ST Engineering Expect flattish growth

Posted on November 8, 2011 by admin
  • 3Q11 core net profit below our expectations
  • High exposure to US and EU economies could limit growth potential
    in the near term; cut FY11/12F earnings by 2-5%
  • Downgrade to HOLD with lower TP of S$3.05

ST Engineering
The Little Book That Still Beats the Market
Earnings propped up by one-off items.
ST Engineering reported net profit of S$134m in 3Q11; excluding a gain of S$19m relating to write-back of allowance for inventory obsolescence and a S$8.5m impairment loss, core net profit of S$123.3m (down 5.3% y-o-y) fell short of our estimates. While 9M11 reported net profit of S$375m (72% of our FY11 forecast) was up 8% y-o-y – owing to the change in depreciation policy back in 4Q10 – 9M11 EBITDA was up only 1% y-o-y.

Guidance toned down.
The Land Systems division was the main under-performer in 3Q11, with revenue down 17% and PBT down 46% y-o-y as sales of specialty vehicles and ammunition dipped amid slow growth in the US and budget cuts in the EU. Excluding impact from change in inventory allowance estimates, Aerospace PBT showed the strongest growth, with PBT margin expanding to 15.5% from 14.1% in 3Q10 and 13.5% in 2Q11. However, in light of the uncertain economic situation, which could affect MRO demand and Land Systems sales in the short term, management adopted a more cautious tone, guiding for PBT to remain flat in FY11.

High exposure to US and EU economies.
This is via the aerospace division as well as other defense contracts. About 45% of Aerospace division revenues – which accounts for 33% of Group revenues and 45% of PBT – are derived from the US and EU countries. Given the weak growth prospects in these economies, we adopt more conservative assumptions and cut our FY11/12F EPS estimates by 2-5%. Downgrade to HOLD, given the flattish growth prospects, with a lower TP of S$3.05 (-1 S.D. from mean valuations earlier). Dividend yield of above 5% should support the stock during market volatility.

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Sembcorp Industries Utilities power up

Posted on November 8, 2011 by admin
  • 3Q earnings below forecasts but Utilities surprises on the upside
  • FY11/12F raised by10-11% as expect Utilities to power ahead
  • Maintain Buy with higher TP of S$4.90 based on SOTP

Utilities electrified 3Q performance.
Net profit of S$222.4m (-9% y-o-y), was 10% below forecast due to weaker Marine (-9%). But, Utilities outperformed, gaining 33% y-o-y to post a net profit of S$78.8m, 27% ahead of our expectation, thanks to higher power spreads in Singapore (+20%) and significant improvement at Australia’s (+24%) waste-collection unit.
China’s profits grew the highest, up 52%, on better utilization of the
water plants and higher tariffs at Caojing power plant in Shanghai. Cascal drove stellar growth at UK and Africa. Overall, 9M11 sales and profits were 75% and 80% of original forecasts respectively.

Utilities will continue to perform better in 4Q11 and FY12, as power spreads in Singapore (89% of Utilities contribution) is expected to remain high in the next two years and SembGas expansion, while slightly delayed to Nov from Oct, will raise gas supply by 26%. Margins are also likely to improve as the new woodchip boiler that commenced operations in Nov would lower the cost of steam generation while the renewal of some S$200m worth of contracts on Jurong Island holds potential for better pricing.

Overseas, China will benefit from the continuous ramp up in water plant utilization, Australia is expected to stay resilient as SembSITA is among the biggest waste collector in Australia, and Middle East will be supported by the 2nd phase completion of Salalah.

Maintain Buy, SOTP-based TP revised up to S$4.90 on Utilities earnings upgrade.
We raised Utilities earnings by 29% as 9M11 has already met 86% of our original forecast. Therefore, despite 5% lower Marine earnings, FY11/12F earnings are revised up by 11%/10% with SOTP-based TP raised to S$4.90. At current levels, SCI’s utilities is trading at an implied stub value of about 4.9x FY12 PE, vs historical average of 8-9x while the implied PE of SMM via SCI is 10.9x FY12 PE vs SMM’s current PE of closer to 12x FY12 PE. Maintain Buy on SCI.

