3Q12 or 4Q12. We estimate the acquisition to add 1-2 per cent to FY13 EPS. We maintain our FY12-13F EPS for now and keep our BUY rating on SCI. – OSK-DMG

 

SIA Engineering (HOLD; Target Price: S$4.04)

SIA Engineering Co Ltd (SIAEC) once again recorded an all-time high quarterly revenue in its 4QFY12 financial results. 4QFY12 revenue grew 16 per cent YoY to S$317 million, while PATMI (net profit) gained 9 per cent YoY to S$66 million. For FY12, SIAEC’s revenue of S$1.17 billion was 3 per cent higher than both our and consensus estimates, while PATMI came in at S$269 million, or in line with our estimate of S$270 million but 1 per cent higher than consensus. 4QFY12 and FY12 operating margins fell 1 ppt and 1.2 ppt respectively from a year earlier to 10.3 per cent and 11.1 per cent. Management partially attributed the higher expenses to increased subcontract costs, arising from higher revenue from its higher fleet management segment. Going forward, with most of its revenue denominated in US dollar, SIAEC’s profit margins will likely face further downward pressure if the US dollar weakens. SIAEC’s Airframe Maintenance and Line Maintenance segments recorded little revenue growth in FY12. However, revenue from its Fleet Management segment jumped 33 per cent to S$218 million. Furthermore, SIAEC now services a fleet of 160 aircraft for 13 customers in this segment, as compared to 140 aircraft and 11 customers at end-FY11. Other notables are SIAEC’s share of profits of JV and associated companies in FY12 grew 9 per cent to S$157 million, contributing to 52 per cent of its pre-tax profit; and management proposed a final dividend of S$0.15/share, which comes after an interim dividend of S$0.06/share. – OCBC Investment Research