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Ezion Holdings (BUY; Target Price: S$1.42)

2Q12 results were boosted by a US$13.8 million gain on divestment of a liftboat unit while JV income was 28 per cent lower QoQ at US$2.7 million as it was negatively affected by translation losses due to depreciation of USD against Euro. Excluding these effects, 2Q12 results were generally within expectations. Revenue came in at US$37.2 million with corresponding net profit of US$28.1 million. We expect a stronger core performance for 2H12 as contributions for its QCLNG project should kick in, as well as the deployment of unit-10, unit-11, and unit-12 service rigs and unit-14 liftboat in 2H12. Gross margins are expected to be sustained at current levels of 45-46 per cent. This has been a bumper year in terms of contract wins for Ezion with almost one new contract win a month. In addition to the US$71 million APLNG marine logistics contract announced last week, Ezion has secured a 5-year US$80 million service rig contract and signed another letter of intent to provide another service rig for US$87.6 million over a 4-year period. We believe that Ezion has the financial resources to fund its current projects. It established a S$500 million debt issuance programme earlier this year which we expect to be drawn down to fund requirements for its projects. This would drive net gearing up to near 100 per cent by end 2012. However, increasing operating cashflows as more units are deployed and projects get started should ease the gearing level subsequently. We expect it to turn free cashflow positive in FY14F. If it secures more projects, it may need to look at more funding sources, and making a sale-and-leaseback of its existing units is one option it may look at. – Maybank Kim Eng Research

 

Neptune Orient Lines (SELL; Target Price: S$0.90)

Neptune Orient Lines (NOL) reported a 2Q2012 net loss of US$118 million, hit by one-off charges of vessel write-downs (US$82 million) and restructuring cost (US$29 million). Global improvements in freight rates and prudent cost management have enabled NOL to eke out a marginal US$7 million core EBIT for 2Q2012 in its liner business, but a core operating profit margin of 0.4 per cent is hardly cause for euphoria. Investors believing that this 2Q2012 core operating profit signals a turnaround in the container shipping sector should be wary that risks still abound. The primary concern remains the persistent overcapacity situation which looks to only ease in 2014 at the earliest. It remains an uphill task to rely on liner co-operation to keep freight rates afloat, especially with the 8-10 per cent YoY forecasted capacity increases in 2012 and 2013. We also see a neutral-to negative demand outlook for the next 12 months in terms of global trade. We expect Asia-US exports to accelerate slightly in 2H2012 and then weaken in 1Q2013. In addition, we continue to see weak Asia-Europe demand trends, which are beginning to have an impact on business confidence in the US as well. These are not positive signs for an industry looking to fill its 10-18k TEU newbuilds looming over the near-term horizon.- Maybank Kim Eng Research

 

Pacific Andes (BUY; Target Price: S$0.178)

Pacific Andes Resources Development (PARD) posted a 43 per cent YoY drop in 3QFY12 net earnings to HK$146.1 million. This formed about 19 per cent of our full year estimate or a total of 78 per cent for the 9-month period – which is fairly in line with our expectations. Revenue dropped 15 per cent YoY to HK$2,530.1 million. However, net margin fell from last year’s 8.6 per cent to 5.8 per cent in the quarter. Fishery & Fish Supply accounted for about 47 per cent of revenue with the balance from the SCM business. The former saw a drop in gross margin from 38.5 per cent last year to 26.9 per cent this year. For the 9-month period, revenue was up 16 per cent to HK$8,302.7 million, while net profit was flat at HK$618.8 million. Management has acknowledged that the catch volume from the South Pacific is not up to expectations despite the potential size there. It is continuing with its strategy of better utilisation of vessels via re-deploying its assets to better yielding fishing grounds. Funds from the recent Senior Notes will be deployed in the coming months and are likely to be utilised to strengthen its business. As the 3Q results were largely in line with our estimates, we are retaining our fair value estimate of 17.8 S-cents. While fish consumption is fairly defensive and unlikely to be affected by the global economic slowdown, pricing, which has already eased in 3Q12, is likely to soften. Risks of this happening have increased especially in view of the still-uncertain economic outlook. As such, we do not see any near to medium term price impetus. However, yield is still healthy at more than 7 per cent based on the last done price of 14.8 S-cents. – OCBC Investment Research

