City Developments Limited (SELL; Target Price: S$7.41)
CDL just submitted a top bid for a 99-year LH land parcel at Buangkok Drive for S$301 million, translating to unit land price of S$508 psf ppr for the residential site. This site sitting on site area of 197,419 square feet with GFA of 592,268 sf and is expected to yield 600 units, in a good location in close proximity to Buangkok MRT. We are somewhat surprised by the relatively muted interest from developers for this site, given the good location 100 metres from a transport node. Although CDL’s top bid for the site at the higher end of market expectations came in at 3.7 per cent above the next bid by Frasers Centrepoint/Lum Chang and breakeven S$800-900 psf is already in line with ASP of S$850 achieved by comparable Riversound Residence, we believe CDL’s bid reflects the current strong take up in the mass segment and their strategy of land replenishment focused on acquiring sites sitting on prime locations near transport nodes. If the site is awarded we preliminarily expect S$0.03 accretion to CDL’s RNAV based on initial estimates and ASP assumption of S$1,045 psf. We remain cautious on policy risks in the near term for CDL as the Singapore residential bellwether and maintain our SELL recommendation. – OSK-DMG
Golden Agri-Resources (BUY; Target Price: S$0.74)
The continued uncertainty in the Eurozone, sluggish economic growth in the US, and the slowing economic growth in China represent potential headwinds for the commodities sector. Although we were generally more positive on the soft commodities, we believe that prices of these soft commodities would not be immune to any pullback, albeit by a smaller extent. Similarly, CPO (crude palm oil) prices are also expected to drift lower, in line with crude oil prices, should the economic headwinds persist. Industry watchers are expecting CPO prices to ease in the second half of 2012, with some even forecasting for it to fall to as low as RM2450/tonne in 4Q12 if Brent crude prices drop to US$80/barrel (high correlation of 0.82). Currently, the benchmark August contract on Bursa Malaysia Derivatives is currently hovering around RM2,989/tonne, or US$943/tonne. In view of the increasingly less optimistic outlook, we are also paring our CPO assumptions for this year to US$925/tonne from US$1,000 previously. While the lower CPO prices will affect the whole CPO industry, we believe that upstream players are likely to feel the impact most; although this could be mitigated by lower export taxes and also increasing downstream activities. As such, Golden Agri-Resources (GAR), being one of the largest CPO plantation owners in the world, is likely to be affected. Keeping our production assumptions and margins unchanged, we estimate that every US$10-drop in CPO prices will trim 0.4 per cent off our FY12 forecasts. Based on our new CPO assumption, we will be paring our FY12 forecasts by 3 per cent. Keeping our valuation peg at 12.5x FY12F EPS, our fair value eases slightly from S$0.77 to S$0.74. But we think that most of the negatives have been into account, hence we maintain our BUY rating on the stock. – OCBC Investment Research
Noble Group (BUY; Target Price: S$1.40)
A comparison of supply chain managers’ PE (price-earnings) ratios indicates that Noble is trading at the lowest PE but has the highest three-year earnings CAGR at 31 per cent relative to its Singapore listed peers – Olam (FY12 PE of 13.8x vs 11 per cent EPS CAGR) & Wilmar (FY12 PE of 10.9x vs 7 per cent EPS CAGR). We see opportunity for Noble’s PE discount (average of 13 per cent) to narrow on account of its faster earnings growth, hence prefer Noble ahead of Olam and Wilmar in the near term. Given the prevailing macro uncertainty and investor focus on the shorter term, we cross check our target price of S$1.40 against sum-of-parts of valuation pegged to peer multiples. Sum of parts valuation equates to S$1.49 per share which consists of S$0.44 valuation for the agriculture business pegged to the average EV/EBITDA multiple of Olam and Wilmar, S$0.79 for Energy and MMO businesses pegged to Glencore’s EV/EBITDA, S$0.18 for Noble’s holding in Gloucester Coal pegged to floor price of A$6.96 as agreed in merger announcement, S$0.08 to account for benefit of US$400 million in cash from capital return and dividends expected from Gloucester Coal post merger with Yancoal. With its superior three-year EPS CAGR, we expect Noble’s discount to its Singapore listed peers Olam and Wilmar to narrow, hence prefer the counter in the near term. In addition, our sum-of-parts valuation indicates comparable upside to our target price of S$1.40. Thus we maintain our BUY call on Noble. – DBS Vickers
Olam (BUY; Target Price: S$2.56)
Olam commenced a share buyback programme on June 8. This follows the mandate which was renewed on 28 October 2011, where Olam may purchase up to 10 per cent of its total issued shares. All shares purchased under the share buyback programme may be held as treasury shares or cancelled, as Olam may decide from time to time. Funding for the programme will be done from Olam’s existing resources. Olam bought back 3.2 million shares (representing 0.13 per cent of its issued share capital) at an average price of S$1.63 per share. The food commodity space is more resilient than the industrial commodities segment in an environment of economic weakness, and this was evident in the recent Olam results. Olam currently trades at 9.1x FY13F P/E, versus the trough P/E of 8x in March 2009, and historical average of 18x. Olam’s share price downside is seen to be limited. Assuming Olam buys back 5 per cent of its issued share capital i.e. 122 million shares, at an average price of S$1.70, this will require some S$207 million. As of March 2012, Olam has cash of S$1,150 million, which is more than 5x the required cash outlay. If 5 per cent of the shares are bought back and cancelled, then Olam may see its FY13F EPS increase to S$0.206 from our current forecast S$0.196. Its FY13F book per share will fall to S$1.35 from our current forecast of S$1.36 – hence the impact on P/B from the share buyback programme is seen to be negligible. – OSK-DMG
