Stock Picks

First Resources: Neutral (DMG, 5 Jan)
According to news reports, Malaysia's export of crude palm oil (CPO) is estimated to reach a record of 1.6 million tonnes in Dec, or up 22.2% month-on-month. As the CPO futures last traded at RM1,735/ tonne yesterday versus our CPO price assumption of RM1,500 per tonne (it was trading in the RM1,500-1,600/tonne range before the new year), we have decided to perform a sensitivity analysis for First Resources. At RM1,800/tonne (+20% above our CPO price assumption), our target price for First Resources would be S$0.51. A 10% CPO price level decline from our assumption to RM1,350/tonne would imply a target price of S$0.28 for the counter. As we do not see this uptrend in CPO price to be sustainable based on fundamentals, profit taking is likely to set in soon. We are maintaining our earnings estimates and CPO price assumption of RM1,500/tonne for FY09. Factoring a P/E of 7x our FY09F earnings, we derive our target price of S$0.36 and maintain our neutral call on the stock.

CapitaLand: Hold (OCBC Research, 2 Jan)
Last month, CapLand announced that it was investing in Peace Base (PB) by exchanging the entire holdings of convertible bonds of principal amount of RMB1,125m (S$249m) issued by Heng Yue. PB currently holds a site in Nanshan, Shenzhen PRC that is slated for the development of Nanyou Shopping Park, which will be a mixed development comprising of residential, retail, office and hotel components. We are positive over the acquisition due to the strategic location of the site, which is strategically located close to the Shenzhen Bay Bridge that connects Shenzhen to Hong Kong. Surrounding the site are built-up residential apartments, which could provide adequate human traffic flow to the shopping park upon completion. However, we have not factored in any potential RNAV contribution from this site yet as development is still in planning stages. We are now lowering our risk-free rate from 3.4% to 2% but our cost of debt has been raised by 100 basis points, from 4.27% to 5.27%, to take into account of the rising cost of financing. We have also adjusted the valuation of CapLand's listed investments base on their current market value. As such, our valuation of CapLand has been lowered marginally from S$3.28 to S$3.27. As CapLand’s share price rose 18.5% since our last report dated 17 Dec 2008, we are now downgrading CapLand from BUY to HOLD in view of the limited upside.

Singapore Post: Buy (OCBC Research, 2 Jan)
SingPost is the designated Public Postal Licensee for Singapore and its main businesses include mail, logistics and retail. Despite the liberalisation of the basic mail services market, it is still in a strong position to remain as the dominant postal services operator. We like SingPost for its stable operating cash flows and dividend yield, and its defensive profile should serve it well given the uncertainty in the markets. Although mail volume growth may be lower with a slowing economy and e-substitution, SingPost has launched new initiatives over the years and diversified into other business areas to pursue growth. We initiate coverage on SingPost with a BUY recommendation and S$0.93 fair value estimate, based on the free cash flow to equity approach with a cost of equity of 8.8% and terminal growth of 2%. SingPost has a dividend policy of minimum S$0.05 per share a year, implying at least a 6.3% yield (FY08 dividend yield was 7.9%).

Karin Technology: Buy (OCBC Research, 2 Jan)
Karin has announced recently that its wholly-owned subsidiary, Karin Technology Ltd (BVI) had increased its investment in Take Talent Investments Ltd from 70% to 75% by the acquisition of 1,250 ordinary shares for a cash consideration of HK$1 (Take Talent is in a net liability position). Take Talent offers IT solutions and professional consultation services and distribution of computer products and peripherals in China. Following this investment, any extra resources, which are presently assigned to Karin BVI will be relocated back to Hong Kong office. This, we note, is part of the management's restructuring measures to drive its cost as low as possible in order to enhance its cost savings efficiency. While we view this transaction positively, we understand that it is not expected to have any material impact on its FY09 financial performance. As such, we are keeping our BUY rating and S$0.18 fair value unchanged.