 

Rotary Engineering (HOLD; Target Price: S$0.50)

Rotary Engineering Limited was hit by an unexpected S$46 million cost over-run for its SATORP project, resulting in a gross loss of S$5.9 million for 2Q12. As the losses occurred mainly on its 51 per cent-owned joint venture company, Rotary’s 2Q12 net profit after deducting minority interest was S$1.0 million, down 90 per cent YoY from S$10.2 million in the year-ago period. Excluding the SATORP cost over-runs, management said that its gross margin will still be lower at 15 per cent due to margin pressure from recent contracts. The S$46 million cost over-run for the SATORP project resulted from several inter-related issues. The original civil subcontractors responsible for the construction work were unable to cope with the schedule and more subcontractors had to be appointed at higher costs. There were also changes to engineering design that resulted in major civil re-work. In addition, piping and electrical and instrumentation activities were also affected due to work sequencing. Rotary is currently rectifying the issues but gave no guidance on additional cost going forward. The group’s orderbook is down 12 per cent QoQ to S$527 million as of June 2012 and will need to replenish its order-book urgently or risk a fall in operating efficiency. Its Fujairah project was again delayed by its client and the likely start date is now September/October 2012. Given the shortage of subcontractors in the Saudi Arabia market and the tight deadline for SATORP (Dec 2012), Rotary’s ability to manage the cost over-run situation may be limited. Therefore, we factored in another quarter of weak results and cut our FY12F EPS by 40 per cent. – OCBC Investment Research

 

Sembcorp Marine (BUY; Target Price: S$5.69)

Sembcorp Marine (SMM) announced this morning that it has secured contracts worth about US$4.0 billion from Sete Brasil for the design and construction of five drillships based on the proprietary Jurong Espadon drillship design. This is in addition to the US$792.5 million drillship contract that the group announced in Feb this year from Sete, bringing the total order win to US$4.8 billion for the six drillships, slightly more than our US$4.7 billion Brazil orders assumption for FY12. The units are scheduled for deliveries between 2Q15 and 2Q19; in comparison, KEP’s first semi-sub for Sete is slated to be completed in 4Q15. We are forecasting operating margins of 8-9 per cent for the first few units with upside from subsequent ones due to execution of repeated units. With these orders, SMM has secured about S$8.1 billion worth of new orders YTD, accounting for 93 per cent of our full year estimate. Though the long-awaited orders are finally announced, this does not mark the end of orders from Brazil as we expect more FPSO work from Petrobras. More specifically, Upstream had reported in Jul that Petrobras would award contracts worth about US$4.5 billion for the construction of topsides for six FPSOs soon. We expect SMM to be a beneficiary with about a US$700 million- US$1 billion share, but have not included this in our model. We estimate these orders bring SMM’s orderbook to about S$11.6 billion vs S$5.1 billion as at end 2011. This provides good earnings visibility at a time when uncertainty in the global economy has resulted in a general lack of clarity in corporate earnings outlook. Meanwhile enquiries for newbuilds outside Brazil remain healthy and SMM is seeing interest for various products which the group is well-positioned to secure given its reputation as a global market leader. – OCBC Investment Research

 

StarHub Limited (HOLD; Target Price: S$3.47)

