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AIMS AMP Capital Industrial REIT (Not Rated)

We recently met up with management to find out more about the trust, in view that the counter has risen by 29.6 per cent YTD and offer an attractive DPU yield of 9 per cent (one of the highest amongst Industrial REITs). It presently has 25 properties valued at S$914.5 million as of 31 March 2012. AAREIT is also redeveloping 20 Gul Way that will quadruple its annual rental income and triple its gross floor area on that property when fully completed in December 2013. DPU grew by 5.3 per cent in FY12 to 10.45 S-cents. Upon the completion of 20 Gul Way, management would expect incremental DPU to be 1.465 S-cents and AAREIT would become the second-largest ramp-up warehouse landlord after CACHE. According to street estimates, FY13 DPU yield is forecasted at 9.2 per cent. AAREIT’s aggregate leverage remains healthy at 30 per cent as of 31 March 2012. We note that AAREIT’s gearing may escalate to 35 per cent after the redevelopment of 20 Gul Way. AAREIT enjoys high portfolio occupancy of 99.2 per cent with an average security deposit of about 8.1 months per property. It has divested several low-yields properties such as 23 Changi South, Asahi Ohmiya Warehouse, and 31 Admirality Road in 2011–2012. It also has six properties, apart from 20 Gul Way, whose plot ratio utilisation is below 60 per cent, thus making them potential candidates for redevelopment. AAREIT is presently in a sweet spot with its exposure in the logistics and multi-factory space (price index rose by 31.6 per cent and 25.4 per cent YoY in 1Q12, respectively). Downside risks, in our view, include a relatively short lease expiry of 2.62 years. Two large assets, 27 Penjuru Lane and 8&10 Pandan Crescent, are expiring in FY13. However, overall lease expiry has been reduced from 29.9 per cent in end-March to 18 per cent in end-Jun (incl. subleases), following lease extensions. There are also varying degrees of: concentration risks as the top ten tenants constitute 70.5 per cent of 4QFY12 rental income; competition risks over tenants and assets; and macro-economic headwinds. Upside risks include more yield-accretive acquisitions, redevelopment projects, and better-than-expected positive rental reversions moving forward. – Maybank Kim Eng Research


Golden Agri-Resources (BUY; Target Price: S$0.81)

Golden Agri-Resources (GAR) last week issued its second sustainability report. We believe GAR’s commitment towards the sustainability of palm oil cultivation in Indonesia should improve its standing among the international food companies. Recall in 2010, several large food companies such as Nestle stopped purchasing CPO from the group, following allegations by Greenpeace that PT Smart had developed on peat land and primary forests. As the second largest palm oil plantation owner in the world, GAR stands to significantly benefit from a rebound in CPO prices. CPO prices have tracked back above RM3,000/tonne in July, rebounding off the June low of RM2,850. However, CPO prices are still slightly softer than the RM3,220 average seen in 2Q12. We believe that a recovery of CPO prices is likely, given the concerns over the impact of a prolonged drought in the US mid-west, affecting the potential supply of soybean crop. Based on the price movements over the last five years, CPO and soybean prices have a strong correlation of 0.85, suggesting CPO prices will likely mirror an increase in soybean prices quite closely. In our previous report dated 14 June, we eased our CPO forecast for this year to US$925/tonne, given the increased economic headwinds coming out of the eurozone, the US and even China. Although we were generally more positive on the soft commodities, prices of these soft commodities are not immune to any pullback, albeit by a smaller extent, in the event of a economic downturn. Nevertheless, our assumptions are already quite conservative and should have captured most of the downside risk. – OCBC Investment Research


Midas Holdings (NEUTRAL; Target Price: S$0.29)