Indofood Agri Resources: Neutral (DMG, 31 Dec)
An update with management uncovers that Indofood's selling prices of cooking oil and fats in Indonesia has been revised downwards by 10-15% on average, due to the steep decline of crude palm oil (CPO) price since its highs in mid July. We have adjusted our FY09 valuations to take into account a 10% decline in margarine's and a 15% decline in cooking oil's selling prices, from 9M08 average selling prices. Management has said that it's maintaining its target to expand oil palm planted area to 250,000 ha by end 2010. Assuming no new plantings were carried out in 4Q08, this works out to approximately 38,000 ha of new plantings per year in 2009 and 2010. However, in view of the current credit tightening environment, management has also indicated that they are reviewing non-essential capital expenditure currently. We are maintaining our CPO price assumption of RM1,500/tonne for FY09 (CPO futures for Jan 09 delivery is RM1,675/tonne) and a 10% year-on-year CPO production. However, taking into account the reduction in selling prices for cooking oil and margarine, FY09 earnings has been revised downwards by 48% to IDR802b. Factoring in a P/E of 7x our FY09F earnings (7x being the average of 10-year historical low P/E valuation for Indonesian and Singapore listed plantation companies), we derive a new target price of S$0.51 (S$1.12 previously) and downgrade our call on the stock to neutral.

Cosco Corporation: Sell (DMG, 31 Dec)
Cosco Corporation (Cosco) has issued a profit guidance note stating that the financial year ending 2008 would show lower profits compared to 2007 due to provision for doubtful debts and higher material costs. Cosco would be making provisions for doubtful debts as the company has recently received requests for payment delays from several ship owners. We have previously expressed our concerns that a heavy concentration of bulk carrier newbuilds in its order backlogs are from smaller ship owners with weak balance sheets and poor financing means. In the wake of the credit crunch, these smaller ship owners may have difficulties financing the new ships as banks tightened the lending. Cosco is also experiencing higher material costs arising from steel procured during the boom times. We understand that procurement of steel is typically made six months prior to the start of construction of the vessels. Given that the management has previously guided that 40 bulk carriers are scheduled for delivery in 2009, we believe Cosco's current steel inventory cost is significantly higher than the market prices of steel today. We believe Cosco is fully incapable of passing the higher material costs to the customers, hence giving rise to lower margins. In addition, Cosco has rescheduled the delivery dates for seven 57.000 dwt bulk carriers after reaching an agreement with a European and Asian shipowner. While we opine that rescheduling of contract delivery dates would imply revenue recognition at later years, we believe this should provide a relief for Cosco as its yards are being developed at a slower pace than originally planned. While we have previously factored in 20% cancellation orders in our estimates, we are putting our earnings estimates under review pending further clarifications with the management.Meanwhile, we are maintaining our target price of S$0.68 and our SELL rating.

SMRT: Neutral (DMG, 30 Dec)
A recent poll of property analysts by The Business Times indicated that retail rents in Singapore's prime areas may decline by as much as 13% in 2009. The study indicated that rents for retailers in areas such as Orchard Road may fall between 5% and 13% and as much as 7% at suburban malls. Besides generating operating profit from its rail businesses, SMRT derives 20% of its operating profit from commercial space rental. For 2QFY09, SMRT recorded a 44.7% year-on-year surge in commercial space rental revenue to S$14.2m, following a 11.7% YoY increase in lettable space to 26,592 sqm. Looking ahead, we expect some earnings weakness coming from falling retail rents. SMRT leases out its retail space for 3-yr periods, and the rental rates are fixed at the onset of the rental period. For renewals that take place in 2009, we can expect lower rates than those renewed in 2008. SMRT remains NEUTRAL with a S$1.65 price target.

Jardine Cycle & Carriage: Neutral (DMG, 30 Dec)
Unit sales of motorcars declined 9.6% month-on-month in November. It sold 27,248 cars during the month, compared with 30,154 in October. This was better than its earlier estimate of 20,839 motorcars. However, Astra's market share improved to 59%, from 55% in October, despite the overall Indonesian motorcar market experiencing slower sales. The overall market recorded 46,122 units of motorcars being sold in November. This was 15.9% lower month-on-month. As for motorcycles, Astra recorded a 3.8% month-on-month increase to 230,544 units in November to increase its market share of the domestic motorcycle market from 43% in October to 47% in November. Its subsidiary, United Tractors announced that its sales of Komatsu vehicles fell to 200 units in November 2008, from 434 units a year ago. Despite that, sales of Komatsu vehicles rose from 3,281 units a year earlier to 4,204 units for the first 11 months of 2008. United Tractors had earlier announced that it may not be able to hit its target of 4,750 units for 2008. We are maintaining our NEUTRAL recommendation for the stock with a target price of S$11.18. We have an estimate earnings of US$462.6m (EPS: US$1.15) for FY08 and US$474.4m (EPS: US$1.12) for FY09.

