Stock Picks

Straits Asia Resources: Buy (OCBC Research, 30 June)
SAR has seen its share price more than doubled since its March lows, in tandem with the resurgence of oil prices. The impact of global economic stimulus plans has started to flow into the real economy, leading to tighter energy markets. Improvements in fundamentals bode well for SAR, as firmer coal prices will boost its revenue. Management holds the view that energy markets will continue to tighten in 2H09 and is optimistic that its FY10 output will be priced at more favourable levels than recent spot prices of around US$60/ton. SAR has entered into sales agreements for the remaining 27% of its FY09 output. We estimate a blended average selling price (ASP) of US$85/ton for its FY09 output, slightly lower than our previous US$87 forecast due to recent weak coal prices. Nevertheless, this is still above FY08's ASP of US$70.50/ton, putting the group on track to deliver record earnings in FY09. This is also well above its breakeven cost of approximately US$38/ton. Production volumes have picked up in 2Q09 following a seasonally wet and slow 1Q09, and we expect output to gain momentum from 2H09 onwards on the back of more favourable weather conditions and increased production capacity. SAR has recently also installed additional infrastructure at its mines. The enlarged capacity will enable it to produce up to 19mt of coal per year, more than double its targeted FY09 production volume of 9mt. Management targets to ramp up its production to 19mt by FY12, pending the resolution of forestry boundary restrictions at Sebuku. We expect growing production volumes to drive SAR's earnings in FY10 and beyond. A sustained recovery of energy prices will serve as an added boost to its earnings. We have adjusted our earnings estimates by -20% to +2% as we lower our FY09 ASP assumption and tweak our cost projections, but raise our ASP assumptions for FY10 and beyond. This lifts our DCF-based fair value estimate to S$2.07 (previously S$1.38). Given the stabilisation of oil prices and the improving outlook for global energy markets, we upgrade SAR to a Buy. Dividend yield remains attractive at 5.2%. Key risks to our assumptions include a reversal of energy prices and refinancing risk.

Singapore Exchange: Sell (DMG, June 30)
A Chinese company, Xingquan International Sports is going to be listed on Bursa Malaysia, and this could mean the start of more competition for Chinese companies seeking listing outside of their home markets. This suggests that we could see slower listing of S-chips on SGX, which could dampen the long term average daily turnover (ADT) growth for SGX. Despite the recent pick-up for the STI, stockmarket turnover values have been lacklustre. 29 Jun 09 turnover of S$881m is only 39% that of May 09's ADT of S$2.27b. While some believe this is a short-term aberration, we believe the weakness could persist going ahead. We believe the equity market has moved up way ahead of economic fundamentals and investor interest has hence slowed down.Given this assumption, we are forecasting FY10 net profit of S$332m. Applying a 20x P/E ratio (which is close to the 21x that SGX traded over the past 3.5 years), we arrive at a S$6.20 price target. Our sensitivity analysis shows that SGX target price would be S$7.10 if FY10 ADT hits S$1.71b, or S$7.90 if ADT is S$2.05b. If one feels that these are more reasonable assumptions, then they can trade on SGX. However, we are not so optimistic. On the other hand, if FY10 ADT falls to S$1.02b, then SGX price target would be a lower S$5.40.

SATS: Buy (Kim Eng, 29 June)
With the Singapore Food Industries (SFI) acquisition completed, the shape of things to come is becoming clearer for SATS, and it is exciting! One alluring aspect is the fact that SATS is on the verge of becoming an Integrated Resort play, with the future opportunity to supply meals to the Marina Bay and Sentosa casinos. Also, it can potentially unlock $0.20/share in value from properties that are still held at book value. Each IR is expected to hire 10,000 staff each, and every one of them has to be fed at least two meals a day. It is a once-in-a-lifetime opportunity; we estimate the IRs could demand 22m meals a year (assuming 3 meals a day) or 85% of the number of inflight meals SATS supplied to airlines in FY2008. SATS has a very high chance of winning, given its ability to cater premium food and now that it has SFI's mass production platform. Management is now moving to manage its key accounts globally as part of its efforts to be its airline customers’ global catering partner whereever they fly to. It will start with the UK, where it can use SFI's food operations (e.g. Daniels', ICL), and it aims to replicate this in important aviation hubs in the region, such as HK. The upside could be substantial, as SATS already caters to 48 of the 68 carriers that use Changi as a hub.
SATS has in its balance sheet $460.8m of properties that are held at historical cost (the two inflight catering centres and six airfreight terminals that it uses to prepare airline meals and handle freight). If SATS opts to sell and lease back the buildings, we estimate a revaluation to market prices will result in at least $215m ($0.20/share) of surplus that could be returned to shareholders if it has no other need for the funds. We upgrade our target price to $2.51, based on 16x FY10F earnings. We have pegged a higher P/E in view of the potential earnings boost from IR-related contract wins. Our FY10-12 forecasts currently do not factor in these contract wins. Other catalysts include the greater stock liquidity once SIA completes its distribution of SATS shares and the potential return of excess capital realised from sale of properties.

Indofood Agri Resources: Sell (UBS, 29 June)
Following the doubling of Indofood Agri’s (IFAR) share price since March 2009, we think its valuation is unattractive and we downgrade its rating from Buy to Sell. Overall, we are negative on the plantations sector as we believe there is downside to CPO price in H209 due to an improvement in the supply/inventory situation. IFAR has one of the highest geared balance sheets in the sector; with net debt of Rp4.6bn (US$453m) and net gearing of 0.41x as at March 2009, which is up from 0.35x in December 2008. Despite the gearing, we estimate EBIT interest cover to be 5.1x in 2009, which is still reasonable in our view. We also note that IFAR has scaled down its planting programme from a target of 20,000 ha pa last year. The US$/S$ strengthened against the Rupiah since March 2009. Our price target is based on our sum-of-the-parts valuation where plantations are valued on a DCF assuming long-term CPO price of US$570/tonne, a WACC of 14%, and long-term growth of 5%. At our price target, the implied EV/mature hectare and 2010E PE are US$10.5k/hectare and 11x earnings, respectively.

