Stock Picks

First Resources : Buy (DMG & Partners, 30 June)
First Resources, being the newest kid on the block, is a pure plantation play that can capture the upside from favourable CPO prices. It recorded gross and EBITDA margins of 73% and 70% respectively in 1Q08. It has a 'youth' advantage in that 61% of its planted area is in the 'prime' category and 11% are in the 'young' category. As these trees mature over the next few years, FFB and CPO production will rise with minimal increases in costs or capital expenditure. We have initiated coverage with a Buy rating and a fair value of S$1.43 (derived using a price-earning ratio of 13 times FY08 earnings).

Ho Bee Investment: Buy (DBS Vickers, 26 June)
Ho Bee launched 122 units of its 348-unit 99-year leasehold Dakota Residences project, a 50-50 joint venture with NTUC Choice Homes last weekend. What's encouraging is that the 80 units sold at an average of $980 psf were to a preview audience as Ho Bee had not advertised this launch in the print media. Ho Bee's management said it will be looking to ramp up publicity for the project in coming weeks. It's also looking to launch The Orange Grove (72 units) as well as its 150-unit Newton (former Elmira Heights) project this year – both of which are freehold projects in the high-end and mid-tier segment respectively. We had earlier made a bear-case assumption of $900 psf for our RNAV calculation for Dakota Residences. Following the encouraging response to the preview launch, we believe that the current pricing for the project could be sustainable and there could even be potential upside for future phases of the project. We recognize the key risk going forward for Ho Bee lies in the sale and execution of its remaining Sentosa projects. To address this, we have taken a 20% cut off average selling prices (ASP) from current Sentosa price levels. We maintain our 30% discount to RNAV, for a revised target price of S$1.25, representing a 52% upside.

Thomson Medical Centre: Buy (DMG, 25 June)
TMC is a leading provider of healthcare services for women and children and remains one of the cheapest private hospitals for deliveries. When means testing in public hospitals begins in January 2009, it may encourage patients to witch to private hospitals for healthcare services. At the same time, inflation and rising costs of medical treatment may encourage patients to switch from the dearer private hospitals to TMC for treatments. The group is also starting to go regional with the establishment of a hospital in Vietnam to be completed by 3Q 2009. TMC is currently trading at forward PE of 15 times FY08 earnings, while its SGX-listed peers are trading at an average PE of 26.5 times. Taking into consideration its smaller market capitalization, we ascribe a PE of 19 times for TMC. Based on FY08/09 earnings, we have arrived at a 12-month target price of S$0.76. TMC has been paying out at least 50% of earnings as dividends, and it aims to continue doing so.

China Farm Equipment: Buy (DMG, 24 June)
CFE's plants are located strategically in Hunan which is the largest grain producer in China with a market share of 13%. Our case for CFE lies within its expansion plans and its R&D projects which in our view will provide more room for growth in the coming years. We are convinced that CFE will be able to maintain good and steady growth in FY08 and FY09 despite rising raw material prices. By FY10 we believe that CFE will see strong earnings through its new diesel engine plant being fully utilized. Maintain BUY with a target price of S$0.88.

ST Engineering: Downgrade to Fully Valued (DBS Research 23 June)
STE may face the first line of cutbacks in workflow as major airlines seek to cut costs. Several major US airlines have said that they will cut back on their routes and pare domestic seating by 10-18% by the end of the year. STE's US operations contributes about 12% of its revenue and 15% of its pre-tax profits (PBT). Hence, We have also tuned down our projection on FY09 earnings multiple for the Group to 15 times at the lower end of its historical PE band and arrived at a target price of S$2.80. Though dividend yield of 6% at current prices should provide some downside support, we downgrade the counter to Fully Valued from Hold. Switch to SIA Engineering, which promises higher earnings visibility and stable growth, as 70% of its revenue is derived from its parent, with the stock trading at more attractive PE of 13.5 times (FY Mar 2010) and dividend yield of 5.3%

Man Wah: Buy (DMG, 23 June)
As furniture maker Man Wah continues to grow its export and local markets, the integration of its manufacturing facilities will enable the group to streamline its operations and achieve better utilisation rate, and economies of scale. Production capacity is expected to rise to 500,000 sofa sets in FY09, compared with 303,000 sets as projected earlier. While the increased production capacity bodes well, we are maintaining our FY09 earnings estimate of HK$195.9 million for now, as we believe it would take a while for production to be ramped up and the average utilisation rate may not be very high, given that China, US and Europe are feeling the pressures of higher oil and food prices. Maintain BUY for a target price of S$0.46 or 9x FY09 PE.

