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CapitaRetail China Trust (BUY; Target Price: S$1.70)

We believe that CRCT deserves a scarcity premium since, as we understand, it is the only pure-play mainland China retail REIT in the world, offering positive exposure to structural shift towards domestic consumption in the second largest economy. In our view, the closest two peers are Hui Xian REIT and Perennial China Retail Trust. Hui Xian is a mixed PRC REIT play, which exposure to mainland retail, office and hospitality segments. Perennial is a PRC retail development trust and is thus exposed to development risks. Hui Xian and Perennial are trading at Bloomberg consensus yields of 7.8 per cent and 6.7 per cent respectively. China’s real GDP grew by 7.8 per cent YoY in 1H12. 1H12 total retail sales of consumer goods grew faster at 14.4 per cent. On a long term basis, retail sales growth should continue to outpace GDP growth as people increasingly turn towards organized retail with urbanization and rising disposable incomes. CRCT has nine malls in first-tier and second/third-tier cities. We believe the vicinity of the four Beijing malls will see limited increase in retail supply space over the next few years. Occupancy in CRCT’s portfolio is good at 97.1 per cent, the highest among the overseas retail S-REITs; we note Lippo Malls Indonesia Retail Trust’s occupancy is at 94.7 per cent while Fortune REIT’s occupancy is at 96.5 per cent. Given the recent run-up in REIT share prices across the board and general yield compressions, we believe that CRCT’s FY12F dividend yield of 6.4 per cent is fairly attractive. For example, local retail REITs are trading at Bloomberg consensus dividend yields of 5.0 per cent-5.9 per cent. Among the overseas retail REITs, although CRCT’s forward yield is lower than LMIRT’s 7.4 per cent, it is higher than FRT’s 5.9 per cent. We lower the cost of equity assumption in the DDM model for CRCT from 9.5 per cent to 8.6 per cent to better reflect the prevailing lower interest rate environment. We raise our fair value from S$1.50 to S$1.70 and maintain our BUY rating on CRCT. – OCBC Investment Research

 

CH Offshore (HOLD; Target Price: S$0.44)

CHO posted FY12 recurring net profit of US$30 million – within expectations. Revenue declined 12 per cent YoY to US$51 million on a smaller fleet as a vessel was sold to an associate to comply with the Indonesian Cabotage Regulations. Since FY11, CHO has disposed a total of four vessels to this associate, in line with its strategy to take advantage of the relatively higher utilisation and charter rates in the captive Indonesian market. This strategy has been successful thus far with FY12 income from associates rising 205 per cent to US$4.3 million. CHO maintained a final DPS of 2.0 S-cents, in line with expectations, but also declared a 2.0 S-cents special DPS, bringing total FY12 DPS to 4.75 S-cents, or a yield of 12 per cent. Its balance sheet remains robust with net cash per share of 10.9 US-cents, forming 34 per cent of its market cap. We maintain our view that the AHTS charter market has bottomed out and is recovering, but current day rates are still only 60-80 per cent of previous peak levels. Indeed, management has also noted an improvement in demand for offshore support vessels. Notwithstanding, the recent conclusion of long-term charters of two 12,240 bhp AHTS deployed to Latin America introduces earnings risk given a lack of visibility on the future deployment of these vessels. We see limited upside from the current share price on potentially weaker FY13F earnings and poor visibility. Nonetheless, we keep our HOLD recommendation for its attractive yield, undemanding valuations, strong balance sheet/cash flows, with valuations supported by its RNAV of S$0.68. – DBS Vickers

 

CWT Limited (BUY; Target Price: S$1.90)

2QFY12 net profit of S$19.3 million was marginally below our expectations but still significantly above consensus. With recurring net profit of S$44.1 million for the first-half, CWT remains well on track to meet our lofty expectations of profit doubling to S$100 million this year. We now expect consensus to adjust earnings upward to account for continued traction of CWT’s commodity trading business. YoY comparison is not meaningful given that there was no commodity trading contribution last year. On a QoQ basis, recurring net profit of S$19.3 million was below last quarter’s run-rate of S$24.8 million. This was partly due to start-up costs to put in place an Asian office to expand the commodity trading business, which we earlier alluded to in our July 12 report “The 100 million Dollar Question”. Admin costs were up S$3.7 million on a QoQ basis. Despite concerns about a slow-down in China, we understand volume was actually higher than last quarter. Profit came in lower due to slightly lower margins but this is part and parcel of the business, sometimes also arising from timing of accounting cost and contract recognition. More importantly, the team expects to sustain this performance into the rest of the year, which implies a net profit contribution of around S$45 million. A S$22.5 million gain for sale-leaseback of 49 Pandan Road will be recognised in the next quarter, while development of the 725,000 sq ft Cold Hub 2 remains on track for completion by the middle of next year. Singapore warehouse space, in particular ramp-up ones, is expected to remain in great demand. CWT’s existing landbank should be supportive of further development gains for the next five years. While the balance sheet appears heavily-geared (net debt/ equity of 71 per cent), we differ from this consensus view. Company presentation now clearly shows most of the debt relates to trade financing for the commodity trading business. To be clear, these debt are secured against each individual trade with no other recourse; and at the MRI level with no recourse to parent CWT. We estimate net debt excluding this is negligible at less than S$50 million. We see very limited downside to the stock but significant growth potential. – Maybank Kim Eng Research