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SingTel Major drag from Bharti

Posted on November 8, 2011 by admin
  • Bharti’s investors shrugged-off poor 2Q12 earnings as EBITDA is
    the key focus for Bharti which was marginally below street estimates.
  • However, lower Bharti’s earnings are likely to affect SingTel’s
    dividends; we trimmed SingTel’s FY12F/13 earnings by 4%/5%.
  • Trading at 1-year forward PE of 13.0x versus 13.2x historical
    average. HOLD with SOP based revised TP of S$3.32

Bharti is progressing slower than street expectations.
Bharti’s 1H12 EBITDA of Rs 115.2 bn makes up 46% of consensus full year forecast of Rs 250 bn. 2Q12 EBITDA of Rs 58.1bn (2% QoQ, 13% YoY) was 2-3% below consensus estimates, due to slower mobile subscriber addition by Bharti in India (5.8m versus 10m in 1Q12) and lower usage (423 min/sub versus 445) in response to the tariff hike. Bharti’s 1H12 earnings of Rs 22.4 bn stands makes up 32% of consensus full year forecast. 2Q12 earnings of Rs.10.7bn (-15% QoQ, -38% YoY) are 20% below consensus estimate, dragged by
(i)
higher finance charges and
(ii) exchange rate & derivative losses on unhedged debt in USD.

SingTel’s dividends are tied to group earnings with payout ratio of
55%-70%.
Bharti’s 1H12 earnings of Rs 22.4 bn have declined 33% YoY, about half of which came from derivative and accounting losses of Rs 4.3bn. We are optimistic and assume reversal of these losses in 2H12 and lower finance charges. This should lead to 15% decline in Bharti’s FY12F earnings followed by +13% in FY13F. This cuts Bharti’s projections by 25%/28%, leading to 4%/5% reduction in SingTel’s earnings.

We project FY12F yield of 5.2% versus 5.5% earlier.
Our SOP valuation is revised up due to higher market price of Bharti despite cut in our estimates. Next year growth at Bharti may partly be offset by challenges in Singapore (slowing economy & National Broadband Network) and Australia
(intense competition).

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CH Offshore 1Q12 disappoints

Posted on November 8, 2011 by admin
  • 1Q12 below on lower revenue, weaker margins and higher admin
    expenses
  • Cut FY12/13 by 11%/4%; spot charters present earnings risk while
    higher admin costs erode profitability
  • Downgrade to HOLD, TP cut to S$0.43

1Q12 below.
CH Offshore 1Q12 PATMI of US$6.4m (-11% y-o-y, -24% q-o-q) was below expectations. Revenue fell 14% y-o-y /7% q-o-q to US$12.3m on a smaller fleet, as CH Offshore had disposed 3 vessels to its associate in FY11 to comply with the Indonesian Cabotage Regulations. Gross margins also weakened to 53.3% (-2.6ppt y-o-y; -10.8ppt q-o-q), mainly on lower revenues against certain fixed overheads, while its SGD denominated admin expenses rose to US$1.1m (+41% y-o-y), largely on the back of a weaker USD/SGD, leading to overall earnings weakness.

Well-positioned for recovery in OSV market, but higher opex to delay
earnings recovery; FY12/13F cut by 11%/4%.
We believe that CH Offshore remains well positioned for a recovery in the OSV market, given its long operating track record and its young fleet of predominantly deepwater capable AHTS. However, in the near to medium term, three vessels on spot charters continue to present earnings risk, while higher admin expenses on persistent USD weakness would erode profitability. As such, we cut our FY12/13F by 11%/4%, factoring in lower utilization rate assumptions for vessels on spot charters and lower GP margins on relatively high operating leverage.

