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Bumi Armada (HOLD; Target Price: RM3.36)

Although Bumi Armada Berhad (BAB) reported a 52.6 per cent YoY increase in 2Q net profit to RM91.9 million, the results were generally below ours and the street’s expectations. 1H12 net profit attributable to shareholders was RM182.6 million and formed only 40 per cent and 33 per cent of ours and the street’s full year estimates. During the quarter, gross margin improved to 40.0 per cent and net margin increased to 23.9 per cent due to changes in product mix (the FPSO division typically yielded higher margins). 1H12 performance of BAB’s four different business division was mixed. FPSO revenue increased 32.1 per cent YoY to RM337.6 for 1H12, mainly due to contribution from its Apache contract. For the OSV division, revenue increased by 10.2 per cent YoY to RM235.8 million, on the back of increased fleet size and higher utilization rates. T&I performance was flat at RM142.6 million for 1H12. The newly renamed OFD – Oil Field Development division (previously Oil Field Services; no change in business composition) recorded only RM3.7 million of revenue in 1H12, due to delay in the award of marginal field contracts. In 1H11, it booked in RM158 million in revenue from the conversion and sale of an FSO to Petrofac. With the uncertainty in the global economy, oil companies have turned more cautious and have delayed the awards of FPSO contracts. This has inevitably affected BAB (and other FPSO operators). We now cut our two FPSO wins per year assumption to just one for FY12-13F, and lowered our FY12-13F EPS by 9-16 per cent. Accordingly, our fair value estimate decreases to RM3.36. – OCBC Investment Research

 

Dyna-Mac Holdings (BUY; Target Price: S$0.52)

Dyna-Mac Holdings Ltd’s 2Q12 results improved significantly with a 145.7 per cent QoQ jump in revenue to S$57.8 million and a 82.6 per cent QoQ increase in net profit to S$6.1 million. Management explained that the improvement was mainly due to faster revenue recognition as its projects proceeded into the middle stages. Gross margin was down to 22.5 per cent, from 28.8 per cent in the previous quarter, but we are not overly concerned because margins fluctuate quarter to quarter depending on yard utilisation and the settlement of claims on variation orders. The group has an orderbook of S$203 million as of August 14 and expects most of it to be recognised by year-end. It is already operating at full capacity in its Singapore yards and is starting production in its recently acquired China yard, DMP Marine Fabricator (DMF). DMF has an annual capacity of 10,000 tonnes and will contribute to 2H12F performance. However, as it needs to train its workers, we project a gradual increase in production over the coming 12 months. Besides DMF, Dyna-Mac disclosed that it has signed a 6-year tenancy agreement for a Johor yard. The Johor yard is currently undergoing some upgrading works and will begin production in 2013 with an initial output of 10,000 tonnes. The management remains optimistic about the outlook for production systems. The level of enquires that it received is healthy and it is currently bidding for a number of new jobs. We updated our model for the 2Q12 results and as we roll forward our projections to FY13F, our fair value estimate increases to S$0.52 (previously S$0.45). – OCBC Investment Research

 

Hong Leong Asia (SELL; Target Price: S$1.38)

HLA reported 2Q12 net profit of S$5 million, down 73 per cent YoY, representing 8 per cent of our previous FY12F. This is below expectations. Besides S$9.2 million PAT losses from Xinfei, Yuchai sold 21.5 per cent fewer diesel engines YoY and halved its PAT YoY to S$21 million. There was some marginal cushioning effect from building materials, which recorded a 9 per cent YoY rise in PAT. Xinfei sold 731,000 units of fridges and freezers, down 29 per cent YoY. This came on the back of systemically weaker demand for white goods. Though Xinfei ASP fell less than 3 per cent YoY, the volume decline led to S$9.2 million PAT losses for Xinfei. Management believes the new incentive program for energy-saving white goods, effective 1 June 2012 for one year, with incentives ranging from RMB180-400 per unit granted to qualified manufacturers, will have minimal benefits as the white goods industry move to the low season. We expect further Xinfei losses in 2H12. China Yuchai sold 109,000 units of diesel engines, down 21.5 per cent YoY, due to weaker demand in the commercial vehicle market, especially in the truck segment. China Yuchai recorded a 14.7 per cent YoY decline in net sales to RMB3.43 billion. However, the building materials unit performed well (due to robust growth in the construction industries in bother Singapore and Malaysia) and offset some of the negatives. The expectations are for continued weakness for HLA’s China operations in 2H12, due to the overall economic softness. We cut our FY12F net profit by 49 per cent to S$31 million (1H12 of S$18.9 million). Our target price is lowered to S$1.38, based on SOTP valuation. Due to the weak earnings, FY12 interim dividend declared was a lower 1S¢/share, compared with 3S¢ for FY11 interim. – OSK-DMG

 

Kingsmen Creatives (BUY; Target Price: S$0.83)

