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CapitaLand (BUY; Target Price: S$4.06)

CapitaLand and Ascott Residence Trust (ART) are proposing an asset swap involving The Ascott Limited’s (TAL) Ascott Raffles Place (ARP) and Ascott Guangzhou (AGZ), and ART’s Somerset Grand Cairnhill (SGC). CapitaLand, via TAL, will acquire SGC from ART for S$359 million, while divesting ARP and AGZ to ART for a total of S$283.3 million. SGC will be redeveloped into a mixed project comprising high-end residential units and a new serviced residence with a hotel licence, which ART has a call option to repurchase in future at an agreed price of S$405 million. As a result of the transactions, CapitaLand could book in net gains of S$98.9 million in FY12. Located just off Orchard Road, CapitaLand will be acquiring a piece of prime property. Including differential premium and lease extension premium estimated at up to S$180 million, the acquisition works out to approx. S$1,156 psf GFA. We estimate the net sellable area at 222,600 sq ft, with a potential ASP of S$2,800 psf on an estimated breakeven of S$2,100 psf. This translates to a fairly attractive pre-tax margin of 25 per cent. The deals are expected to be yield-accretive for ART, as it will be divesting SGC at an EBITDA yield of 3.8 per cent, while acquiring ARP and AGZ at 4.1 per cent and 5 per cent respectively. Even the new Cairnhill serviced residence is projected to have an EBITDA yield of 4.5 per cent at the agreed price. On a pro-forma basis, ART’s FY11 DPU would grow by 4.1 per cent as a result of the enlarged portfolio. The transactions, subject to ART’s unitholders’ approval, highlight the point that the much maligned Sponsor-REIT model can lead to mutually beneficial outcomes and it remains an integral part of CapitaLand’s capital recycling model. Reiterate BUY, with a target price of S$4.06 pegged to a 20 per cent discount to RNAV. – Maybank Kim Eng Research


China Minzhong (HOLD; Target Price: S$0.60)

Since our last report on 2Q12’s results note in February, the stock has fallen 40 per cent from S$1.01 to S$0.61. We believe the stock has derated from 3.7x FY13F PE in February to 2.7x FY13F PE, marred by poor fundamentals. We believe weak fundamentals are likely to persist going forward. The slower-than-expected flushing out of crops due to the winter delay in FY12 and persistently higher costs are likely to depress margins going forward. We believe MINZ is heading into a consolidation mode as management slows down farmland expansion and concentrates on attaining optimal operating efficiencies. On the back of higher costs and unexciting outlook, we assume declining gross margins from 38 per cent in FY12 to 35.3 per cent in FY14F will lead to muted growth of 3 per cent/8 per cent for FY13F/FY14F. Valuation is no doubt a steal at 2.7x forward PE. However, in view of the more challenging outlook faced by MINZ, we believe taking a more cautious stance is more appropriate for now. We would be buyers only if fundamentals turn significantly positive. Downgrade to HOLD. – DBS Vickers


Ezra Holdings (BUY; Target Price: S$1.35)

Ezra Holdings reported a 61 per cent YoY rise in 3QFY12 revenue to US$265.6 million and a 244 per cent increase in net profit to US$22.4 million, such that 9MFY12 net profit accounted for 81.5 per cent and 85.5 per cent of ours and the street’s full-year expectations, respectively. Excluding one-off items such as fair value changes with respect to derivative instruments and foreign exchange gains, we estimate core operating profit to be around US$11m vs 2QFY12’s US$3 million. Revenue increased in both the offshore support services and subsea services divisions in 3QFY12, due to contributions from an expanded vessel fleet and commencement of new projects awarded after the acquisition of AMC. Marine services, however, saw a decline of US$25.7 million in turnover due to lower revenue recognized for engineering projects in Vietnam compared to 3QFY11. Gross margin was 17 per cent in the last quarter compared to 16 per cent in 2QFY12 and 18 per cent in 3QFY11. However, administrative expenses continued to rise to US$34.0 million in 3QFY12 vs US$31.7 million in 2QFY12 and US$26.6 million in 1QFY12. We would monitor this figure to see if the group is able to rein in costs after the acquisition of AMC. The group announced that it has won six contracts worth about US$87 million for the charter of PSVs and AHTS vessels. The contracts have an average tenure of two years (including options) and the units will be deployed in Asia and Africa. Meanwhile, Ezra’s engineering, ship construction and fabrication services arm also clinched a US$77 million contract to build a specialized offshore unit. The group remains cautiously optimistic about the outlook of the oil and gas industry, and we believe the focus going forward should be on the smooth execution of subsea projects. As we still see an upside potential of 24.3 per cent based on our fair value estimate of S$1.35, we maintain our BUY rating on the stock. – OCBC Investment Research