Venture Corp: Buy (UBS, 29 June)
We raise Venture's sales estimates for 2009/10/11 by 1.1%/1.6%/2.0% factoring in the expansion of its printing and imaging fulfilment services from Asia to other regions. Our checks with Venture's management give us confidence that it will maintain its margins. Additionally, we expect Venture to benefit from increased contribution from several Original Design Manufacturing (ODM) projects in its sales in 2010 and beyond. Our review of Q109 results of Venture's key clients broadly suggests a cautious outlook. Its printing and imaging client, HP indicated sluggish IPG demand, while its storage business clients EMC and IBM reported weakness. Agilent, its test and measurement client guided for around 25% YoY sales decline in 2009. However, in the RSS business, the outlook was relatively positive from Hypercom and Micros Systems. Contrary to the market perception that Venture lost its HP business to Hon Hai, our checks confirm that it was Cal-Comp that was actually losing business to Hon Hai. We continue to believe that Venture's business model is defendable, given its diversified product mix as well as client mix, apart from its focus on delivering high-value added services.Maintain Buy rating with the price target raised from S$7.2 to S$8.00

Olam International: Sell (DMG, 29 June)
We reiterate our SELL call on Olam on valuations. Olam is acquiring a tomato processor in California for US$39m, or 5% of our estimated acquisition potential with the placement to Temasek. The new business is not expected to be earnings accretive in FY10, but Olam expects steady-state revenues of US$200m from FY12. We are leaving our FY10 earnings unchanged.As our assumption of 20% pa growth till 2014 has factored in some acquisitions, we are not changing our valuation matrix. Fair price for Olam remains at S$1.90. Olam announced its agreement to acquire selected assets of major US tomato processor, SK Foods and its wholly owned subsidiary RHM Industrial/Specialty Foods (RHM) in California has been approved by the US Bankruptcy Court in Sacramento. The purchase value is US$39m. SK Foods was established in 1990 and privately owned by the Scott Salyer family and is the second largest Californian tomato processor with 14% market share in the US. It is estimated to be the fourth largest globally with a global market share of 5%. SK Foods tomato processing facility is located on 82 acres in the central California city of Lemoore while RHM’s plant is located on 42 acres in Williams, in the north Sacramento Valley. The two facilities have a combined peak capacity to process 1.5m tonnes of raw tomatoes. The acquisition is an all-cash transaction financed through a combination of internal accruals and debt. Olam expects a lower capacity utilization for FY10, due to the limited time for preparation before the start of the season. Olam does not expect the business to be earnings accretive in FY10 and hopes to achieve steady state revenues of US$200m and EBITDA margins of 12-13% from FY12. Factoring in the S$437.5m proceeds from the Temasek placement, and assuming Olam secures bank loans of S$656m (1.5x that of proceeds), this will provide Olam with acquisition potential of S$1,093m. The acquisition of SK Foods account for S$57m or 5% of our estimated potential. If we assume acquisitions based on an average 13x P/E and interest expense of 6%, then Olam can derive earnings accretion of S$49m, which represents 22% of our FY10 earnings. If on the other hand, we assume acquisitions based on 10x P/E, then Olam can derive earnings accretion of S$74m, which is 33% of our FY10 earnings forecast.

Olam International: Hold (OCBC Research, June 29)
Olam has revived its inorganic growth pipeline with the purchase of tomato processing assets of SK Foods, a California-based company which has filed for bankruptcy protection. The acquisition is a bargain at US$39m vs. its replacement cost of US$130m, and will be funded using internal reserves. This acquisition is expected to accelerate Olam's entry into the US tomato processing industry and create synergies. We do not anticipate significant near term financial impact from the transaction, which is expected to be earnings accretive from FY12 onwards with revenue generation of US$200m per year (3.3% of FY09F revenue). Our FY09 and FY10 estimates remain intact. Olam’s shares have more than doubled since March and currently trade at a premium to the STI and its peers, no longer providing an attractive entry level. Nevertheless, we are keeping our HOLD rating intact given its enhanced prospect of inorganic growth. We are raising our peg to 20x (from 17x), deriving a fair value estimate of S$2.37 (previously S$2.01).

KS Energy: Hold (OCBC Research, June 26)
The price of crude oil has risen more than 50% this year, hitting a high of about US$73/barrel on 12 Jun 09. The correlation between oil and equity prices has also increased significantly since the financial meltdown last September. With an unwinding of the Armageddon scenario and improving investor sentiment, global risk appetite increased. This and various concerns about the strength of the USD with the huge amount of quantitative easing underway led to a weaker dollar, fueling higher oil prices. However, crude oil price seems to be facing some resistance currently with fatigue in the equity market, falling to about US$68/barrel two days ago. Demand for oil ultimately depends on economic recovery, and economic indicators are showing more positive signs in general. OECD composite leading indicators point to a slower pace of deterioration in most of the OECD countries with possible troughs in countries like China and the UK. The US Conference Board leading index of consumer expectations also improved significantly from a low of 50.5 in February this year to 69.4 last month. However, a proportionate increase in the demand for crude oil and oil products seems elusive. Demand from OECD countries for oil products remains low (Exhibit 1), though some form of stabilization is expected, if leading indicators sustain their upward trend. Jack-up day rates have been affected by lower oil prices, but KS Energy's contracts are based on fixed charter rates, so lower spot rates are unlikely to impact the group adversely for now, unless oil prices trend significantly lower and customers negotiate for lower rates. Things should be looking better for the group's customers with the recent recovery in oil prices. KS Energy's fixed charter rates and existing contracts will serve it well during this downturn, but its distribution business may continue to feel the impact of reduced capital expenditure by oil companies. As the current level of oil price is still unable to induce a full recovery in overall E&P activity and markets remain relatively volatile, we maintain our Hold rating and S$1.36 fair value estimate on the stock. However, the inventory restocking of commodities by China and possible oil speculation by institutions may contribute to higher oil prices despite soft fundamentals, which would lend support to the stock price.

Hyflux: Overweight (JP Morgan, 25 June)
Hyflux has signed a memorandum of agreement with the Libyan government for two reverse osmosis seawater desalination projects with a combined capacity of close to 1 million m3/ day. The structure of the contract is expected to be similar to the two existing desalination projects in Algeria where Hyflux will be the 100% EPC contractor and will take a minority 49%-stake in a joint venture company with the General Desalination Company (GDC) of Libya to own and operate the plants under a 25-year concession. This structure essentially allows Hyflux to enjoy 100% of the EPC earnings while controlling its gearing as it will not consolidate the debt of the project on its balance sheet (1Q09 gearing: 0.82x). While exact details of the contract sizes are not available yet, we estimate that the EPC portion will be higher than comparable Algerian projects due to the greater amount of project specifications involved. The EPC portion of the 500,000m3/day Magtaa plant was US$443 million (~S$666 million). Hence we estimate that these two projects could add at least another S$1 billion to Hyflux's existing S$1.15 billion orderbook. We expect financial close and commencement of project by early 2010 and completion in 36 months. These two desalination plants are part of the three in the first phase of the Libyan government’s desalination program. Management highlighted that there will be a total of 3 phases to the program, implying greater orderbook visibility for Hyflux.We have not included the earnings and valuation contributions from these projects so we expect upside risk to our price target. We remain positive on Hyflux given its increasing market share in desalination in the MENA region, although we stay cautious on potential geo-political risk factors, as the market may award a risk premium on these projects until management proves itself on the execution front.