Downgrade to HOLD; TP cut to S$0.43.
Our TP has been correspondingly reduced to S$0.43, still pegged to 9x FY12 PE. Since we upgraded CH Offshore to BUY in August, the counter has generated a total return of 9.7% (capital gains + final DPS of 2.0 Scts). Current valuations are not rich (7.4x FY12PE, 0.8x P/BV) and should be supported by relatively attractive and sustainable dividend yield of 7.5% and estimated RNAV of S$0.57. However, we see limited catalysts for the counter. Key risks include potential earnings downside with 3 vessels on spot charter and delays in customer payments. As such, we downgrade CH Offshore to HOLD, with limited upside to our revised TP.
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Cosco Corporation Higher losses from offshore project

Posted on November 3, 2011 by admin
  • 3Q11 net profit below expectations, dragged by cost overrun in
    offshore projects; 9M11 account for only 60% of our /street estimates
  • Cut FY11-12 EPS by 15-16% on lower offshore margins and order win
    assumptions
  • Challenging operating environment ahead
  • Maintain Fully Valued, TP reduced to S$0.88.

Hit by provision for losses in offshore projects.
3Q11 results fell short of market expectations by 30%. Net profit came in similar to last quarter at S$32m (-42% y-o-y, +1% q-o-q). The main culprit was margin decline for the offshore segment due to cost overrun. Cosco provided S$47.4m for potential losses arising from penalty for late delivery for a project, extra cost on design modification and higher-than-expected equipment cost. As a result, offshore gross margin fell to <5% from 9% in 2Q11. This was mitigated by forex gain of c. S$20m. Group gross margin contracted 3.5ppt y.o.y. to 8.6%.

Cut FY11-12F earnings by 15-16%.
We have trimmed FY11-12F net profit by 15% and 16% respectively after:
1) lowering offshore margin by 1.0-1.5ppt; and
2) reducing order win assumption for FY11 by US$500m to US$2bn.
YTD order wins amounted to US$1.86bn.

Keen competition in offshore; slow orders for new vessels.
Order flow for both shipbuilding and rigbuilding are expected to remain slow in months ahead, amid the financial woes in Europe, tighter credit market and gloomy economic outlook. This has exerted downward pressure on newbuild prices as shipyards are fighting to secure orders to fill up their yards. Competition in offshore segment will intensify with new players in China. Cosco is sitting on a gross orderbook of US$6.4bn currently, which translates to book-to-bill ratio of 1.7x. This implies that Cosco would need to replenish its orderbook by mid-2012. Unless newbuild prices recover, shipyards will be taking in shipbuilding orders at a loss, given rising labour cost and RMB appreciation. About half of Cosco’s order book is from Europe,
including Greece, raising risks of delayed payments/cancellations.

Maintain FULLY Valued; TP lowered to S$0.88.
Our TP is revised down to S$0.88 following the earnings revision, still based on blended 13x PE and 2x P/BV. Maintain FULLY VALUED. Weak industry outlook, poor earnings visibility and steep learning curve would put pressure on share price performance. Key inflexion points would be sustained earnings turnaround, rebound in newbuild orders and shipbuilding prices amidst a positive macro/shipping outlook.

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Broadway Industrial Group

Posted on November 3, 2011 by admin
  • 3Q below forecast; FY11/12F cut by 85%/11% on higher non-HDD
    losses, higher labour costs & start up expenses
  • Thailand situation, while volatile, will allow BWAY to gain market
    share
  • Maintain Hold, TP lowered to S$0.32 based on 0.6x P/B

Net loss of S$9.9m due to forex losses.
As previously guided, BWAY recorded 3Q11 net loss of S$9.9m as a result of forex losses of S$13.2m, of which S$16.5m are unrealized MTM losses from hedging of USD/CNY and USD/SGD. Excluding forex losses, operating profit would be S$3.3m, which is below our S$4m estimate due to higher operating costs in China, weaker than expected non-HDD business (operating loss of S$1.1m) and start up expenses.

Sales was flat y-o-y at S$145.5m as higher foam plastic revenue (+30% y-o-y) offset lower turnover at HDD (-6.8%: weaker USD/SGD) and Non-HDD (–13.4%: weak semicon & auto demand).

4Q looks worse operationally.
HDD shipment is forecasted to plummet 28% q-o-q. Seagate expects 12%decline while WD expects a 58% plunge. For BWAY, we estimate a 16% drop in group sales, and significantly lower earnings because of further non-HDD losses, higher labour costs and start up expenses in China.