Raffles Medical Group (BUY; Target Price: S$2.73)

We believe that Raffles Medical Group (RMG) would continue to benefit strongly from the healthy uptrend in medical travellers to the region, despite growing supply of new hospital beds from both local and regional competitors. This is premised on the group’s competitive pricing vis-à-vis its comparable peers, strong brand equity and continued drive to enhance the depth of its specialist offerings. Research firm Frost & Sullivan projected that the number of medical travellers to Singapore and the corresponding revenues generated would grow at a CAGR of 12.4 per cent and 13.6 per cent to 851,000 and S$2.03 billion, respectively, from 2012 to 2016. RMG’s new Specialist Centre in Orchard is scheduled to begin operations in 1H13, while its Raffles Hospital extension (additional 102,408 sf) is expected to be completed in early 2015. In the meantime, management has actively decanted some of its existing hospital facilities. This resulted in the opening of a Neuroscience specialist centre in Apr, while renovation works are ongoing for the expansion of its Health Screening facilities. We reckon this would improve its income streams as there could be follow-up treatment procedures. RMG recently implemented wage increments across the board in 2Q12, driven by the Singapore government’s initiative to raise salaries in the public healthcare sector. We ease our EBIT margin assumptions and our PATMI forecasts for FY12 and FY13 are reduced by 2.1 per cent and 1.4 per cent, respectively. We believe that part of RMG’s cost pressure also arose from headcount expansion in preparation for the commencement of its new Specialist Centre. While these additional staff would also aid in the generation of revenue at existing premises now, pre-operating expenses incurred would cause some drag on its earnings as their contribution is not at an optimal level yet, in our view. We roll-forward our valuations to 24x blended FY12/13F EPS, which in turn raises our fair value estimate from S$2.58 to S$2.73. – OCBC Investment Research


Singapore Exchange (SELL; Target Price: S$5.00)

SGX has signed a Memorandum of Understanding with London Stock Exchange (LSE) to jointly develop capabilities to enable cross-trading of their largest and most actively traded stocks. With this agreement, SGX members will be able to trade FTSE100 securities on SGX’s GlobalQuote Board while LSE members will be able to trade 36 securities of Singapore’s leading indices on LSE’s newly-created International Board. The collaboration will occur in stages. Subject to regulatory approvals, the SGX securities will be quoted on LSE’s International Board by early next quarter while the LSE securities will be quoted on SGX’s GlobalQuote by 1H13. Recall the October 2010 quoting of ADRs of Asian companies on GlobalQuote, which met with limited improvements in ADT (partially attributed to the market conditions). Whilst we are positive on SGX’s continued innovation to develop new products, the benefits may only show up in the longer term. The current market conditions could lead to continued weakness in ADT. Our target price of S$5.00 is premised on FY13 ADT of S$1.5 billion, versus the MTD ADT of S$1.1 billion. The risk of market players lowering their ADT expectations is high. – OSK-DMG


Tiger Airways (BUY; Target Price: S$0.92)

Tiger Airways Singapore saw a 15 per cent YoY increase in carriage to 645 million p-km in June 2012, while load factor stayed flat at a robust level of 86 per cent. This is an improvement on May 2012 load factor of 82 per cent, and indicates that demand is finally catching up with the significant capacity increase in Singapore operations in FY12. Operations in Australia also continue to register improvement, with load factor improving from 74 per cent in April and 75 per cent in May to a healthy 82 per cent in June. As a group, passenger carriage (RPK) in the month of June 2012 rose by 3 per cent YoY to 831 million p-km on a slight decrease in load factor by 1 ppt to 85 per cent, as group capacity rose by 4 per cent YoY. Tiger Airways also recently announced the appointment of Koay Peng Yen as its new CEO, to take over from Chin Yau Seng, who will be returning to Singapore Airlines after doing a commendable job in restoring confidence in the carrier. Koay has served in top leadership roles in the marine, offshore and shipping industries in the recent past, including a long stint at NOL Group, and though he has no prior experience in the airline industry, he brings proven leadership and strategic skills to the table and his appointment lends stability at the top to take the Tiger story forward. Looking ahead, with Tiger Australia having started operations from its second base in Sydney on July 1 and gradually restoring flights to pregrounding scale by October 2012, we expect the carrier to move steadily towards profitability and expect the group as a whole to be profitable by the last quarter of CY2012 (3QFY13). – DBS Vickers