Hyflux: Buy (OCBC Research, 25 June)
Hyflux has announced a new MOA (Memorandum of Agreement) with the General Desalination Company (GDC) – the commercial arm of the Ministry of Utilities in Libya to for a number of JV companies to develop two seawater desalination plants. The first would be a plant with a minimum design capacity of 500k m3/day in east of Tripoli – possibly the largest membrane-based plant in the world; the second will have a minimum design capacity of 400k m3/day in Benghazi. Although Hyflux has provided a brief outline of the likely JV – which is pretty similar to the one adopted for its projects in Algeria, other details (including the project value) are still sketchy at this stage. As it may take several months before the actual agreement is signed, we do not expect the Libyan projects to have any immediate financial impact. But we estimate that the project value of the two projects should easily exceed S$1b (to as much as S$1.5b) and would bump up Hyflux's order book for the next three years. We believe that the latest geographical expansion into Libya is an important milestone for Hyflux and would further serve to showcase its technologies to the rest of the world, and should result in more project wins. Meanwhile, we are keeping our FY09 and FY10 estimates unchanged until we get better clarity on the two projects. Nevertheless, due to the positive development and the recent re-rating of the equity market, we raise our valuation from 18x FY09F EPS to 20x blended FY09/10 EPS and our fair value from S$$2.11 to S$2.52.

Keppel Corp: Buy (DMG, 25 June)
The divestment of Keppel's SPC stake to PetroChina represents a win-win partnership for both parties. For one, Petrochina could utilize Keppel's shipyard when it expands and/or upgrades its offshore facilities for deepwater exploration and production purposes. In addition, we expect more synergistic activities to occur in the medium to long term, such as joint collaborations to secure potential upstream assets. In addition, Keppel's Infrastructure division may be able to benefit from China's push for clean energy production and the gradual shift from coal to natural gas as the primary energy mix. We think Keppel could leverage on PetroChina's extensive platform to build up the former's infrastructure/energy/utilities business in China, given PetroChina's domination of the country's gas transmission network. Iy has also been reported that Brazilian construction group WTorre and Keppel were closing in on an agreement that would give Keppel a 70% stake in the Estaleiro Rio Grande (ERG) yard in southern Brazil. As the ERG facility was initially established by Petrobras, we believe its acquisition would bolster Keppel-WTorre's bid to clinch Petrobras' tender for the hull construction of eight floating production, storage offloading (FPSO) vessels. In addition, we think the cash proceeds will strengthen Keppel's balance sheet and allow it to explore M&A interests, particularly for expansion of Brazilian presence, integration of O&M expertise with upstream assets and pursuit of new infrastructure ventures. The strategic significance and outlook appears exciting, in our view. As such, we reiterate our BUY call on Keppel with a target price of S$8.60, based on sum-of-the-parts valuation.

Indofood Agri Resources: Buy (UOB Kay Hian, 24 June)
With 40% of total mature area under prime age and 29% in huge immature area, we expect sturdy crude palm oil (CPO) production from Indofood Agri Resources (IFAR) in the next few years. Despite the recent price weakness, CPO prices (FOB Malaysia) still increased a significant 33% qtr-on-qtr (qoq) to about RM2,575/tonne for the second quarter. We expect IFAR to post stronger revenue in 2Q09 on the back of sturdy CPO prices and higher production volume. Moreover, we believe margins in the plantation division are sustainable thanks to lower fertiliser purchase prices. In addition, London Sumatra Indonesia (LSIP/BUY/Rp4,100), a subsidiary of IFAR, was awarded The Roundtable on Sustainable Palm Oil (RSPO) certification for its four mills and factories located in North Sumatra estates which covers about 50% of LSIP's annual production. This certification will help the company to push its palm oil products to the European energy players. LSIP may also command a premium selling price of US$10-20/tonne for the CPO under RSPO certification. We expect net profit to decline 15% yoy to Rp1,056b in 2009 due to lower CPO prices, and increase 25% to Rp1,321b in 2010 on the back of higher CPO prices and production volume. Our CPO price assumptions for 2009 and 2010 are RM2,200/tonne and RM2,600/tonne respectively. Our target price is S$1.45, based on 12x 2010F PE for mid-cap and integrated plantation players. The stock is trading at 9.6x 2010F PE.

Keppel Land: Buy (Kim Eng, 24 June)
The recent sales momentum in the primary market has sparked off interest up to the mid- and high-end segments, with projects like One Devonshire (ASP ~$1800 psf) and Martin Place Residences (ASP ~$1700 psf) enjoying good take-up rates. We believe that this bodes well for KepLand, which has a landbank predominantly for these market segments. With the Integrated Resorts some 6-9 months away from completion, we believe that KepLand could capitalise on that to re-launch the balance units at Reflections at Keppel Bay, as well as possibly prepare to launch Marina Bay Suites. The proximity of the projects to each of the Integrated Resorts (IRs) would be a key selling point, and few competitors can boast to have a landbank that has similar exposure to both IRs. With the completion of both phases of the Marina Bay Financial Centre (MBFC) and the Ocean Financial Centre, KepLand would be one of the largest landlords of prime Grade A office space in the Marina Bay area, with an attributable GFA of about 1.6m sq ft. We believe that the low all-in costs of both developments (~$1000 psf) provide sufficient buffer against further declines in the market capital values of prime Grade A office space. We believe that with the return of buyers' confidence in KepLand's key markets like Singapore and China, KepLand is in-line for a re-rating. Backed by a strong balance sheet strengthened by the recent rights-issue, KepLand is well positioned for the next phase of the cycle. We maintain our BUY recommendation at a target price of $2.73, pegged at a 20%-discount to RNAV.