But BWAY looks like it could gain market share from Thailand floods. For a start, it has extra capacity in Wuxi to capture all customers’ requirements before its Thailand plant resumes in March 2012. More importantly, key customers Seagate and Hitachi are least affected by the flood and will snap up WD’s market share loss as 40% of the latter’s output is offline. On components, BWAY is poised to gain as smaller actuator rivals are falling out partly due to the floods. However, the current situation is still volatile and it remains to be seen if the spillover would flow to BWAY.

Hence, we are maintaining our HOLD call on the sotck. TP lowered slightly to S$0.32 based on 0.6x PB.

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STX OSV Holdings

Posted on November 3, 2011 by admin
  • Eksportfinans loan exposure to a single customer to be cut by 80%,
    limited impact to STX’s existing order book
  • But potentially negative for new order intake, as the move comes
    into effect from 2013.
  • Separately, STX OSV in the running for Petrobras-bound pipelay
    vessel, estimated at US$200-400m
  • Maintained BUY, TP unchanged at S$1.54

Eksportfinans to reduce single client loan exposure.
With the expiry of exemption to the European Union’s Capital Requirement Directive by end 2012, Norwegian export credit institution Eksportfinans’ maximum allowable exposure to a single client will be scaled down by 80% to c. NOK1.4bn, from the current NOK7.1bn. While half of STX OSV’s current projects are from customers backed by Eksportfinans, these projects were secured before the proposed implementation date (2013) and hence, limits the impact on its existing order book.

But potentially negative on new order intake for STX OSV
Nonetheless, we believe this presents additional uncertainty on the funding outlook which could affect new order intake for STX OSV. We had previously reduced our FY11-13 order wins assumption to NOK10.5bn / NOK10.0bn / NOK12.5bn, given possible order deferments amid ongoing economic uncertainty, and tightening credit market.

STX OSV could benefit from recent Petrobras pipelay orders. Separately, STX OSV is amongst the bidders for a newbuild pipelay vessel, to be built in Brazil. Depending on the vessel’s technical specifications, we estimate the value of this potential shipbuilding contract to range between US$200-400m, which will serve as a boost to STX OSV’s orderbooks if won. Maintain BUY, TP S$1.54. TP of S$1.54 is maintained, based on 9x FY12 PE.

Current valuations at 5.6x/7.0x FY11/12 PE are undemanding, supported by strong quarterly results over the near term and sustained solid project execution. Maintain BUY on STX OSV for its market dominance in complex and highly customized OSVs, solid execution and track record.

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HI-P

Posted on November 2, 2011 by admin

HI-P (57 cents, down 1/2 cent)
As warned by management on 21 Oct’11, 3Q’11 profit crashed 81% yoy to S$6.47mln, hit by delays in ramping of certain programs by customers, pricing pressure, higher material costs due to change in product mix, increased labor costs, additional costs due to activities arising from production site consolidation and higher depreciation charge due to change in accounting estimate pertaining to useful life of certain property plant and equipment. Sequentially, profit fell 42%.

3Q’11 performance was also hit by inventory obsolescence of S$3.2mln and fair value loss of S$2.87mln on derivatives offset partially by inventories and bad debts written back worth S$1.4mln.

On the back of the volatile business environment, management will develop new business opportunities for wireless, computing and peripherals, home appliance and personal grooming devices, lower operating costs via automation and come up with new processes and technologies to align with market trends and demands.

Management expects 4Q’11 profit to be higher than 3Q’11′s S$6.47mln, but lower than last year’s 4Q’10′s record S$35.88mln.

Notwithstanding the weak operating performance, the company’s financial position remains comfortable with cash of S$290mln against debts of S$89mln, giving a net cash position of S$201mln or 40% of its market cap of S$500mln.

At 0.85x price to book, the stock is below its 5 year historical average of 1.2x, but above its lows in 2008/2009 of 0.45x.

The stock had previously benefited from the company’s aggressive share buy back program which had ceased in Feb’11 when the company last bought 168,000 shares at S$1.18 each. Since then, the stock has fallen 59% to a recent low of 48 cents, before rebounding to 57 cents currently.