StarHub Ltd posted 2Q12 revenue of S$590.7 million, up 3.0 per cent YoY but flat QoQ, and was just 1.6 per cent shy of our estimate. Net profit jumped 11.3 per cent YoY to S$86.8 million, and was about 5.9 per cent above our forecast. For 1H12, revenue was up 4.8 per cent to S$1,181.7 million, meeting 49.2 per cent of our FY12 forecast, while net profit grew 19.1 per cent to S$175.2 million, meeting 53.7 per cent of our full-year forecast. Going forward, StarHub has maintained its previous guidance for the rest of the year, with revenue expected to grow in the low single-digit range. It has also kept service EBITDA margin outlook of about 30 per cent, versus 32.1 per cent achieved in 1H12, citing the impending launch of the iPhone 5 as the main reason. Cash capex will be 11 per cent of operating revenue, versus no more than 11 per cent previously, because it may accelerate its LTE roll-out with more LTE-enabled handsets expected to enter the market. Finally, it will continue with its S$0.05/share dividend per quarter, or a total dividend of S$0.20 this year, despite the likely higher capex spend in 2H12. As the numbers were mostly in line with our expectation, we are leaving our forecasts unchanged. However, with the low interest rate environment likely to continue into 2014, or even 2015, we are paring our required return from 6.8 per cent to 6.05 per cent. This in turn bumps up our DCF-based fair value from S$3.10 to S$3.47. But we maintain our HOLD rating from a valuation standpoint, given the stock’s strong outperformance YTD. We further note that StarHub is already trading at more than two standard deviations above its 3-year average EV/EBITDA. – OCBC Investment Research

 

Super Group (HOLD; Target Price: S$2.02)

Super registered a healthy set of 2nd quarter results, with reported net profit of S$17.5 million up 48 per cent YoY. Profit growth was supplemented by a small reversal in non-operating losses as well as a lower tax for the period. Stripping out these effects, we estimate underlying profit would show a growth of about 28 per cent YoY. 2Q12 revenue was down 2 per cent YoY but gross profit was up 11 per cent in the same period. One major factor for the profit growth was another sequential improvement in gross margins from 34 per cent in 1Q12 to 36 per cent in 2Q12. This is on the back of softer coffee bean prices at the start of the year. However, soft commodity prices have been elevated again in recent months and may negatively impact margins going forward. Key ingredients for Super also include sugar and palm oil. Sales of coffee in the branded consumer segment showed a decline of 11 per cent YoY. This was largely due to lower sales into Thailand, a major market for Super. Last year, A&P budgets meant for the 2nd half of the year was shifted forward to not coincide with the elections. Most other markets showed growth. Historically, sales are seasonally stronger in the 2nd half and that is factored into our estimates. Sales in this segment were down 8 per cent YoY despite higher capacity this year. Weakness stemmed from SEA markets, although management shared that new customers have been secured in these markets. On a positive note, sales into China, where new capacity expansion in non-dairy creamer was concentrated on, grew strongly by 185 per cent. This segment is seasonally stronger in the 2nd half, which will be a better gauge of growth traction. We adjust our FY12-FY14F estimates marginally upward by 3-5 per cent to account mainly for stronger gross margins as well as lower effective tax rates due to incentives. – Maybank Kim Eng Research

 

Valuetronics Holdings (HOLD; Target Price: S$0.21)

Valuetronics Holdings Limited (VHL) reported 1QFY13 revenue of HK$634.5 million, which represented a 20.4 per cent YoY jump and was within our expectations. However, PATMI dipped 18.7 per cent YoY to HK$25.7 million and missed our estimates due to lower-than-expected gross margin. Topline and bottomline formed 23.8 per cent and 18.8 per cent of our full-year estimates, respectively. VHL reclassified its three business segments into Consumer Electronics (CE), Industrial and Commercial Electronics (ICE) and Licensing this quarter, given the blurring differences between its previous OEM and ODM segments. Strong YoY revenue growth of 36.9 per cent in the CE segment was partially offset by weakness from its ICE (-9.0 per cent) and Licensing (-50.4 per cent) segments. What surprised us was management’s decision to cease its Licensing business given significant challenges ahead from a tepid US economy and intense competition which resulted in a shrinkage in its market penetration. We had previously estimated this segment to achieve breakeven in FY14. VHL expects to incur total termination expenditure of HK$28 million, which would be booked in 2QFY13. Management believes that it would likely incur heavier losses in FY13 if it continues the Licensing operations given significant advertising and promotion subsidies to retailers. We slash our FY13 and FY14 PATMI forecasts by 40.3 per cent and 28.0 per cent respectively, due largely to lower gross margin assumptions, but partially mitigated by lower operating expenses. We expect margin pressure for VHL to continue, given the decline in ASPs typical for LED lighting products and the ability of its largest customer to squeeze its margins in exchange for higher volume orders. We ascribe a lower valuation peg of 4.5x (previously 5x) to our FY13F core EPS estimate to reflect the group’s weaker fundamentals and increasing dependency on its largest customer. – OCBC Investment Research