Epure International: Buy (DMG, June 24)
Epure is investing in a second build-operate-transfer (BOT) project in Shaanxi Province. The project is expected to have a treatment capacity of up to 30,000 tonnes of wastewater per day. The investment would cost approximately RMB46m and the concession period is 25 years. We estimate the project would commence around 2H10. As this project is not expected to impact Epure's earnings in FY09, we are maintaining our forecasts. This new project would bring the total number of BOT projects invested by Epure to six. We note that this latest project is the second BOT project secured in Shaanxi province. Similarly in Xi'an province, Epure has secured two projects so far. We remain confident that Epure's strong reputation and track record will continue to help them secure project wins in existing and new provinces. As evidenced by the RMB4t stimulus package, environmental issues remain a priority for the Chinese government in the long run. With the positive industry outlook, we are expecting continued growth in revenue from Epure's project wins. We are maintaining our estimates for revenue and earnings. Earnings is estimated to be RMB252.2m for FY09 and RMB299.8m for FY10. Applying a P/E of 10x to Epure's FY10 earnings, we derive a target price of S$0.51. We maintain our BUY rating given its strong order books of RMB800m (as at end Dec 08).

CapitaMall Trust: Hold (OCBC Research, June 24)
According to data from MasterCard, spending by local MasterCard holders during the first weekend (May 29 to 31) of the Great Singapore Sale (GSS) had increased by 7% YoY to US$26.3m. Including spending by tourists, sales increased by a smaller 1% YoY to US$37.5m and this was due to lower tourist arrivals. Nevertheless, spending by locals still represents a higher proportion of the retail spending and the improvement in spending sends a positive signal that consumer sentiment continues to improve after hitting a low in February. Even though the economic outlook remains uncertain, we believe that the initial stage of fear among consumers has now passed and small-ticket item spending by local consumers is now picking up, as seen in the recent retail sales data. This momentum has continued into May as supported by data from MasterCard. This bodes well for retailers that had been facing pressures from declining sales and rising operating costs since 2H08. To retail landlords such as CapitaMall Trust (CMT), concerns on tenant eviction and rising tenant turnover would also ease.While we believe that the worst could be over for the retail industry, we expect the recovery in consumer spending to be gradual as consumers are likely to stay cautious in light of the uncertain economic outlook. As such, we maintain our forecast of a 10% decline in rent for FY09 and a 5% decline in rent for FY10. Our RNAV estimate remains at S$1.36 per unit. We also expect mid-year revaluation of the retail malls to remain stable. After the Rights issue, its gearing level will decline to 29.1% after the repayment of borrowings and we estimate that CMT's asset portfolio can tolerate up to an 18% decline in valuation before it reaches the upper bound of its comfortable leverage target of 30%-35%. Our fair value of CMT remains at S$1.21 and we maintain our Hold rating.

DBS: Buy (OCBC Research, June 24)
In tandem with global equity markets, the Singapore market also staged a good rally in 2Q 2009, with the STI appreciating 67% from the 2009 low in March to the recent high of 2424.52. Together with renewed wave of buying, this also benefited the banking stocks. DBS, which hit a low of S$6.42 in Mar 2009, has since recovered to a high of S$12.90, more than doubling from the low. Over the past few days, a much-need breather has entered the market and we view this correction positively. There are also some signs of market fatigue, as reflected by the decline in daily trading volume and value on the local exchange as well as the drop in market breadth. This has thrown up an opportunity to buy into the banking sector again. There is also a gradual shift recently to defensive stocks and DBS offers a good dividend yield of 4.1% (based on our reduced DPS estimate of 46 S cents for FY09 versus 65 S cents in FY08). In 1Q09, we saw some capital market raising exercises locally, but the momentum gathered pace in 2Q 2009, led by several government-linked entities. We note that DBS was one of the key underwriters/managers of these issues (see exhibit 1) and we expect fee income to get a significant boost this quarter even if impairments remain high. In addition, the improvement in the equity market should also boost other fee-related income. Since hitting a recent high of S$12.90, the stock has corrected and closed at S$11.20 yesterday, down 13.2%. We are maintaining our FY09 earnings estimates for now, noting that impairment charges could remain high in 2Q and 3Q, albeit lower than the 1Q level of S$437m. We are also maintaining our peg at 1.2x book and our fair value estimate of S$12.40 for now, until we see further re-rating for the sector and the market. As there is a potential upside of more than 10% from current level coupled with the estimated yield of 4.1%, we are upgrading the stock to BUY. Accumulate at current level and lower.

Starhill Global REIT: Buy (UOB Kay Hian, 23 June)
SGREIT has announced a fully underwritten renounceable 1-for-1 rights issue at S$0.35 per rights unit to raise S$337.3m. The rights units are priced at a 45.3% discount to the last closing price of S$0.64. YTL Corporation has undertaken to sub-underwrite up to 75% of the total rights issue. Independent valuers had valued SGREIT’s portfolio of investment properties at S$1,954.6m as at 15 Jun 09, a decline of 7.1% from the valuation conducted on 31 Dec 08. The company's gearing has therefore increased from 31.1% to 33.4%. The 1-for-1 rights issue will reduce the gearing to 20.7%, thus providing financial flexibility. However, NAV/share will be reduced by 37% from S$1.27 to S$0.80. SGREIT intends to pare down its existing debts, pursue acquisitions and embark on asset enhancement initiatives. It is scouting for opportunities to invest in distressed assets in Singapore, Malaysia, China, Japan and Australia, particularly from distressed sellers having difficulties in refinancing debt. In Malaysia, SGREIT could potentially acquire retail assets from Starhill REIT listed on Bursa Malaysia. The company targets an asset size of S$3b within two years. SGREIT plans to invest S$100m for an asset enhancement initiative at Wisma Atria (plan not finalised yet), which will add 40,000sf of retail space fronting Orchard Road. Reducing debt will also help it to attain a lower cost of borrowing when refinancing S$617m of debt facilities due next year. We have cut our 2010 DPU forecast by 40.7% to 3.5 cents due to dilution from the rights issue and trim our assumptions for office rentals at Ngee Ann City and Wisma Atria. We cut our target price by 25.2% to S$0.80 based on the Dividend Discount Model (required rate of return: 7.7%, terminal growth: 2.0%).