Starhub: Buy (DMG, 20 June)
The introduction of mobile number portability 13 Jun 08 is unlikely to have a major impact on market share among the three major telcos though marketing and promotional expenses will pressure margins. In StarHub's case, average acquisition cost surged 28% to S$124 per subscriber. We are, however, more sanguine on its long-term outlook as telco players in Singapore have generally co-existed well over the years and have not succumbed to 'destructive' competition. StarHub has committed to a minimum dividend payout of S$0.18 per share, which works out to a relatively attractive yield of 6.5%. The company is expected to raise the payout if its capex requirements remain low. Upgrade to BUY with a target of $3.10.

Swiber Holdings: Buy (DMG, 19 June)
Swiber is an integrated Engineering, Procurement, Construction, Installation and Commissioning (EPCIC) provider, well-positioned to capitalise on the robust E&P activities anticipated over the next decade, especially in Asia Pacific and Middle East. Its complementary portfolio of fleet ownership and managed operations through its asset-light strategy will see margins improvement from cost synergies. Driven by potential new orders inflow and its aggressive fleet expansion, we forecast Swiber's 3-year (FY06 to 09F) CAGR earnings at 107%. We value Swiber based on P/E 13.5 times FY08/09 blended earnings to derive a target price of S$4.01, representing 48.5% upside. We have initiated coverage on Swiber with a BUY rating.

OLAM: Buy (DMG, 19 June)
Olam, a leading global supply chain manager with operations in 56 countries, has recorded a historical 3-year net profit CAGR of 31%. This came on the back of its very aggressive expansion programme, both organic and inorganic, as well as its focus on raising contribution per ton of commodity traded. Its success is evident from its 9MFY08 gross contribution per ton from fibre and wood products up 54% from FY04.Looking ahead, Olam's JV with Wilmar to form Nauvu will lead to interests in palm oil, natural rubber and sugar assets in Africa. While the market has was concerns that the recent US$300m convertible bond issue could dilute Olam’s EPS going ahead. We agree that the dilution could range between 6.2% and 8.3%, depending on whether the US$100m upsize option is exercised. We view this fund raising exercise a positive as it provides Olam with additional funds to expand its business. Our DCF valuation gives a S$3.20 target price, which works out to 28x FY09 EPS.

F&N: Buy (Nomura, 11 June)
Our sum-of-the-parts (SOTP) fair value for property-focused conglomerate Fraser & Neave (F&N) is S$4.06 per share (17% implied downside). Our bearish stance on the group is based on our wary view of the Singapore and China residential markets, which we estimate comprise 62% and 25% of the net asset valuation (NAV) of F&N’s development properties. We expect a cyclical downturn in residential property prices to prompt lower sales volumes, just as higher construction costs hurt both development margins and valuations.

ASL Marine: Buy (Kim Eng, 11 June)
ASL's current shiprepair gross margins stand at over 30%, and ASL expects this to be maintained, with raw material increases able to be passed on to its customers, as well as maintaining a 6-month stockpile of steel. As for ship chartering, most of its contracts are currently short-term at around 3 months, which fully capitalises on the current firm charter rate environment. Furthermore, ASL will benefit from the addition of a further 15 vessels to its fleet over the next 3 years. We continue to like ASL's prospects across all its 3 primary business divisions. It is still a clear beneficiary of the marine and offshore oil & gas upswing, and offers excellent value at just 0.27x PEG. Our target price of $2.04 is derived from a FY08 PER of 10x, 63% upside.

AusGroup Ltd: Buy (OCBC Research, 11 June)
AusGroup has expanded its order book to over A$200m with a A$21m repeat order from an existing customer in the iron ore industry to fabricate a twin cell car dumper and iron ore wagon indexer for the unloading of iron ore trains delivering ore to a new iron ore facility in the Pilbara region of Western Australia. Australia dominates the global iron ore export business. Major exporters who are also AusGroup customers include Rio Tinto, BHP Billiton and Fortescue Metals. These three players are also the only ones to have their own railways taking iron ore out of the Pilbara region. The mining industry is flourishing in Australia as a whole with over A$30 billion being spent on new mining-related capex in the country just this year. We believe AusGroup will continue to benefit from the project flow and its strong track record in the industry. We maintain our Buy rating and S$1.33 fair value estimate.

