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COSCO Corp (SELL; Target Price: S$0.84)

COSCO Corp’s net profit attributable to shareholders decreased by 13 per cent YoY to S$27.6 million such that 1H12 net profit formed 50 per cent and 43 per cent of ours and the street’s full year estimates. Revenue was flat at S$975 million, but gross profit jumped 56 per cent YoY to S$117.4 million due to higher contribution from ship repair, conversions and offshore engineering. However, the gains were offset by lower other income (S$34.0 million) and higher net interest expense (S$13.2 million). Unlike previous quarters which saw provision of losses for certain contracts (due to cost overruns), COSCO recorded S$15.9 million of write-backs in 2Q12. Excluding provisions and write-backs of expected losses on construction contracts, the group’s (adjusted) gross margin recovered to 10.4 per cent for 2Q12. As quarterly margins are historically volatile due to variation of orders, this ‘margin recovery’ may not be sustainable. Management is also not optimistic. Shipbuilding margin is likely to remain under pressure due to low values of contracts secured in 2010, while the offshore segment is expected to incur higher execution costs going forward. The group faces significant headwinds in its transition into an offshore yard. Without an established track record, the group may need to bid for jobs at low margins or with back-loaded payment schedules, resulting in higher balance-sheet risks. Furthermore, COSCO’s broad range of outstanding offshore jobs – many of which are new to the group – imply higher risks of cost over-runs. We adjusted our model slightly to incorporate the latest results and keep our SELL rating and S$0.84 fair value estimate unchanged. – OCBC Investment Research


Hyflux Limited (HOLD; Target Price: S$1.45)

Revenue was up 71 per cent YoY to S$190.4 million, on the back of higher contributions from Asia ex China. PATMI (net profit) grew by 21 per cent YoY to S$17.5 million, though gross margin shrank from 50 per cent to 35 per cent due to additional overhead and manpower costs for the Magtaa project, higher staff and financing costs, and the shift of order book profile from MENA (projects with higher margin) to Singapore where lower margins are offset by a more secured earnings profile. 1H12 results have met only 30 per cent of our FY12F revenue, compared to 40 per cent in the last few years. In Singapore, Tuaspring is progressing well, with the desal plant slated for completion in July 2013, and the on-site power plant in the following year. In India, financial close for this desalination project in Dahej is set for year-end. In MENA, the Magtaa desal plant will be ready for commissioning by year-end. Generally, activities in China have slowed down with the impending change in leadership. Despite the challenging global outlook, management is optimistic about the opportunities present in MENA, especially in Algeria, Saudi Arabia, Oman, Qatar and Kuwait. The Arab Spring brought about a drought in water contracts for the past 2-3 years, and hence, there is pent-up demand now. As the region comes to realise the advantages of membrane desalination over thermal desalination, there would be more contracts up for grabs. However, margins may dive as competitors fight for contracts after the long hiatus. We believe Hyflux is bidding for 2 major projects in Saudi and Oman but the outcome will only be known months later. Following our downward revisions on FY12/13F by 30 per cent/27 per cent to reflect lower sales and margin, we have also revised down our SOTP fair value for Hyflux to S$1.45. Upside risks to earnings would be better than expected margins or earlier than expected completion of orderbook. – DBS Vickers


Marco Polo Marine (BUY; Target Price: S$0.53)

Marco Polo Marine (MPM) reported a 32 per cent YoY fall in revenue to S$14.4 million but saw a 104 per cent rise in net profit to S$8.9 million in 3QFY12. Its results were above our expectations as we were forecasting net profit of about S$5 million for the quarter. Higher gross profit margins and a reversal of share of losses in associate BBR helped to boost net profit by 110 per cent QoQ. The group enjoyed higher gross margin of 32.0 per cent in 9MFY12 vs 25.2 per cent in 9MFY11, mainly due to the ship repair division which generated substantial increases in ship repair and outfitting revenues at higher yields, particularly in 3QFY12 when all three dry docks were in full operation. We note that the group has found its niche in smaller and medium-sized vessels, servicing them well with a short turnaround time. Recall that BBR had been impacted by unrealized foreign exchange losses in 1HFY12 due to movements in the USD against the IDR. As BBR has successfully changed its functional and presentation currency to the USD, MPM reversed its share of earlier losses from BBR (from loss of S$1.1 million to profit of S$0.9 million in 1HFY12) in 3QFY12. We estimate BBR contributed about S$1.5 million to the group in 3QFY12. The group has seen an increase in enquiries for ship repair, outfitting and conversion services. As for the chartering side, MPM expects charter rates for offshore vessels as well as tugs and barges to remain stable, based on recent enquiries and indications. We have tweaked our estimates to incorporate higher margin assumptions as well as BBR’s new functional currency. Rolling over our valuation to 8x blended FY12/13F earnings, our fair value estimate rises to S$0.53 (prev. S$0.43). Meanwhile, the stock has fallen by about 18 per cent since its last high in mid March. – OCBC Investment Research


Neptune Orient Lines (HOLD; Target Price: S$1.23)

