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United Overseas Bank (HOLD; Target Price: S$19.0)

Compared to 1Q12, we anticipate a more subdued outcome when UOB reports 2Q12 results on 7th August after-market. But we don’t expect a large QoQ profit decline given the bank is pointing to fee revenue holding up reasonably well and 2Q seasonal revenue support from the receipt of dividend income. Trading revenue is likely to decline QoQ on weaker financial markets, the NIM should fall slightly and we suspect UOB will point to a more uncertain loan growth outlook. Although we expect low-teens loan growth guidance will be maintained, recent UOB feedback pointed to moderating GDP growth and a weaker outlook. Given lending is a pipeline business 2Q12 shouldn’t be affected, but loan growth seems set to moderate through 2012. Trade finance is still being impacted by the near term reversal of RMB arbitrage activity, although UOB is relatively less exposed here. While funding competition and mortgage portfolio churn are key headwinds, through 2012 NIMs appear likely to trend sideways across the sector. We’re not expecting any material credit quality deterioration, although note that 1Q12 credit costs were driven by individual impairments suggesting some collective provision top-up potential in this result. At 1.38 per cent, collective provision coverage remains well below recent highs (1.58 per cent 1Q10). – Deutsche Bank



Singapore Exchange (NEUTRAL; Target Price: S$6.69)

The key message from the CEO was that the exchange is looking at ways of firming up its risk management and capital adequacy (which is still one of the best globally), so as to reduce counter-party risks. This, in turn, may in future allow banks and brokers to allocate lower amounts of capital for trades where SGX is a counter party vs. other exchanges. While no methods of shoring up capital adequacy were precluded, we believe that the exchange will not need to lower payout ratios any time in next 3 to 5 years. The exchange is looking at four methods of increasing market velocity: attracting more IPOs, with more focus on retail allocation, Technology, which includes Reach (and eventually HFT), hubbing and co-location, Higher number of Index products, as well as structured warrants, ETFs and single stock derivatives, and Micro-structure, which includes continuous all-day trading, lowering bid-ask spreads, pre-trade risk control and introduction of circuit breakers. The introduction is in the works and will likely start in the next 12 to 18 months, but only after a clear framework on risk management is in place. – J P Morgan            


Fraser & Neave (NEUTRAL; Target Price: S$9.16)

The board of F&N will likely decide this Friday on Heineken’s offer to acquire its 40 per cent stake in Asia Pacific Breweries. The decision could come down to the following options. Option 1: Say No to Heineken’s offer citing APB being too strategic to F&N’s future and perhaps propose a review of the group’s strategy at a future date. Option 2: Put the offer to a Vote by shareholders of F&N since the offer is important for shareholders to vote on. The share price is likely to weaken if the board decides against the offer, while it will probably trade higher if the group puts the offer to a vote by shareholders. Our target price of S$9.16 is pegged at a 5 per cent discount to our SOTP of S$9.64 which is based on a value of S$50 per share for APB. – Nomura Equity Research


BreadTalk Group (HOLD; Target Price: S$0.560)

Despite the difficult operating environment during the second quarter of the year, we remain hopeful for a stable QoQ showing in BreadTalk Group’s (BTG) 2Q12 results, which are due to be released on 10 August. With around half of its revenue coming from Singapore – where F&B retail sales have declined on a MoM basis over the past three months – there would undoubtedly be some negative impact on its bakery and restaurant segments as consumers tightened up their purse strings. However, we do not anticipate a significant revenue drop-off from the previous quarter as BTG’s strong bakery brand equity and popular Din Tai Fung (DTF) restaurant chain will allow it to maintain its share of the market. Furthermore, we expect BTG’s operations in China and Thailand to provide additional support through strong sales in its bakery and Bangkok DTF respectively. 30 per cent of BTG’s cost of sales is attributed to raw materials such as vegetable oil, wheat, flour, corn etc, and the prices of some of these products have spiked sharply since the middle of Jun. Supplies of corn and wheat have been threatened by a severe drought in the United States and a heatwave across southern Europe, and that has led to a flurry of investment activity pushing prices to near 17 month highs. As BTG purchase its raw materials a few months out at a time, there will be a laggard effect before the higher costs hits its books. While we retain our confidence in management’s ability in controlling costs and highlight the general stability in gross profit margins, which indicates that BTG’s management is effective in their cost control initiatives i.e. inventory control, purchasing ability, we adjusted our FY12 costs of sales projections slightly to incorporate the likelihood of a sustained elevation in raw material costs for the year. This adjustment sheds a cent off our fair value estimate to S$0.56. Reaffirm our HOLD rating ahead of BTG’s 2Q12 earnings announcement. – OCBC Investment Research


China Minzhong Food Corporation (BUY; Target Price: S$1.160)

We visited Minzhong’s Tianjin king oyster mushroom farm last week. Management showed us the whole stack farming process and at the same time announced its plan to target a few more cities in China to replicate its Tianjin plantation model. In our view, this is a very important step towards the modernisation of the company’s agricultural operations and reducing its reliance on labour in the long run. Management also announced that it is looking at a few target cities to replicate its Tianjin model and build more similar factories to tap on rising demand for king oyster mushrooms in China. We believe that it is likely to open its next mushroom farm in two years, most likely near Hubei. Currently, the revenue split between “Process” (for foreign markets) and “Cultivation” (for the domestic market) is roughly 65-35. Going forward, management expects this ratio to gradually move towards 50-50. A more balanced revenue split would not only reduce default risks of European counterparties’ given the financial difficulties that many European companies now face, but also improve overall gross margins. We reiterate our BUY call with an unchanged target price of SGD1.16 after the company visit. The risk-reward profile of Minzhong is very attractive now, we believe. In our view, moving towards industrialised farming will not only see Minzhong gain an edge over its competitors but also somewhat ease investor concerns on corporate governance issues surrounding the whole S-chips sector. – Maybank Kim Eng Research