Midas announced that Dongguan Rail Transit has awarded a RMB860 million metro contract to its 32.5 per cent-owned associate, Nanjing SR Puzhen Rail Transport (NPRT) for Dongguan Rapid Railway R2 Line Project. NPRT will supply 20 train sets (or 120 train cars) with delivery expected to take place from 2013 to 2015. In our financial model, we have assumed NPRT to win RMB1.5 billion of new orders per year. This latest contract brings NPRT’s total order win to RMB1.4 billion YTD12, which is within our expectations. We estimate the follow through to Midas to be a potential contract win worth between RMB30-40 million from NPRT and income from associate of between RMB6-10 million. This would result in a total profit of some RMB10-14 million, which will be recognised progressively from FY13 to FY15. Nonetheless, we note that NPRT did not have a consistent profitability track record as its quarterly contributions had fluctuated between a RMB5 million loss to a RMB6 million profit since 1Q11. – OSK-DMG


SingPost (BUY; Target Price: S$1.14)

The Infocomm Development Authority of Singapore (IDA) has revised the Quality of Service (QoS) framework for postal services. A key change is the increase in financial penalty for breach of the standards – a penalty of up to S$50,000/month per indicator may be imposed for non-compliance. This compares with the current penalty of S$1,000- S$5,000/month per indicator. The second key change is the requirement for SingPost to appoint an independent assessor to conduct a sampling letter test. The revised framework will be applicable to Singapore Post’s (SingPost) basic letter delivery service (effective 1 July 2012), and does not apply to parcel deliveries. According to statistics collected by SingPost in recent years, the group has been delivering over and above IDA’s requirements. Should this trend continue, we do not foresee an impact from the increase in penalty. Meanwhile, SingPost’s compliance with IDA’s QoS framework is currently measured via a sampling letter test that is carried out by SingPost itself. Under the new framework, SingPost has to appoint an independent assessor to conduct the sampling letter test at SingPost’s cost as an additional method of measuring compliance. A structural decline in the mail business due to e-substitution and lifestyle changes has affected personal correspondence and business transactional mail. However, growth in direct marketing mail has been observed, supporting mail volumes. We appreciate SingPost’s dominant domestic market position, operating efficiency, and stable operating cash flows. We are also mindful of margin pressures as well as the relatively limited growth opportunities in the core mail business. However, the group is seeking geographical and business expansion in logistics and retail, with continued investments in its core mail business. – OCBC Investment Research


SMRT (SELL; Target Price: S$1.38)

SMRT will be extending the morning off-peak travel discount scheme to five more stations in town (total: 14 stations) and increasing the discount quantum from 30 S-cents to 50 S-cents. This applies to commuters who end their journey at these 14 stations before 7.45 am. This scheme, effective from 6 August 2012, is part of SMRT’s effort to ease the morning rush hour train load. Our opinion: probably not, especially if you are earning an average or above-average wage. We suggest an alternative of a fixed percentage-based discount, which we believe would give a better incentive to those living in fringe locations to switch to an earlier travel schedule. The new discount is intended to persuade another 3–4 per cent of commuters to start travelling earlier. This translates to approximately 2,000 more commuters daily and a revenue loss of S$0.25 million p.a. for SMRT. Including the existing commuters who are already travelling during this time period, we estimate the total negative impact on SMRT’s top and bottomline to be under S$1 million. Although the financial impact to SMRT may not be material (less than 1 per cent of FY12 profit), we believe the push for such initiatives reaffirms SMRT’s/LTA’s concern about over-loaded trains. The discounts, in light of the absence of fare revisions this year, will further diminish the bottomline for shareholders. SMRT’s share price has recently been supported by its S$0.057 per share dividend going ex on 18 July. We maintain our SELL call based on 15x FY13 PER, as we remain concerned about the continuous pressure on SMRT to improve maintenance efforts without any fare relief this calendar year. While current efforts to reduce overcrowding should reduce the strain on SMRT’s trains, and alleviate maintenance needs in the longer term, we think that a percentage-based discount could work better in maximising the intended effect of an off-peak rate, and create more goodwill for its target commuter segment. – Maybank Kim Eng Research