ST Engineering: Buy (DMG, 26 Dec)
ST Engineering's Land Systems unit ST Kinetics landed two contracts from the UK Ministry of Defence (MOD) last week, totaling over S$400m. The first is a £150m (S$330m) deal for the supply of Bronco All Terrain Tracked Carriers (ATTC). Known as "WARTHOG" by the MOD, it is expected to give an increase in protection against roadside bombs and is used for Urgent Operational Requirement (UOR). The Bronco is said to deliver increases in range, payload and internal capacity over existing vehicles currently being deployed in Afghanistan. The deliveries will commence in 3Q09, with the bulk to be delivered in 2010. The other contract involves the supply of 40mm High Velocity High Explosive Dual Purpose (HV HEDP) and High Velocity Flash & Bang (HV F&B) rounds ammunition worth £35m (S$77.2m). This is a repeat of the S$42.5m HV HEDP 40mm munitions order made in Feb 08. Initial delivery is targeted to be in 3Q09 and be completed by 1H11. Both orders will not have an impact on the financials in the current year. We estimate earnings to grow 2.1% to S$514.2m in FY08 and 10.4% to S$567.7mm in FY09. At S$2.31, ST Engineering is trading at 13.5x FY08 and 12.2x FY09 earnings. It offers an attractive yield of 7.4% to 8.2% over the current two years. Maintain BUY.

Land Transport Sector: (DMG, 22 Dec)
      ♦ ComfortDelgro (BUY\Target S$1.63)
      ♦ SMRT (NEUTRAL\Target S$1.65)
WTI crude oil price averaged US$44/barrel in the first 18 days of Dec 08, one-third the Jun 08 peak level of US$134/barrel. Soft crude oil prices will translate to lower electricity expenses (for rail operations) and lower diesel costs (for bus operations). ComfortDelgro has partially hedged its fuel requirements till Jun 09. Hence, the recent sharp decline in crude oil price will only have a muted impact on its 1H09 earnings. But going ahead, we expect the earnings enhancement to be quite significant. SMRT has a 6-mth electricity contract till Mar 09 (the rate being 30% higher than the previous 6-mth contract). We therefore expect the benefits of lower electricity prices to only filter through in FY10. Our sensitivity analysis shows that a 10% fall in crude oil price (from our current base case of US$70/barrel for 2009 and US$63/barrel for 2010) will raise ComfortDelgro's FY09 net profit by 8.8% and SMRT's FY10 net profit by 5.7%. The greater sensitivity for ComfortDelgro is attributed to its greater dependence on land transport operations for its operating earnings, whereas SMRT derives 20% of its operating profit from commercial space rental (which is not sensitive to crude oil price changes).

China Sky Chemical Fibre: Hold (Phillip Securities, 22 Dec)
China Sky Chemical Fibre Co Limited is involved in the manufacture and sale of chemical fibres, mainly high-end nylon fibres, with a wide and diverse range of commercial applications ranging from high-end sportswear and casual wear to other consumer products. We initiate coverage on China Sky Fibre with a HOLD rating at a fair value estimate of S$0.35. This represents a potential upside of 18.6% from its last traded price of S$0.295. However, we are skeptical about the fibre sector and the poor equity market conditions due to the global economic slowdown.

Li Heng Chemical Fibre Technologies Limited: Hold (Phillip Securities, 22 Dec)
Li Heng Chemical Fibre Technologies Limited is principally engaged in the manufacture and sale of high-end nylon yarn products in the PRC. Their two production facilities in Changle City, Fujian Province, PRC, are strategically located amongst clusters of textile and garment manufacturing industries, which happen to be their main customers as well. We initiate coverage on LiHeng Chemical Fibre with a HOLD rating at a fair value estimate of S$0.325. From the last traded price of S$0.28, our target price shows a potential upside of 16.1% however, we have placed a HOLD call on the company on the back of a poor sector outlook coupled with weakening fibre demand due mainly to the global economic slowdown.