CDL Hospitality Trust: Buy (UOB Kay Hian, 23 June)
As the economy recovers from the current downturn, we expect tourist arrivals to rebound by 20% yoy in 2010 after a 12% yoy decline in 2009 (2008: 10m), augmented by the opening of the two integrated resorts (IRs). Genting Singapore alone expects 12m visitors per year comprising 40% locals and 60% tourists. The locals include visitors from the Malaysian cities within a 3-hour driving radius to RWS. Apart from the casinos, both IRs boast a variety of tourist attractions such as the Universal Studios at RWS and the ArtScience Museum at Marina Bay Sands. Occupancy could return to above-80% levels from 2010 onwards. There is a huge supply of around 11,807 new hotel rooms in 2009 through 2012 adding to the existing stock of 31,364 rooms. This implies a 4-year CAGR of 9% in the Available Room Nights. However, our analysis suggests that occupancy rates could still return to above-80% levels, factoring in a mere 3% 4-year CAGR in tourist arrivals from 2008 to 2012 (vs the historical 10-year CAGR of 5%) at an average length of stay (ALOS) of 3.7 days. Our forecast of a 20% rebound in visitor arrivals in 2010 is expected to result in above- 80% occupancy levels from 2010. otwithstanding the recovery in occupancy levels back to above 80%, we expect RevPAR to remain largely unchanged as a result of the offsetting effects of lower room rates. Zeroing in on 2010, we expect promotional discounts at the IR hotels and knock-on effects on other hotels to keep room rates at 2009 levels of S$140-145. In the longer term, we expect room rates to stabilise below the historical three-year average of S$170 as we expect IR operators to offer more appealing rates in order to attract gaming revenue, and for the effects to trickle down to other hotels as well. A recent newspaper report noted that Novotel Clarke Quay, owned by CDREIT, has already filled 80% of its rooms for the 2009 Formula One event at lower rates. We expect to see a similar situation with the opening of the IRs in 2009 and 2010. We believe the knock-on effects from the opening of the casinos will be great, and CDREIT is well positioned to benefit from this as all of its properties in Singapore are strategically located either in or near the Central Business District and Orchard Road. We remain positive on CDREIT for its fixed rent component and its potential to reap benefits from the opening of the IRs. Our target price of S$1.24 is based on a two-stage dividend discount model (required rate of return: 7.7%; terminal growth: 2.5%).

Olam: Sell (DMG, 23 June)
On 1 Jun 09, Olam announced the issue of 273.5m new shares at S$1.60 each to raise gross proceeds of S$437.5m. The shares will be issued to wholly owned subsidiaries of Temasek. These new shares represent 13.8% of the enlarged issued capital of Olam. Olam indicated that 80-100% of the proceeds will be used to finance new capital expenditures and 0-20% for general corporate purposes. We spoke to management who indicated that Olam would consider all products that could enhance its margin, and acquisition of plantations is also possible. Olam has a adjusted net debt to equity of 0.83x as of Mar 09, and this will fall to a proforma 0.31x after the placement to Temasek. Olam share price is now 13% higher than on 29 May (last trading day prior to new share issue announcement). Whilst the additional funds will provide Olam with more muscle to make acquisitions, we believe the general weak global economies will limit organic earnings growth. With the placement, debt levels will fall and equity holders will enjoy a larger share of Olam's value. However, the improvement is partly offset by our DCF model factoring in a higher WACC of 7.2% (from 7.0% previously), which is attributed to a higher risk free rate of 2.73% (previously 2.12%) and market risk premium of 7.4% (previously 6.7%). We have raised our target price from S$1.83 to S$1.90. However, the recent surge in Olam’s share price has made it more susceptible to possible weakness in global equity markets.

Wilmar International: Buy (OCBC Research, 23 June)
Wilmar is one of Asia's leading agri-business group, where its business activities include oil palm cultivation, edible oils refining, oilseeds crushing, consumer pack edible oil processing and merchandising, among others. Headquartered in Singapore, its operations are located in over 20 countries across four continents, with a primary focus on Indonesia, Malaysia, China, India and Europe. Given its extensive network and business in China, Wilmar has plans to spin off its business there with a primary listing either in Hong Kong or China. According to management, it plans to float 20-30% of its China business. Despite its integrated agri-business model, Wilmar remains subject to the volatile fluctuations in the prices of vegetable oil like soy bean and crude palm oil (CPO), which remains a key risk for us. But given that cooking oil is a necessity and demand should be fairly inelastic, we believe it may be less of an issue for more downstream play like Wilmar than pure plantation plays. As such, we initiate coverage on the stock with S$5.64 fair value (based on 18x blended FY09/10 PER) and a BUY rating

M1: Buy (Kim Eng, 22 June)
M1's latest offerings – Take3 and the Sunsurf VAS data plans – are aimed at luring higher average revenue per user (ARPU) that can help improve margins instead of chasing market share. We reckon these initiatives should impact positively on margins and market share in the segments that matter within 1-2 quarters. Take3 (launched in Feb) allows users to choose a eligible handset within the subscription plan tiers without any upfront cost and exchange it for another handset after 9 months (for a fee) or after 20 months (without a fee). Out of the 5 bill plans, we reckon targeted users are most likely to opt for the $83/month SunMax plan as it includes popular phones (eg HTC Touch Diamond 2 and Blackberry Storm) that are also in the top-end $201 Talk All U Can plan. As phone buyers are more sensitive to the upfront handset cost than the monthly fees, this plan should boost ARPU. M1's new SunSurf VAS data plans also offers the most value-for-money. The $10.70/month 100MB Plus plan is the most compelling as it offers 10x more bundled data capacity vs StarHub’s Value plan. As these plans are targeted at high-end users that buy feature-rich smartphones that can download music or stream video, we believe these plans could also motivate users to switch to M1, especially SingTel which has no cap on monthly charges (unlike M1 or StarHub, which are capped at $36.38). Although M1 lost 11,000 subscribers in 1Q09, the decline was due to a 53,200 fall in 2G subs, where users are being migrated to 3G, and the deactivation of 8,000 prepaid subs. Most notably, M1 gained 50,200 3G subs and we believe Take3 was one major factor. Management indicated that 20% of new subscribers in 1Q09 took up the Take3 plan. Given these positive driving forces, we reckon margins should improve further and M1 stands a good chance of arresting its postpaid ARPU slide, which has fallen from $62 in 1Q08 to $60 in 1Q09. We maintain our Buy recommendation and target price of $2.01.