Li Heng Chemical Fibre Technologies: Buy (DMG & Partners, 11 June)
A producer of high-end nylon yarn products, Li Heng can be considered to be China's top three market leaders in its field with a current market share of close to 10%, and also a leader versus other SGX listed chemical fibre players. The Group recently increased its production capacity by 81% in March, from 92,400 tonnes to 167,200 tonnes per annum. By 3Q09, capacity will increase by another 53.8% to 257,200 tonnes and by end FY09, we estimate Li Heng to increase its China market share to 21.6%. The new Polyamide chip (PA chip) facility, which is expected to be ready in 3Q09, will help provide one-third of its raw material needs at a 10% discount from imported prices, and more importantly enhance its raw material supply resources. China has been increasing its production capacity and hence market share steadily year after year, growing its pie from 4.7% in 1990 to 24.7% in 2006, on the back of surging demand and consumption. The future bodes well for China as other established countries such as the USA, Japan and Taiwan are downsizing their capacities, which should ensure that China exerts an even greater influence on the world’s market share going forward. The stock is only trading 4.9 times and 3.5 times FY08 and FY09 P/E respectively, compared to its local higher value-chain peers which are trading at an average of 5.4 times FY08 and 3.9 times FY09 P/E. Target price: S$1.35.

Singapore Petroleum Co: Buy (DBS Vickers, 11 June)
SPC's share price has fallen 13.2% within the past two weeks to a 4-month low, and is 22% below this year's peak. We believe the current share price level offers good re-entry opportunities with limited downside. We raised FY08-09F net profit by 8.4% and 10.1%, respectively to reflect current strong crude prices, but maintain our refining margin assumptions. Consequently, SPC's sum-of-parts target price is upgraded to S$8.22. (Prev S$ 7.84). The counter also provides an attractive dividend yield of 10%.

Micro Mechanics Holdings: BUY (OCBC Research, 11 June)
We like MMH for its consistency in growth strategies and effective cost management. While we have revised down our FY08 sales and net profit forecasts by a slight 2.7% and 2.5% respectively, we are confident that MMH will still maintain its more than 50% gross margin despite increased raw material prices, higher headcount and price pressures. We derive a fair value of S$0.74, based on a 10 times blended FY08/09F price earning ratios. (see Corporate Watch: Unfazed by chip cycles)

Raffles Medical Group: Buy (DMG & Partners, 10 June)
Raffles Medical Group has consistently recorded growth in both topline and bottomline over the past 4 years. Annual revenue grew at the rate of 14.2% while net profit increased by 45.7% yearly. Now that RMG has full ownership of its hospital, we believe it will be able to enhance the services it offers to patients and continue to grow earnings. Besides basic health services, RMG also offers a range of lifestyle and wellness services, ranging from aesthetics to dental services. It has also developed its line of health supplements, which are sold in regional markets such as Hong Kong, Malaysia and Indonesia. As more people look towards attaining a healthy lifestyle, this area would be another growth driver for RMG. Its peers are currently trading at 29 times FY08 earnings. We have a target price of S$1.69, based on 26 times blended FY08/09 earnings. Besides a defensive stock and stable earnings, RMG has also been returning steady dividends to investors.

Koda Ltd: Buy (OCBC Research, 9 June)
Consumer spending in the US remains cautious in light of the recent credit crunch, and management hinted of signs of softening sentiment in the UK and Europe. While furniture maker Koda has built up a geographically-diversified revenue base, a concurrent slowdown in the US, UK and Europe would inevitably impact on its earnings negatively. We have eased our FY08 earnings estimate to US$6 million (from US$8.2m previously), and rollover our valuation to 8 times FY09 PER, deriving a fair value estimate of S$0.565. Nevertheless, this still represents 38% upside from its last traded price. As such, we are keeping our Buy rating on the stock.

China XLX Fertiliser: Buy (DMG & Partners, 9 June)
China XLX is in the business of producing coal-based urea, compound fertiliser, and methanol. Fertiliser is an important ingredient in the production of food as it speeds the growth and increases the volume output of food. In the long term we believe that China XLX is going to be a beneficiary of the current food crisis. China XLX is currently trading at 10.7x FY08 P/E. We reiterate our Buy recommendation with a price target of S$1.17 based on 15x FY08 P/E.