Pending an update from management this morning, we are maintaining our AVOID recommendation (a recommendation we’ve had since the company’s first profit warning issued on 1/7/11).

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Sakari Resources Risk assessment lowered

Posted on November 1, 2011 by admin
  • 3Q11 net profit in line; though cash costs remain high amid slower
    volume ramp up at Jembayan
  • Raised coal reserves at Jembayan by 23%
  • Maintain HOLD and raised TP to S$2.30 accounting for current lower
    risk for coal prices and earnings

High costs dampen results.
3Q11 net profit of US$37m came in largely in line with estimates (9M11 net profit of US$117m made up 72% of our FY11 estimates), though volumes and cash costs at Jembayan disappointed somewhat. ASPs maintained at US$94/ton, but cash costs remained stubbornly high at US$61/ton on flat production volume of 2.4m tons and high strip ratio of close to 11x. Sebuku production came in at 0.3m tons, and the Northern Leases are expected to contribute to coal sales from 4Q11. Cash costs at Sebuku declined to US$44/ ton.

Fillip to coal reserves.
Management reported an increase in JORC-compliant coal reserves at Jembayan – after completion of a new drilling programme – to 142m tons, up about 23% from previously recorded reserves of 122m tons (adjusted for production). This adds about 2 years of mine life at Jembayan and enhances the sustainability of SAR’s coal production profile. Sebuku Northern Leases’ initial reserves estimations are expected in mid-FY12.

Trading in line with peers.
Based on management’s revised guidance post 3Q results, we modify our volume and cost estimates for the 2 mines (details inside). Overall, our FY11/13 EPS estimates are lowered marginally by 1.5-4.1%. Maintain HOLD, but raise TP to S$2.30, pegged to higher blended valuation at –0.5 S.D. (10x PE, 3x P/BV) from –1 S.D. previously as we do not anticipate any sharp correction in coal demand or coal prices in the near term. We reckon SAR is unlikely to trend towards 2008-09 trough valuations again, given a better execution track record, a more robust volume growth profile and potential for improved margins from higher quality Sebuku coal.

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Neptune Orient Lines Bigger losses, as expected

Posted on November 1, 2011 by admin
  • Net loss of US$91m largely in line with estimates
  • Low freight rates compounded by high fuel costs
  • Balance sheet could come under increased stress
  • Maintain FULLY VALUED with S$1.05 TP

Losses continue to mount.
As we had expected, NOL recorded a bigger net loss of US$91m in 3Q11 – compared to the US$57m net loss in 2Q11 and quite close to our recent projection of US$75m net loss. NOL was unable to pass through any peak season surcharges in 3Q11 given the prevailing oversupply of vessels. Average freight rates for 3Q11 came in at US$2,539/FEU, down 19% y-o-y and flat q-o-q. The container shipping division reported an operating loss of US$88m, despite overall volume growth of 6.7% y-o-y. Volumes were driven by the Intra-Asia trades (up 25% y-o-y), while Transpacific volumes were again disappointing (down 10% y-o-y). High bunker fuel prices YTD have meant a 45% increase in unit fuel costs in 3Q11, leading to a 3% q-o-q increase in operating expenses per TEU to US$2,850/FEU, and dragging down profitability further.

Outlook remains grim.
We remain pessimistic on the container liners’ outlook in the near term. Unless we see a coordinated effort by the liners to lay up capacity to the tune of at least 5-6% of fleet or clear signs of inventory restocking activities in the US, we are unlikely to call for a bottom. We expect NOL to remain in the red in FY12/13.

Balance sheet looking increasingly stretched.
NOL has already incurred more than US$1.2bn in capex YTD in FY11, and will need to invest similar amounts in FY12/13 to finance its existing orderbook of 34 new vessels. Net gearing level is already up to 0.56x at end-3Q11 from 0.12x at end-FY10, and could fast hit unsustainable levels if losses continue, which could even lead to a cash call by the end of FY12. Hence, given the heightened uncertainties, we maintain our FULLY VALUED call on the stock with an unchanged TP of S$1.05.

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