Rotary Engineering: Buy (OCBC Research, 22 June)
Saudi Aramco Total Refining and Petrochemical Company (SATORP) has finalized the awarding plan for the 13 Engineering, Procurement and Construction (EPC) contracts for its Jubail JV refinery which is expected to be fully operational by the 2H13. While news flow has indicated that SATORP will only be sending out letters of intents to the awarded contractors this week, MEED.com, a middle eastern newswire has indicated that Rotary 51% owned subsidiary (49% by Rafid Group), Petrol Steel, has won the refinery tank farm package. While official figures are not yet available, we estimate it to be worth US$700m. Besides having a strong track record and a ready facility in Jubail, the collaboration with Saudi Arabia based Rafid Group undoubtedly gave Rotary a favourable edge in winning the package. However, this would mean that the positive financial impact would be diluted. Moving ahead, good execution on this project would position Rotary to win more projects in the Middle Eastern region. Although the SATORP project is a key catalyst for Rotary, we believe that the group was and will still be pursuing projects in Singapore and the region to fully utilise its 7,000 plus global workforce staff. Management indicated that there were still some substantial projects (more than S$100m) that are up for tender in the region during the last results briefing. We have catered for project wins of about S$175m and S$185m in FY09F and FY10F, respectively. Although Rotary has yet to receive official confirmation of the contact, the likelihood of winning is high. We have factored the US$700m project to span 4 years from 2010 to 2013. We have assumed gross margin for EPC to start to edge upwards to reach a peak of 22% in 2011. However, the longer time span will have a less accentuated effect on the earnings impact as the Singapore based S$535m Universal Terminal that only spanned about 2 years. While we have rolled our valuation forward to FY10F, we have maintained our peg at 8x. If the terms of contract are better than our expectations, the stock could be positively re-rated Upgrade to a Buy with fair value of S$0.81 (prev. S$0.51).

Yangzijiang: Outperfrom (CLSA, 19 June)
Yangzijiang has significantly improved the efficiency of its existing yard over the past year. On top of this it started producing larger, more complex vessels at its new yard. The company reduced the production cycles for its containerships and bulk carriers by 7 to 30%. This is the result of extensive new worker training programs and the adoption of new engineering technology. At the new yard it delivered 4,250 TEU containerships and 92,500dwt bulk carriers more than double the size of previous vessels. Thanks to its 52 year track record Yangzijiang delivered 27 vessels in 2007 or 3% of the total Chinese shipbuilding output. So far this year the company has delivered 16 vessels and is on schedule to deliver another 24 vessels by the end of the year. In 2008 the company was only using 25% of its new yard's capacity, so it has enough space to deliver 40 vessels in 2009 and 45 in 2010. Yangzijiang has consistently collected cash for the vessels under construction. Out of its US$6.9 billion order book as of the end of 2008, the company had received US$3B or 44% in cash payments. It had only recognized US$0.7B in revenues for the vessels under construction; the remainder remains a liability on its orderbook. Hence, we believe that the 6 months delivery delays that the company has been granting to some of its customers should not create a cash constrain especially since Yangzijiang is in a 67% net cash position. We increased our PE-derived target price from S$050 to S$0.75 as a result of the increase in PE estimate from 6x FY09 to 9x in-line with global rise in valuations of shipbuilding stocks.

First Resources: Neutral (DMG, 19 June)
We have upgraded First Resources to Neutral due to higher than expected crude palm oil (CPO) production and lower estimated FX losses going forward for FY10. Correspondingly, our target price has been raised from S$0.42 to S$0.60, based on 10x FY10 earnings. We are, however, maintaining our view that CPO prices may trend down in 2H09 on the back of strong production. We are now expecting a 10% year-on-year CPO production growth for FY09 and FY10, up from our earlier estimates of 5% for both years previously. This growth in production is in line with production guidance from some of the other Singapore-listed Indonesian planters. In addition, we have also revised our financial expenses (net) for FY09 and FY10, to IDR364.6b (+4.1%) and IDR199.7b (-43.1%) respectively. We estimate lower FX losses in FY10 vis-à-vis FY08 taking into consideration the expected weakening of the US$ vis-à-vis the Indonesian rupiah. Consensus estimates that the US$/IDR is expected to weaken from current spot rate of 10,175 to 9,500 by end 2010. We are maintaining our CPO price assumption of RM1,900/tonne for FY09. Meanwhile, we have revised our revenue downwards by 3.7% in FY09 and upwards 0.7% in FY10 with the 5ppt increase in production and exchange rates updates. Revenue for FY09 and FY10 now stands at IDR2.1t and IDR2.4t respectively. On the other hand, earnings have been revised downwards by 18.6% in FY09 (due to lower financial income forecasted) but up 31.4% in FY10 largely due to revisions in the expense estimates detailed above. This brings earnings to IDR320.8b in FY09 and IDR614.8b in FY10.

ParkwayLife REIT: Buy (Kim Eng, 18 June)
PREIT has appointed Mr. Tan Seak Sze as the new Vice President of Investment with effect from 15 June. Mr Tan Tee Meng, who previously held dual roles as VP of Asset Management and Investment, had been re-designated to VP of Asset Management. We read this as PREIT being ready to take a more active stance on acquisitions and asset enhancements initiatives (AEI). The management has also stated its intention to reduce tenant concentration risk from PHL from the current 80% to about 40-50% in the long term and is open to investing in more nursing homes, medical units or funds in Japan, Australia, Singapore and Malaysia, possibly adopting the similar inflation-linked leasing structures. AEIs are also advancing, with indicative yield of more than 10%. Fitch Ratings had downgraded PREIT's long-term issuer default rating and $500m MTN program to 'BBB' to 'BBB+' on weak credit profile of sponsor, Parkway Holdings (PHL), despite PREIT’s good interest coverage, low debt cost and refinancing risk, and stable rental mechanism. PHL owns Parkway Hospital Singapore Pte Ltd, the operator of PREIT's hospitals in Singapore. However, we believe the negative has been priced in. The credit-rating downgrade centres on whether PHSPL is able to service rental payments to PREIT, should credit quality of PHL deteriorate. We believe that such concerns are overplayed as the master lease agreement confers PREIT the right as a creditor to claim the rental guaranteed for the remaining lease period in the event PHL goes into financial distress. Our target price has been raised to $1.17 as we roll forward our DDM valuation to FY10F. The stock price has increased 24% over the last three months since our initiation despite the premium over S-REITs but has lagged the FSTREI by 14%. Entry of new shareholders from Europe, US and Asia observed by the management during this period affirms our belief in the long-term growth potential of PREIT. Reiterate Buy.