SATS Limited (BUY; Target Price: S$3.04)
Recent visitor statistics have shown an encouraging uptrend despite the volatile economic situation stemming from the European debt crisis. Tourists have not only continued to make Singapore one of their preferred destinations (2011 visitor arrivals +13 per cent YoY), but also increased their spending, leading to an 18 per cent YoY growth in tourist receipts to S$22.3 billion for 2011. Together, these figures support the notion of a sustainable tourism boom that Singapore is currently experiencing and which SATS is well-placed to benefit from. The aviation visitor segment has shown standout growth of 15 per cent YoY to breach the 10 million visitor mark for 2011, backed by the proliferation of budget airline flights to-and-from Singapore. SATS’ key market segment remains the aviation-related space (84 per cent of FY3/12 revenue), and with the Singapore Tourism Board forecasting a further 10 per cent increase in visitor arrivals for 2012, the outlook remains rosy for the company. SATS’ JV with Creuers (SATS-Creuers) to operate Singapore’s newest Marina Bay Cruise Centre welcomed its first vessel on 26 May 2012. While we believe that significant earnings contributions will only accrue to SATS in the medium term, we remain positive that this foray into the cruise terminal operating business will only serve to widen its expansion capabilities within the gateway services space. Though mindful of the risks ahead for SATS, our optimism continues to be buoyed by its resilient earnings, healthy balance sheet and attractive dividend yields. We maintain our BUY recommendation and target price of S$3.04, based on 17x FY3/13F earnings. Investors buying in now stand to enjoy the bumper dividend of S$0.21 per share, which goes ex-dividend on July 31. – Maybank Kim Eng Research
Sheng Siong Group (BUY; Target Price: S$0.49)
The share price of Sheng Siong Group (SSG) fell 17.3 per cent in less than two months from our last report compared to a drop of 6.5 per cent for Singapore’s barometer (FTSE STI Index). With the rest of the broad market performing poorly, we deem the proportionally greater sell-off to be related to loss-covering as investors use gains from SSG since its IPO to cover other unprofitable ventures. Nonetheless, the sell-offs have resulted in an attractive entry point for SSG, and we base our argument on three main factors: shifting consumer spending patterns, improving and promising operations, and likelihood of interim dividend.
With the macro environment remaining shaky, we have seen a drop off in retail sales on a trend basis especially in the F&B services segment. Persistence in this regard will benefit supermarkets as they benefit from a greater number of consumers cooking at home more often. Competition amongst the Big three supermarkets has started to ease up as evidenced by a drop-off in the number of items in weekly promotions, and expect gross profit margins to start inching higher above the 21 per cent mark. Furthermore, SSG’s new stores have received favourable responses and are expected to breakeven within a four-month period.
Management had previously stated its intention to disburse the entire proceeds of a one-time S$10.4 million gain from the sale of its old Marsiling warehouse facility to shareholders. We believe that an opportune time for this disbursement has emerged as it would reinvigorate interest in the counter and repay the faith of its shareholders. With its FY12 revenue expected to grow unabated and a 90 per cent dividend payout ratio, SSG’s proposition as a quality, defensive play with attractive dividends (FY12F: 6.9 per cent) remains unaltered. As we leave our FY12 projections unchanged, we upgrade our rating on SSG to BUY on valuations grounds with the same fair value estimate of S$0.49. – OCBC Investment Research
Viz Branz (Not Rated)
Coffee maker Viz Branz has been under the heat from a longstanding father-and-son conflict between CEO and ex-CEO. Nonetheless, the group has still managed to produce solid financial results: its 9MFY12 net profit of S$14.3 million surpassed its performance in FY11 by 17.2 per cent YoY. The group completed its purchase of Goldwaves Food (GFS) in Shanghai for S$550,000 in January 2012. GFS’s operations include roasting coffee, as well as packing and distributing coffee powder, sugar and other beverages. This acquisition further highlights the group’s focus on its key market. As of 9MFY12, China constitutes more than 50 per cent of its sales. Viz Branz had previously struggled with raw material prices that are largely subjected to fluctuations of the USD, RMB, and CHF against the SGD. However, the group’s efforts in managing procurement, cost reduction, and inventory control, as well as passing on costs to customers, have worked out well. Its success is reflected in the improvement of its 9M12 margins and positive operating cash flows. The company announced a proposed 1-for-1 bonus share issue on May 25. The existing share capital of company comprises 361.1 million (including 6.1 million treasury shares) that will effectively be doubled after the new bonus shares are issued. This move will improve liquidity and trading volume as the current free float is only 19 per cent. The bonus issue is still awaiting the approvals of SGX and shareholders at the EGM. As the smallest coffee-maker listed on SGX, the group has already declared a S$0.033 interim dividend for 1HFY12, which implies a 6 per cent yield, as opposed to 2.8 per cent of its peers. – Maybank Kim Eng Research