 Kingsmen once again did well, with its 2Q12 PATMI (net profit) rising 15.3 per cent YoY to S$5.2 million on the back of revenue growth of 24.1 per cent YoY to S$70.9 million. The results were in line with expectations. All business segments recorded growth in 2Q12, led by its exhibitions and museums division. Management is optimistic of its prospects, as can be seen from the growth in its orderbook. While management has always been constantly keeping in close contact with its clients to ensure timely collections, the improvement in end 2Q12’s net cash position (23.4 S¢/share) was largely attributed to a significant amount of progress billings and net collections received during the quarter. Kingsmen’s operations have always generated positive cash flows. We are estimating net cash of S$38.0 million as at end FY12. We remain positive on Kingsmen, given its pipeline of contracts, supported by relatively-strong consumerism in Asia, Singapore as one of the top MICE destinations in Asia and healthy growth of Asia’s amusement industry. We are keeping our estimates intact. Kingsmen is currently trading at 7.9x forward earnings, or 5.3x stripping out net cash. Ascribing a P/E of 7x, and taking into account our net cash estimate, we raise our target price to S$0.83. Maintain BUY, for a stock that has consistently distributed stable and attractive dividends. – OSK-DMG

 

Sound Global (BUY; Target Price: S$0.86)

SGL reported net profit of RMB116.9 million, representing a 7 per cent YoY increase. Results was driven by an 11 per cent rise in revenue to RMB740.9 million due to higher contributions from the O&M segment as BOT projects started operations (8-9 in operation now), as well as turnkey EPC services. Gross profit margins were a shade lower at 29.2 per cent, but management expects this to remain relatively stable at 30 per cent for the full year. For 1H12, net profit stands at RMB193.5 million, forming 42 per cent of our FY12F. SGL exited 2Q with cash of RMB1,990 million and net cash of RMB252.3 million. Although net cash has dipped lower as more borrowings were taken up for capital intensive BOTs, we do not expect the company’s balance sheet to be very much affected by the impending CB redemption due on September 2012. The expected proceeds of US$146.4 million from the recent senior notes will be more than sufficient to refinance the US$130.3 million worth of CBs. Our update with management indicated that its orderbook has been largely stable at RMB2.5 billion. This implies robust order wins of over RMB1.3 billion in addition to the RMB240 million of BOT contracts announced YTD. We understand that the bidding pipeline is healthy. This is supported by more stringent wastewater discharge standards in China, which is driving new and replacement demand of wastewater treatment plants. Despite the lack of new order announcements, we maintain our assumption of RMB1.7 billion for SGL this year. Operationally, we are positive on SGL’s business outlook as the long-term trend of the water industry in China is buoyant. Based on current cash on hand, we estimated the company has sufficient funds to invest in over RMB3 billion worth of BOTs to support organic growth for the next one to two years. However, near term share price performance may be affected by the outcome of the CB redemption. – DBS Vickers

 

ST Engineering (BUY; Target Price: S$3.60)

2Q12 net profit of S$143 million was slightly above our expectations of S$138 million, even after adjusting for S$12.8 million gains on the sale of investment property, which was largely offset by S$10 million allowance for doubtful debts. Revenue was up 10 per cent YoY and 7 per cent QoQ to S$1.57 billion, driven largely by the Land Systems and Marine sectors. 1H12’s net profit of S$277.5 million makes up 50 per cent of our existing full-year estimates for FY12, which is ahead of usual seasonality. Overall PBT margin improved sequentially to 12 per cent in 2Q12 from 10.5 per cent in 1Q12. Aerospace core PBT margin was strong at 15 per cent, compared to 13 per cent in 1Q12 and 13.5 per cent in 2Q11, owing to a favourable sales mix (higher heavy maintenance sales). Shipbuilding margins in the Marine segment also improved, despite an unfavourable fair value change of embedded forex derivatives in the S$880 million Oman navy contract, which is denominated in euros. STE won close to an estimated S$2 billion worth of new orders in 2Q12, as its orderbook expanded to record level of S$12.7 billion at end-2Q12 from S$12.2 billion at end-1Q12. About S$2.5 billion of its orderbook will be recognised in 2H12. Despite some acquisitions-related hiccups in the recent past, STE’s growth trajectory seems to be on track, driven by healthy order-win momentum and improvement in margins. We revise upwards our FY12/13F earnings estimates marginally by about 1-1.2 per cent to account for the above. Operating cash flows in 1H12 remained strong, driven by higher customer deposits, in line with healthy order wins. Interim dividend of 3 S-cents was declared, at par with 1H11 levels. – DBS Vickers

 

UE E&C (BUY; Target Price: S$0.71)

UE E&C’s 2Q revenue and net profit increased by 51 per cent and 62 per cent QoQ to S$85.5 million and S$6.4 million respectively. The construction pace hastened in 2Q and we expect it to pick up further in 2H12F as most of its development projects (i.e. Austville) are now substantially sold. Operating margin improved to 10.5 per cent (1Q12: 7.0 per cent) and remains within the typical 7-11 per cent range. As of end of June 2012, it maintains a strong net cash position of S$104 million. According to the management, the construction industry is facing a labour crunch with stricter foreign manpower quota. To alleviate labour supply concerns, UE E&C will focus on training and retaining its higher-skilled workforce. It will also continue to improve its processes and introduce new technology in project execution. UE E&C needs to quickly replenish its orderbook as the majority of its existing construction and engineering projects are due for completion within a year (by August 2013). However, project bidding can be tricky especially in the current environment. Besides the labour supply issue, contractors need to be wary of counterparty risks of their developers and suppliers. Should the slowdown continue, weaker contractors could also run into cash-flow problems. We continue to like UE E&C for its disciplined approach to project bidding. Its large projects are usually with government-linked entities or reputable business partners, implying lower counterparty risks. Its EC projects also carry lower risk – buyers need to fulfil a minimum occupancy period and are therefore less likely to be speculators. – OCBC Investment Research