Singapore Press Holdings: Buy (UOB Kay Hian, 18 June)
The latest May page-count is a clear sign that confidence is returning with recruitment drive stepping up. Display ads are also showing signs of a recovery with a declining monthly contraction of 18%, 8% and 7% in March, April and May respectively.SPH will be releasing its 3QFY09 (March-May) results in early-July. 3QFY09 is likely to show the worst performance in the current economic crisis. Our page-counts point to an 18% yoy contraction in SPH's advertising revenue (AR) in 3QFY09 (2QFY09 page-counts: -13% yoy). SPH earlier reported newspaper AR contraction of 20% in 2QFY09, higher than the 13% indicated by our page-count monitor. Our page-count monitor suggests a sharper contraction in 3QFY09 than 2QFY09's. Our monthly page-counts, however, are showing a gradual recovery with an AR contraction of 23% yoy, 16% yoy and 14% yoy in March, April and May respectively. ACNielsen data point to an improvement in advertising spending with improving monthly contraction of 16% in January and February (combined to even out the seasonal effect of the lunar new year), 19% in March and 9% in April. SPH's share price historically has a strong relationship with advertising spending growth. Meanwhile, newsprint price peaked at US$760/tonne in December and has since been on a decline. The price of 30-lb newsprint currently stands at US$550/tonne.. SPH's charge-out newsprint cost (2QFY09: US$827/tonne) typically lags spot price by six months because of its newsprint inventory. Furthermore, SPH's purchase prices are lower than spot prices due to its bulk purchases. In 1HFY09, newsprint cost was 17% of SPH’s S$410m total cost. We have factored in an average charge-out cost of US$750/tonne and US$550/tonne in our FY09 and FY10 earnings forecasts respectively. With advertising spending showing signs of a recovery, we see a re-rating of SPH. While the stock is usually a late-cycle recovery play, we believe it will stage an early comeback this time round, aided by the opening of Singapore's two mega integrated resorts, Marina Bay Sands and Resorts World@Sentosa. We maintain our earnings forecasts and target price of S$3.90 (8% discount to our SOTP valuation of S$4.23.

Ascott Residence Trust: Hold (OCBC Research, 18 June)
ART has seen a 41% increase in its unit price since April on the back of, we believe, lower risk of a systemic credit breakdown. World governments have 1) committed to maintaining the viability of credit institutions and 2) also introduced fiscal stimulus packages. However, this economic stimulus has yet to translate into private spending. In line with this view, we expect 2Q results to be largely unchanged versus 1Q09. Our investment thesis stands: we see near-term yield volatility but believe ART's long-term prospects are sound. ART is only trading at 0.44x book but we do not think current levels provide the best entry point for investors, in view of the near-term fluctuations in yield and RevPAU. We advocate patience for now and downgrade our rating for ART to HOLD. Our S$0.82 SOTP value incorporates our assumption of an equity issue of S$160m at the S$0.55 price level (up from S$0.45). Our fair value estimate for ART is S$0.61 (S$0.57 previously), at a 25% discount to our SOTP value.

Singapore Exchange: Buy (Citi Research, 17 June)
We raise our target price on SGX to S$9.50 (from S$8.00) based on a new 12-month STI target of 2700 (from 2400). We raise forecasts 7-19% on FY10E average daily turnover (ADT) of S$2.1bn. The recent STI rally, up 65% in 14 weeks, saw ADT triple from Feb lows to S$2.1bn/day in May, suggesting a forecast 61%qoq jump in 4Q09E (June 2009) profit. Our revised FY10 forecast of S$444m is 28% above consensus. Key risk is after a nearly 100% price jump SGX is vulnerable to price corrections. Our strategist has raised the STI target to 2700 (mid-cycle STI P/B of 1.62x), citing upside risk to our above consensus 2009E GDP of minus 5%yoy and Singapore being out of recession possibly as early as 3Q09. Past market cycles suggest that the STI "normalizes" toward mean P/B levels as expectations of recovery set in, and may even overshoot the mean during periods of ample liquidity. It is important to note that we are just 14 weeks into this new recovery cycle. Our study of past STI cycles shows that with one exception (post Sept-01) every STI bull market recovered at least 90% of the prior bear market points lost, which in the current cycle implies returning to 3590 on the STI. Having already rallied c.100% in 14 weeks from its S$4 trough, SGX is susceptible to near-term price volatility and market corrections. A fundamental medium-term risk would be the entry of a competitor exchange, which could materially affect SGX's equity pricing structure.

Midas: Buy (Kim Eng, 17 June)
Midas has secured two contracts worth RMB603m to supply aluminum alloy extrusion profile for 100 inter-city high-speed train sets (1,600 train cars) to subsidiaries of the China Northern Railway Group (CNR Group). This will comprise of a 50-train set RMB306m contract from CNR Changchun and a 50 train set RMB297m contract from CNR Tangshan. The train cars involved will be part of the "CRH3-380" project which has speeds of up to 350km/h. We believe these cars will be used for the Beijing-Shanghai High-Speed train line. This amounts to a high profile and prestigious project and is also Midas's single largest project to date. We estimate these contracts, which will be delivered from 2H2009 to 2011 will involve about 18,000 tonnes of Assuming an even delivery schedule, these contracts alone will utilize about 25% of Midas's enlarged 30,000 tonnes per annum production capacity during this period. It also forms 30% and 28% of our revenue estimates for FY10 and FY11 respectively. While initially produced on its existing lines, this project will involve the upcoming third production line once it comes onstream in 1Q2010. A minor portion of the contracts will also be for downstream fabrication work on the profiles, which we believe will eventually aid Midas's foray into this area. We believe that new contract announcements are likely as the third production line comes onstream. The PRC government's RMB 4 trillion stimulus package will continue to benefit the rail infrastructure sector and we believe there will be more contract wins for Midas as we approach 2010. Buy with target price maintained at $0.82.

