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CapitaMalls Asia (BUY; Target Price: S$1.79)

CMA announced it has established a US$1.0 billion CapitaMalls China Development Fund III (CMCDF III), which would invest primarily in Chinese retail properties. CMA would hold a 50 per cent stake with the remainder held by institutional investors from Asia and North America. Assuming a gearing of 40-50 per cent for CMCDF III, the fund could allocate up to US$1.8 billion to US$2.0 billion in total capital (CMA has 50 per cent commitment) during a 2-year investment period window with an IRR hurdle in the mid-teens. CMA would divest three shopping malls, currently under development, as seed assets to CMCDF III. These are CapitaMall Tianfu and CapitaMall Meilicheng in Chengdu, and the Luwan integrated development in Shanghai (still subject to approval). We understand that these would be injected for S$749 million, versus their current book value of S$640 million. This would result in a net gain of S$72 million, on a 100 per cent basis for these properties, and a net cash inflow of S$335 million to CMA for the sale of its stakes. We expect the market to react positively to this development. In our view, divestment valuations are in line with the street’s and our estimates, and would serve as key data-points validating CMA’s asset values in the market. CMCDF III would also be an option for capital recycling ahead; however, we note divestment targets would likely be assets under development majority owned by CMA, and only Tiangongyuan (Beijing) fits this profile currently. In addition, we expect CMCDF III to be a potential JV partner for future developments, which would give CMA a larger scope for capital allocation for acquisitions ahead. CMA’s valuation remains undemanding, and we see significant upside as its asset pipeline transitions into an income-generating portfolio over FY12. Maintain BUY with a higher fair value estimate of S$1.79 versus S$1.76 previously, mostly due to stronger valuations for Chinese assets and listed entities. – OCBC Investment Research

 

Civmec Limited (Not Rated)

We visited Civmec Limited’s integrated sea-front yard facility in Henderson, Western Australia last week. As a company with a relatively short operating history, Civmec has achieved highly commendable financial performance and its share price has more than doubled since it listed in April 2012 at an IPO price of S$0.40. We have an overall positive impression after witnessing its operational capabilities and the scale of its modern production facilities. Civmec is benefiting from the energy and mining boon in Australia which is drawing huge investments in mega-projects in the respective sectors. As at December 2011, the total value of investment projects underway exceeded A$913 million, of which 45 per cent are in the oil and gas and mining sectors. This should continue to fuel orderflows for Civmec with many of these projects expected to go into peak modes in 2013. We believe that Civmec’s competitive advantages lies in its experienced management team, strategic location of its facility in Western Australia, strong execution and timely delivery of projects, thereby winning strong affirmation and repeat orders from international customers, which include Chevron, Cameron, BHP Billiton, Rio Tinto and Leighton. Concerns were raised on falling gross margins and risk of cost overruns. Management explained that it is taking on larger scale and higher value project which have lower margins to grow its revenue base. Cost overruns are minimised with active monitoring while labour cost escalation is predictable and controlled with fixed labour agreements. With the runup in share price, Civmec is currently trading at annualised FY6/12F PER of 15.3x. This is essentially higher than peer average. However, given the positive sector outlook, there is every opportunity for Civmec to achieve higher earnings in coming years. – Maybank Kim Eng Research

 

Micro-Mechanics Holdings (HOLD: Target Price: S$0.325)

Given the still lacklustre conditions present in the semiconductor industry, we continue to estimate that Micro-Mechanics Holdings (MMH) could report a 16 per cent and 22 per cent YoY fall in revenue and net profit, respectively, for its upcoming 4QFY12 results. Sequentially, we forecast flat sales and net profit to grow 23 per cent. But we are cognizant of a possible upside surprise to our revenue projection, given the relative strength of the USD against the SGD in 2QCY12 as compared to 2QCY11. This is in contrast to the preceding quarters of FY12, in which the depreciating USD vis-à-vis the SGD adversely impacted MMH’s topline, as close to 50 per cent of its invoices are denominated in USD. MMH recently secured its first commercial production order worth almost S$1 million for its new 24/7 Machining Line. This entails the supply of parts used in lasers manufactured by Nasdaq-listed Newport Corporation. We believe this could set the precedence for future order flows from other customers in its Custom Machining & Assembly (CMA) division. This is bolstered by the 24/7 Machining Line’s ability to integrate various processes simultaneously, thus improving efficiency for the group. Moreover, we expect this system to improve MMH’s product cycle time and consistency of its product quality. This could thus aid its CMA segment’s turnaround. While the latest data on global semiconductor sales exhibited a tenth consecutive month of YoY decline, sequential growth for the second straight month was reported. We expect a moderate recovery for the sector as we enter into the seasonally stronger 2H of the year. This is also supported by a slightly firmer macroeconomic outlook, continued recovery from the Thailand floods, and anticipated IT product launches. Likewise, we expect gradual sequential improvement in MMH’s financial performance moving forward. – OCBC Investment Research

 

Technics Oil & Gas (BUY; Target Price: S$1.28)

Technics has two existing yards in Batam and Singapore with revenue capacity of S$250-300 million. The company has entered into an agreement to acquire an existing private yard in Vietnam for a maximum consideration of S$10 million that will double their revenue capacity. We believe the yard will be strategically important to secure more work in Vietnam.  Technics’ business model requires very limited capex and generates strong operating cash flow. Balance sheet is healthy with a net gearing of 0.28x. In FY10 and FY11, the company paid 10.5 S-cents and 12.0 S-cents dividends respectively, and management is guiding for 8 S-cents dividend payout for FY12F. This translates into a yield of 8.6 per cent. The earnings growth is largely driven by strong revenue growth of 24 per cent CAGR over FY11-14F while we expect blended EBITDA margins to stay strong at around 18.0-20.5 per cent. We expect Technics to build a stronger foothold in Vietnam after the purchase of the new yard in Vung Tau. The acquisition is expected to complete in August 2012. Technics’ valuation at 9.3x FY12 P/E with 8.6 per cent yield is appealing. We use a target P/E of 12x on blended FY12/13F EPS, at the top of its historical range, as we expect P/E valuation to expand on stronger earnings, higher recognition by the market (stock is under-researched) and spin-off of Norr Offshore Group. Key risks are project execution, erosion in pricing power for EPCC projects, and delay in award of projects. – OSK-DMG