 

Venture Corp (BUY; Target Price: S$8.72)

Venture Corp’s (VMS) 2Q12 revenue declined 2.7 per cent YoY to S$611.8 million, but this was within our expectations. PATMI fell 19.9 per cent YoY to S$33.6 million. This came in below our expectations due to lower-than-expected margins, attributed largely to a change in product mix as 2Q12 saw stronger volume sales from lower-margin products. PATMI was also boosted by a S$3.2 million gain on disposal of available-for-sale investments. Sequentially, topline grew 6.5 per cent but bottomline declined 5.3 per cent. For 1H12, revenue of S$1,186.1 million represented a YoY fall of 2.5 per cent, or 46.1 per cent of our original FY12 projection. PATMI dipped 16.8 per cent to S$69.1 million, forming 40.1 per cent of our full-year estimates. While we maintain our belief that FY12 would be a back-end loaded year for VMS, we opine that the recovery momentum in 2H would be less robust than we had previously expected. This stems from increasing cautiousness amongst key customers against the backdrop of the ongoing macroeconomic uncertainties. Management highlighted that it was more difficult to get a firmer visibility from customers, although there would still be new product launches, mainly from networking and communications, industrial and life sciences towards end 2012. We believe that more meaningful contribution would only come in FY13. VMS would seek to intensify its engagement with key customers with the aim of gaining more market share. In light of the still-tepid industry conditions, we slash our FY12/13F PATMI forecasts by 12.8/11.2 per cent largely on softer gross margin assumptions. Nevertheless, VMS’s financial position remains healthy, in our view, with net cash of S$227.4 million as at June 30. We forecast the group to generate S$146.8 million in FCF in FY12. This would solidify its ability to at least maintain its DPS payout of 55 S-cents in FY12F, in our view, which translates into a yield of 7.1 per cent. – OCBC Investment Research

 

Yangzijiang Shipbuilding (HOLD; Target Price: S$1.02)

Yangzijiang (YZJ) reported 2Q12 revenue of RMB3.94 billion and net profit of RMB0.88 billion, coming in within our expectations. 1H12 revenue and net profit respectively made up 45 per cent and 47 per cent of our FY12F forecast. While earnings for FY12F-13F are relatively secure, outlook for FY14F remains uncertain given weak orderbook momentum, margin pressure and cancellation risks. Order win momentum has not improved. YZJ has secured only US$295 million in new order wins YTD, against management’s expectation of US$2.0 billion. Meeting this full-year order win target is highly dependent on Seaspan, a customer, exercising its options for eighteen 10,000-TEU containerships. The initial value of the contract was estimated at about US$1.8 billion. However, given current depressed shipbuilding prices, Seaspan may be asking for a price reduction. We do not expect Seaspan to execute the full order for 18 vessels. Our order win assumption for FY12F is for US$1.5 billion. Current orderbook stood at US$3.8 billion consisting of 80 vessels. YZJ also saw the cessation of 8 shipbuilding contracts due to customers’ failure to meet financial obligations. It has collected an average of 15 per cent in deposits for those vessels and has subsequently sold 3 of the vessels at an average loss of 5 per cent. It is actively sourcing for buyers for the remaining vessels. Potential positives could come out from its move into offshore which may see some rig-orders by year-end. Its held-to-maturity assets, although often frowned upon, have kept overall profitability up, compensating for the weaker shipbuilding contributions. At bottom valuation but no positive triggers yet. We believe that current shipbuilding downturn would continue to weigh down on the stock and share price would remain at a depressed level even though valuation is at a bottom. – Maybank Kim Eng Research