Singapore Airlines: Neutral (JP Morgan, 9 June)
SIA's share price has performed largely in line with the STI despite the 40% rise in jet fuel prices year-to-date. This suggests that the market views SIA as relatively immune to higher fuel prices. Although the airline has been the least affected by high prices of oil in the sector given its superior hedging, pricing power, and the strengthening Sing dollar, it will not escape unhurt. We estimate that SIA will have to increase fuel surcharges by another 50% or raise fares by 10% to completely offset this. Our price target of S$15 is based on our expectation that SIA will trade in line with its historical trading range in the next 6-12 months. However, if traffic or load factors turn down more than expected or fuel prices rebound, the stock could well de-rate to its previous trough levels of 0.88 times P/BV, implying a 30% potential downside from the current share price. One reason for our Neutral rating is that SIA's core airline business has now dipped below its book value and looks attractive. Historically, the airline's core business has traded at a discount to its book value during periods of downturn (e.g., post SARS, September 11, rising threat from low-cost carriers). Note also that SIA is currently trading cum-dividend of 80 cents per share.

Parkway Life REIT: Buy (UOB KayHian, 9 June)
Parkway Life REIT provides strong defensive qualities as the minimum rent increase for Gleneagles Hospital, Mount Elizabeth Hospital and East Shore Hospital is set at CPI + 1%. Assuming that CPI is 5.5% in 2008, the minimum rent increase for the three hospitals in Singapore would be 6.5% in 2009. Where CPI is negative for any given year, then it is deemed to be zero. This ensures that rental income from hospitals in Singapore is always increasing. Parkway Life REIT has acquired a pharmaceutical production and distribution facility in Japan for a total cash consideration of ¥2.59b, or S$35 million. It will also be acquiring soon two nursing homes located in Yokohama City and Ibaraki City, Japan for S$34.9 million. We like Parkway Life REIT for its healthcare focus. It provides strong defensive qualities as rental income from hospitals in Singapore and nursing homes in Japan is linked to inflation. The company also has a low level of gearing. Our target price: is S$1.52. (Pvsly: $1.82)

Venture Corporation: Buy (DMG & Partners, 6 June)
Contract manufacturing is highly commoditised and is characterised by razor thin margins. However, Venture has steered away successfully with its ODM strategy, which currently accounts for 35% of total revenue. This is expected to grow further in the years to come as its strategy crystallises. It has over 600 design engineers, probably the largest among Singapore contract manufacturers, and is well-respected for its R&D capabilities. We are ascribing a 13.3x FY08 P/E to the stock which represents a 20% discount to its 5-year average of 16.6x P/E. This translates to a target price of S$14.60 which equates to an expected capital return of 42.8% and a prospective dividend yield of 5.9%. With the potential 48.7% upside, we are maintaining our BUY recommendation.

SembCorp Marine: Buy (Merrill Lynch, 6 June)
PPL shipyard, subsidiary of Sembcorp Marine (SCM), secured two contracts from Seadrill to build 2 jack-up rigs with total value of US$430mn (S$589mn). The scheduled deliveries for the jack-ups rigs are in March and November 2010 respectively. We expect earnings from these orders to flow through in FY09. With the new orders, SembCorp Marine’s total addition to the order book in 2008 is now just under S$1.9 billion, representing 34% of FY2007 additions of S$5.4 billion. This announcement reaffirms the market's positive view on SCM's ability to grow its order book, which was S$6.6 billion as of 7 May 2008. We estimate the current net order book at S$8.1 billion. We maintain our Buy on SCM with a target of S$5.50. SCM is currently trading at a 2008E P/E of 20 times with a dividend yield of 3.6% and remains one of the most attractive pure plays in the offshore space, in our view. Rig demand continues to outstrip supply and exploration and production budgets are rising to new highs. We expect margin expansion from the firm with better business mix, principally in the ship repair business, given the shortage of dock space in the region.

Olam International: Buy (DBS Research, 5 June)
Story: Olam announced that it is issuing US$300m of convertible bonds bearing an annual interest rate of 1%, a yield-to-maturity of 4.5% per annum and with a conversion price of $3.8464. These US$ convertible bonds will mature on 3 July 2013. Given that the issue was multiple times oversubscribed, we have assumed that Olam will exercise its option to issue up to US$400m in convertible bonds, which represents potential dilution of 8.3%. In addition to the S$300m raised recently in a preferential rights offering and through further leverage, Olam would have a sizeable war chest with which to continue pursuing its organic growth and acquisition plans. Following a string of small but successful acquisitions over the last 15 months and with a substantially stronger balance sheet, we believe that Olam may start to look at more sizeable (and therefore more impactful) acquisitions to grow their business. Whilst we have cut our target price to S3.51 (still based on 30 times FY09 earnings) to factor in the potential dilution from the issue of these convertible bonds, we would look to raise our target price when Olam announces more value accretive acquisitions and/or as the Group delivers on its earnings growth.