 

Fortune REIT (HOLD; Target Price: HK$5.33)

In June, the value of HK retail sales climbed 11.0 per cent YoY due to resilient local demand and an increase in the number of tourists. The rise was greater than the comparatively low 8.7 per cent YoY increase seen in May, and was above the 8.2 per cent median forecast from a Dow Jones Newswires poll. Given that the indexes for private retail rents and prices for May were up 2.4 per cent and 3.8 per cent MoM, we are mildly optimistic that there could be further increases in the months ahead. FRT is arguably exposed to one of the more resilient sectors in the HK real estate market – suburban retail. We note that 57.5 per cent of the gross rental income is in the non-discretionary categories (Services & Education, F&B, Supermarkets, Homewares, Wet Markets and Community Services). We have just visited Fortune City One, Ma On Shan Plaza, Fortune Metropolis and Provident Square, which was recently acquired in February 2012, and observed that a substantial component of FRT’s tenant sales were resilient in nature, e.g. F&B outlets were quite full during weekday lunch and dinner periods. FRT’s closest peer is The Link REIT. FRT is the purer HK retail play since The Link has about a fifth of its revenue from carparks. The Link is offering a consensus FY13 (end March 2013) DPU yield of 4.2 per cent. In comparison, FRT’s estimated FY12 yield is reasonably attractive at 5.9 per cent. Fortune is trading at a P/B of 0.66x (NAV per unit of HK$8.34) and an estimated FY12 dividend yield of 5.9 per cent. We last wrote about FRT on July 23 following its excellent 2Q12 results. The share price has since jumped 10.2 per cent to HK$5.49. We maintain our fair value of HK$5.33 but downgrade FRT to HOLD on valuation grounds. – OCBC Investment Research

 

Keppel Corp (BUY; Target Price: S$13.80)

Keppel has firmed up the contracts for five DSS™ 38E semisub rigs with Sete Brasil valued at US$4.1 billion. The latest announcement is a follow up to the Letter of Intent awarded in April 2012. With the latest firm contracts, Keppel will be building six semisubs for Sete Brasil. The six drilling rigs are scheduled for delivery in 4Q2015, 4Q2016, 3Q2017, 2Q2018, 4Q2018, and 3Q2019. The rigs will be chartered to Petrobras for a period of 15 years and operated by Queiroz Galvão Óleo e Gás SA (three units), Petroserv SA (two units) and Odebrecht (one unit). We estimate that the contracts lifted Keppel‘s YTD order win to S$7.1 billion and net orderbook to S$12.8 billion. The orderbook is near its record level of S$13 billion achieved in 2008. We keep our FY12-14F earnings estimates unchanged as we have factored in the five semisub orders. We remain positive on Keppel: with a high orderbook, Keppel can afford to be selective with new jobs and pick the ones with higher margins; we believe Keppel has the capacity to win S$3-4 billion new jobs in the near-term before order momentum slows down. Excluding the Sete rigs, Keppel has won S$2.1 billion new orders YTD compared to our FY12 forecast of S$6 billion. – OSK-DMG

 

Noble Group (BUY; Target Price: S$1.42)

Noble is announcing 2nd quarter results next Monday 13th August. We are expecting some weakness in operating numbers due to the difficult environment, but that should not be a major surprise to the market. Recurring net profit should come in the lower end of its recent normalised quarterly run-rate of US$130-US$150 million, though that will be padded by gains on the Yancoal deal. The Yancoal-Gloucester Coal deal was completed during the quarter, which should reflect in a one-off profit gain of about US$200 million. This by itself should provide a marginal 5 per cent uplift to book value/ share, which stood at 74 US-cents/ share last quarter. Further to that, the capital distribution of some US$400 million should come in handy for Noble which appears to be on the opportunistic M&A mode again for value assets. Both the coking and thermal coal markets have experienced significant weakness in 2012, due to factors such as slower demand from key Asian markets like China as well as a shift to cheaper natural gas in the US. While this would have been a more significant negative impact for Noble normally, it is mitigated by the consolidation of its ASX-listed subsidiary Gloucester Coal merging into the bigger Yancoal. The latter is in the stage of ramping up production aggressively on reserves, which should be supportive of growth. One of the factors which pulled down Q1 profit was the first time consolidation of cost at its two new sugar mills in Brazil (Q1 has no harvest). However, wet weather continues to hamper production since then, with output down 29 per cent YoY according to Unica. As a result, production is now likely to peak only in the 2nd half of the year, which may result in a slight drag on 2nd quarter earnings. In the agriculture sector, Soybean crushing margins, which has historically been an important factor in Group earnings will likely continue to be soft due to overcapacity in China. – Maybank Kim Eng Research

