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

Latest throughput data released by Cosco Pacific for Yantian and COSCO-HIT contained no major surprises and YTD volume growth was within our estimates. May 2012 throughput volumes at Yantian grew +5.1 per cent YoY, bringing YTD May 2012 volume growth to +2.1 per cent YoY. The robust growth is consistent with management’s guidance in its 1Q12 results briefing. YTD throughput growth is still running below our full-year estimate of +3.0 per cent in FY12 for Yantian but we believe a stronger rebound in the subsequent months will lift growth in-line with our expectations. Throughput volumes at Kwai Tsing terminals grew at a slower pace of +0.6 per cent YoY in May (compared to +6.8 per cent in February, +6.5 per cent in March and +0.7 per cent in April). YTD May 2012 throughput rose +2.9 per cent YoY. We believe HIT should perform better than other ports in Hong Kong given its strong market position: in 1Q12, HIT registered +9.4 per cent YoY throughput growth vs +4.6 per cent for Kwai Tsing. We maintain our estimate of +6.0 per cent throughput growth for HIT in FY12. We made no changes to our throughput volumes and earnings estimates. Our FY12F DPU estimate (6.07 US-cents) is 8 per cent below management’s guidance and implies a yield of 8.37 per cent based on its last closing price. – OSK-DMG

 

K-REIT (BUY; Target Price: S$1.21)

Suntec REIT (BUY; Target Price: S$1.58)

K-Reit and Suntec Reit had announced that they have successfully converted the vehicle which holds Marina Bay Financial Centre Towers 1 & 2 and Marina Bay Link Mall Phase I (collectively known as MBFC Phase I), into a Limited Liability Partnership (BFCD LLP) structure. Under the previous structure, both K-Reit and Suntec Reit pay a 17-per cent corporate tax rate on the rental income generated on the property. Upon conversion, the operational rental income (excluding income support) generated by MBFC Phase 1 will no longer be subjected to corporate taxes. The new structure will take effect from 16 June 2012 and is not retrospective. Based on our estimates, both Reits should reap tax savings of close to S$2.2 million and S$4.5 million in FY12 and FY13 respectively. Netting off administration fees, we estimate that FY12 DPU should increase by 1-2 per cent and FY13 DPU by about 4-5 per cent. We think this conversion is a positive step as it would also pave the way for the possible restructuring of One Raffles Quay’s (ORQ) into a similar more tax efficient LLP structure in the longer term Currently, the payable tax for ORQ is estimated to be close to S$3 million p.a. We continue to like Suntec Reit for its strong balance sheet and we believe the tax savings should help to partially offset the income vacuum of Suntec City Phase 1 AEI works which began 2Q12. We have also upgraded K-Reit to BUY from HOLD. We like K-Reit’s for its quality assets and we believe the tax savings would help to strengthen its balance sheet. – DBS Vickers

 

Pacific Century Regional Developments (Not Rated)

Pacific Century Group has been buying shares on the open market since May this year, following PCCW’s successful spin-off of HKT Trust late last year. This may be a hint that corporate restructuring may be in the works. PCRD has no other significant asset or earnings stream other than its stake in PCCW, making it effectively a holding vehicle. On paper, the deep value is obvious; this stake is worth S$747 million vs its own current market capitalisation of S$539 million. Its balance sheet carries no debt, with another source of value being S$104 million in financial assets. All this would imply almost a 40 per cent discount market value for PCRD. In the first clear statement of intent with regard to succession plans, Li Ka Shing, dubbed “Superman” by the Hong Kong media for his ability to generate returns, announced this year that elder son Victor will take over Cheung Kong Holdings and Hutchinson Whampoa, while he will now bankroll younger son Richard’s future ambitions, which will be centred on PCCW. Restructuring scenarios could entail Richard Li either taking PCRD private to tighten his control over PCCW, or using PCRD as his alternative vehicle for expansion. Having failed to privatise/sell off PCCW several times, Richard Li appears to have finally found an acceptable solution by spinning off PCCW’s traditional telecom assets into HKT Trust and using the cash proceeds/dividends to fund PCCW’s more exciting media and IT solutions businesses. This implies deep value even on the PCCW level (see illustration on the next page for shareholding structures and discounts). – Maybank Kim Eng Research

 

STX OSV (BUY; Target Price: S$2.00)

Following our report on June 13, in which we argued that the market has overreacted to market rumours involving a supposed Fincantieri/Carlyle deal, STX OSV has announced three contracts worth an estimated NOK2.5 billion (US$400 million). This underscores the buoyancy of the offshore market and validates our investment thesis that investors should take the opportunity to gain exposure into the premium offshore builder at a reasonable valuation. On June 14, STX OSV announced it has signed a contract for a large, advanced Offshore Subsea Construction Vessel (OSCV) and a LOI for a Platform Supply Vessel (PSV). The first contract – worth about NOK1.4 billion – is with Ocean Installer and Solstad Offshore. It is subject to board approval from Norwegian Guarantee Institute for Export Credit (GEIK), expected to be received around 20 June 2012. The second order was awarded by Troms Offshore for an undisclosed amount. Based on its specifications, we estimate the contract size to be around NOK350 million. The contract is expected to be entered into by end June 2012. The third contract, announced last evening, was with Farstad Shipping for two PSVs worth a total NOK700 million. The vessels will be scheduled for delivery in 2Q-3Q14 from Langsten (Norway) and Vung Tau (Vietnam) yards. Year-to-date, we estimate STX OSV has secured about NOK6.7 billion of contracts. This forms about 60 per cent of our FY12F estimate (NOK11 billion). As such, we are keeping our forward estimates unchanged. – OCBC Investment Research