With significant freight rate increases between March and May 2012, NOL should improve its showing significantly when it reports 2Q12 results next week. After posting two quarters of huge losses, we expect NOL to move closer to breakeven in 2Q, given that bunker fuel prices have also eased during that period. Bunker fuel prices tend to have a lagged impact on earnings, though, and will likely have a bigger impact on 3Q12 earnings. In the absence of a strong demand push, the proposed peak season surcharges haven’t met with much success as yet – with spot rates still largely around early June level for the main lanes – but we don’t see too much risk of a sharp decline in rates as long as the current carrier discipline continues to hold. We remain hopeful that major liners, led by Maersk, will remain more focused on profitability than market share in the near term. The unfavourable containership demand-supply mismatch will of course, continue to pressure rates, but we are looking for a gradual slide downwards in 2H12 at worst, unlike the sharp fall last year. We revise upwards our earnings estimates for NOL to account for the likely impact of cost savings initiatives by the management as well as lower bunker fuel prices, but overall profitability should continue to be choppy, at best, for the remainder of FY12 and FY13, generating sub-par ROEs. However, with more confidence in carrier discipline and a lower probability of market share wars resuming, we upgrade the stock to HOLD from FULLY VALUED, with a revised target price of S$1.23, pegged to 0.9x P/BV, after accounting for an estimated US$200 million gain on the proposed sale of NOL’s headquarters building in Singapore. – DBS Vickers


Sarin Technologies (BUY; Target Price: S$1.66)

2Q12 results came in within our expectations with revenue of US$18.2 million and net profit of US$6.6 million. 1H12 revenue and net profit both made up about 47 per cent of our previous FY12F forecast. Sarin also declared an interim dividend of 1.25 US-cents per share. With some headwinds in India, we reduce FY12F net profit forecast by about 9 per cent which resulted in a lower target price of S$1.66, based on 16x FY12F PER. However, we remain optimistic on its long term growth prospects given the positive developments in new products. Sarin delivered another 14 Galaxy systems in 2Q12, bringing the total installed base of Galaxy systems to 83, well on track to meet its full-year target of 100 installed Galaxy systems. Galaxy-related sales accounted for more than a third of its overall revenue in 1H12 while recurring revenue made up about 20 per cent of total sales for the same period. A situation of high rough diamond prices and expectation of fall in polished prices have resulted in Indian manufacturers holding out on purchasing of rough stones, and wholesale traders delaying purchase of polished stones. Indian manufacturers also face a liquidity issue and could put off capital equipment spending. These factors could impede Sarin’s business in the short term. However industry players are expected to restock soon in preparation for the coming holiday season given that their inventory levels are low, which would alleviate the current situation. We expect the headwinds to dampen 3Q12 performance but this could dissipate as early as towards the end of 3Q12 resulting in a normalised performance in 4Q12. Sarin would continue to roll-out products for the polished diamond trade, which we believe would fuel its next leap of growth. Sarin remarked that interest and positive feedback for the Sarin LightTM exceeded its expectations. We expect news of any established commercial agreements with major opinion leaders to be a positive trigger for share price. – Maybank Kim Eng Research


Sembcorp Marine (BUY; Target Price: S$5.85)

SMM’S 2Q12 recurring PATMI (net profit) of S$145 million was below our and consensus expectations; 1H12 core PATMI of S$258 million forms 36 per cent of our FY12F. 2Q EBIT margins declined by 6 per cent YoY to 13.1 per cent on initial lower margins on new design jackups, and forex translational losses. SMM maintained its 5.0 S-cents interim DPS. Despite the continued macro uncertainties and volatile oil price environment, SMM has secured S$3.1 billion orders YTD. Indeed, SMM notes sustained order enquiries across all segments. Aside from the impending Petrobras drillship orders worth S$5 billion, SMM is in line to secure fabrication and integration contracts for at least 2 Petrobras-owned FPSOs, as reported by Upstream. We believe SMM is also a strong contender for 2 harsh environment “Cat J” jackups for Statoil; these could easily boost SMM’s current S$6.6 billion backlog beyond 3Q08’s peak. We have now taken the 5 outstanding Petrobras drillships in our FY12 order wins assumption of S$11 billion. We have reduced our FY12F by 8 per cent on weak 1H12 and a reduced EBIT margin assumption of 14.5 per cent. Our FY13F is intact, with the initial contributions from the assumed Petrobras rig orders to offset adjustments to our orderbook recognition schedule. We expect earnings to pick up in 2H12 and rebound 17 per cent YoY in FY13 as deliveries could see risk contingencies reversed and booked into profits; efficiencies from repeat designs; and contribution from new yard kicks in. SMM is a prime beneficiary of the current upcycle of deepwater, harsh environment rigs. We see near term catalysts in the form of strong order wins momentum and better quarterly earnings ahead. – DBS Vickers


StarHub (SELL; Target Price: S$3.06)

 StarHub will report 2Q12 results on August 8 and earnings should rise on seasonal strength. The stock’s continued rise is a good chance to take profit, in our view, as the launch of a new iPhone in 3Q12 can be expected to depress margins in 2H12. Also, yields have been compressed to historical lows and we do not expect upside in dividends given potentially heightened capital commitments next year for BPL and 4G spectrum cost. Given benign competition during the quarter, we expect service revenue to grow YoY and QoQ, driven by mobile and Pay TV, which had the benefit of Euro 2012 revenue in June. Topline is expected to grow 5 per cent YoY to S$600 million while net profit should rise 15-20 per cent YoY to S$90-95 million, aided by better margins from lower subsidies, fuelled by higher Android sales. However, 2H12 is expected to be hit by lower margins given the impending launch of a new iPhone. The important factors to look out for are EBITDA margin, Android handset mix, pay TV content cost and management tone on dividends. Finally, do keep an eye on the Samsung/Apple legal tiff as it is likely to impact future phone prices and telco subsidies. – Maybank Kim Eng Research