 

Singapore Land (HOLD; Target Price: S$6.49)

Singland’s 2Q12 results were within expectations, with net profit down 83 per cent YoY to S$46.5 million on a 40 per cent drop in revenue to S$104.2 million. The decline in bottomline also reflected a lower revaluation surplus of S$5.6 million. Operations-wise, the drag on topline was due to lower progressive billings from The Trizon as well as a dip in hotel contributions as a result of closure of Pan Pacific Hotel for renovation works. Office rental income remained relatively stable YoY. Share of associate contributions also dipped 30 per cent YoY on lower revaluation surplus from Marina Square office and retail assets. Looking ahead, we expect office rental income to remain relatively stable for the remainder of this year as landlords continue to hold onto rents and as demand continue to trickle in. The latter is largely from the oil and gas as well as legal services sector. Residential contributions are expected to pick up pace with the Archipelago under construction and acquisition of 2 sites at Jervois and Farrer Rd totalling 245,000 square feet of GFA from the GLS earlier this year. The renovation of Pan Pacific Hotel is also expected to be completed in 4Q12 and resumption of activities should boost earnings. We retain our HOLD recommendation with a target price of S$6.49, pegged to a 35 per cent discount to RNAV of S$9.99. While valuation is not expensive, there is no compelling buy catalyst in the near term. – DBS Vickers

 

United Envirotech (BUY; Target Price: S$0.425)

United Envirotech Limited (UEL) saw its 1QFY13 revenue surging 54.2 per cent YoY to S$20.8 million, meeting 20 per cent of our FY13 estimate. Net profit jumped 66.3 per cent to S$5.9 million, or 25 per cent of our full-year forecast, was also aided by the increasing treatment revenue, which comes with much higher margins. By segments, Engineering jumped 58 per cent YoY to S$25.3 million, largely due to EPC work to upgrade the Liaoyang TOT project. Some 30 per cent of the RMB104 million contract has been recognised, with another 60 per cent likely to be recognised in 2QFY13. Treatment revenue rose 42 per cent YoY to S$6.8 million. Management expects revenue to stabilise at S$7 million/quarter. Management believes there are opportunities for TOT/BOT/BOO investment projects in China and is actively seeking out suitable projects. At end-June, UEL is sitting on a cash balance of S$98.6 million. This puts it in a strong position to compete against other domestic bidders, given the current onshore credit situation is still relatively tight. Based on its usual 40:60 equity-debt funding ratio, we estimate that UEL can finance up to S$245 million worth of additional projects. Management expects UEL’s growth momentum to outperform that of FY12 and cited the growing demand for membrane-based water and waste-water services. Demand for such services are driven by the stricter discharge limited imposed by the Chinese government and the shortage of water supply in various parts of the country. Upgrading of old water treatment plants also holds great promise and UEL has embarked on several of such projects, including some of its existing plants. – OCBC Investment Research

 

United Overseas Bank (BUY; Target Price: S$21.30)

UOB reported 2Q12 net earnings of S$713 million, above market expectations of S$628 million based on information from Bloomberg. This is up 12 per cent YoY. Net Interest Income up 7 per cent YoY to S$981 million, very much in line with its peers. Non-interest Income up 20 per cent YoY to S$629 million. Fee and Commission Income performed well, up 7 per cent QoQ to S$386 million, a new quarterly high. Net Interest Margin (NIM) fell in line with the industry, down from 1.98 per cent in 1Q12 to 1.92 per cent in 2Q12. Cost-to-income ratio remained relatively flat QoQ around 41 per cent, but was better than last year and lower than its peers’ of 43-45 per cent. For 1H12, net earnings amounted to S$1,401 million, up 12 per cent. While loans growth was modest at only 1.4 per cent in 2Q12 and NIM eased, there were some positive indicators in 2Q12 despite the general slowdown in economic growth. These include lower costs and higher fee income (corporate finance, wealth management, trade and loan-related). In particularly, we expect trade finance and wealth to still see growth. However, margin compression is likely to remain, echoing the same view as its peers. Chairman Wee Cho Yaw has announced that he will relinquish this role and former SGX CEO Hsieh Fu Hua will be taking over. We do not expect this move to have any impact on its business strategy or outlook. Meantime, we have raised our FY12 earnings estimate from S$2,570 million to S$2,732 million, up by 6 per cent due to the stronger-than-expected 2Q12 fee income. The stock has performed well this year, up 31 per cent YTD to S$19.95 currently. We remain positive on UOB’s fundamentals, but in view of the current market headwinds, we prefer to be prudent and retained our valuation methodology of pegging at 1.5x book. – OCBC Investment Research