MAP Technology: Sell (DMG, 17 June)
MAP Technology announced a profit warning for 2Q09 and FY09 and is expecting a loss for the full year. Notable reasons for the dismal outlook given include:- (i) the global economic downturn; (ii) the absence of the US$19.6m exceptional gain from the previously planned sale of M&J Technologies; (iii) provision for doubtful debts for Fujilink and; (iv) a potential impairment of the goodwill on the acquisition of Amould Plastic Industries and SEB from Jurong Technologies made during Aug 08. MAP also announced a 4-for-1 rights issue of shares at S$0.01 apiece which represents a hefty 94% discount from its last traded price of S$0.175. This move is expected to generate gross proceeds of S$14.86m, representing 15.4% of its shareholders' equity as of end-1Q09. According to our estimates, the theoretical ex-rights price works out to be S$0.043, representing a 75.4% discount to its last traded price. We view MAP as a HDD-component supplier that has been lagging behind its peers – during 1Q09 where most of the more well-managed SGX-listed HDDcomponent suppliers had simply registered lower earnings, MAP had instead turned in a US$1.3m loss. Moreover, almost all of these tech firms are expected to experience a positive 2Q due to restocking activities while MAP is seemingly being left out of the party. We therefore do not view this rights issue exercise as a cure-all to the woes that it is presently going through. We advise investors to sell off their MAP shares in the open market rather than subscribe to the rights. Accordingly, our SELL recommendation remains although our target price of S$0.16 is under review.

SingTel: Buy (OCBC Research, 17 June)
SingTel's 100%-owned Australian unit Optus has won a contract to provide managed network services worth A$186.5m over the next four years from the Australian Taxation Office. The contract is said to be Optus' largest contract win to date in the federal government sector, which was awarded via a competitive tender. However, the financial impact of this contract is not expected to be material to the SingTel group, which posted operating revenue of S$14.9b for FY09 ended 31 Mar. Nevertheless, we remain upbeat about SingTel's prospects, both in Singapore (NBN), Australia (possible sale of network assets), as well as on its regional associates. We will be keeping a close watch on the proposed MTN-Bharti merger and will adjust our forecasts accordingly when we get more information. For now, we maintain our BUY rating and our S$3.18 fair value.

StarHub: Buy (DMG, 17 June)
The National Broadband Network (NBN) opens up new opportunities in the corporate segment. Currently, StarHub's fibre optic network covers 25% of non-residential buildings, with the remaining 75% being a virtual monopoly for SingTel. Post-NBN, StarHub will be able to raise its market share at the expense of SingTel. Another area which the latter dominates is the government sector, and this is likely to provide some growth for StarHub in the next few years. Consumers may be salivating at the prospect of having high speed internet at a fraction of today’s prices with the launch of NBN, but think again. CEO Terry Clontz believes that the pricing may be as much as S$75 per residential line, less than 10% lower than today’s prices. The high cost and low margins may deter competitors from entering the fray. He concedes that M1 will try to gain market share resulting in some near term downward pressure on margins, but beyond that, it will still be a "shoot-out" between StarHub and SingTel. StarHub will likely fight hard to retain the broadcast rights for the English Premier League (EPL). We estimate that StarHub's winning bid will be 50% more than the US$160m that it paid previously, and this would likely lower EBITDA margins by 1.5%. However, Media Development Authority (MDA) is now studying the possibility of non-exclusivity of such coveted contents, which we believe is positive for StarHub as it lowers content costs substantially and allows it to retain its customers. Mobile broadband growth will likely peak this year, with handheld smartphones usurping the throne. It will be applications driven, leading to higher average revenue per user (ARPU). In management's view, Pay TV also has some room to grow, from the current penetration rate of 46% to 55-60% in the steady state. Maintain BUY on sound fundamentals and high yield, with DCF-backed price target of S$2.39.

Midas Holdings: Buy (DMG, 17 June)
Midas Holdings announced that its Aluminium Alloy Division, Jilin Midas Aluminium Industries, has secured two contracts that are worth Rmb603m collectively. These contracts will be for the supply of aluminium alloy extrusion profiles for a total of 100 train sets for the inter-city high-speed train CRH3-380 project in China. We reiterate that Midas' ability to clinch these contacts further proves its market leadership position in the PRC rail transportation sector. Additionally, the PRC government's Rmb4 trillion stimulus package – which has a strong focus on rail infrastructural development – is generating many opportunities in the railway infrastructure market. These two contracts are expected to be earnings-accretive for 2H09 to 2011. We maintain our BUY recommendation with target price of S$0.855 under review.

Oceanus Group: Buy (OCBC Research, 16 June)
Oceanus is engaged in the breeding, processing and sale of abalones. It is the largest land-based abalone producer and one of the lowest cost producers in the world. The group is in the expansion phase of its business cycle. It has been expanding its abalone population aggressively in preparation for exponential growth over the next few years. We expect earnings to be driven by: (i) the rapid expansion of its abalone population, (ii) the maturing age profile of its abalone, which will grow to marketable sizes over the next two years, and (iii) downstream activities such as its newly established restaurant chain and processing activities. Oceanus offers growth amid a recessionary environment. We initiate coverage on the stock with a BUY rating and S$0.40 fair value estimate based on 2x blended FY09/10F NAV.

Yanlord: Buy (UOB Kay Hian, 16 June)
Yanlord continues to be one of our top choices in the sector as: a) 60% of its NAV is exposed to Shanghai and the neighbouring cities where property prices going forward will benefit from the development of Shanghai into a major global financial hub, b) its landbank is situated in urban locations where demand is more assured and prices firmer, c) it boasts one of the best corporate governance track records among mainland developers, and d) there is further upside potential on its NAV if the Yanlord brand continues to command premium prices on the new projects and as it ventures into new cities. Following an amazing April, Yanlord generated another Rmb1.4b (52% from Shanghai Yanlord Riverside City and 25% from Yanlord Peninsula in Suzhou) contract sales in May. Some 72% of the total Rmb5.3b generated up to May this year came from Shanghai Yanlord Riverside City. As a result, almost 85% of the 0.2m sqm completed but unsold inventories brought forward from 2008 have been sold. The bulk of the remaining unsold space relates to the 30,000 sqm at Nanjing Yanlord International Apartments. As inventories have already come down sharply, there is no rush to sell any units now. The rate of sales has exceeded expectations. Contract sales in the first five months this year are already 13% above that generated in the whole of 2008, and account for some 58% of the Rmb9b that could be generated this year assuming all units that are available for sale are sold. As Yanlord's contract sales in May have again beat expectations, this has given us confidence that Yanlord’s brand carries a solid premium. As a result, we are now using more upbeat average selling price (ASP) assumptions in our model, raising our 2009 net profit forecast by 9% to S$265m, representing a 60% yoy growth, followed by a 20% upgrade for 2010. We have also replaced our original assumption of a 10% increase in property prices in 2009 by a more upbeat 20% to take into account Yanlord’s premium brand, thereby raising our NAV from S$2.61 to S$2.88/share. Our target price has been raised from $2.87 to $3.17.

Hyflux: Buy (Kim Eng, 16 June)
The recent spate of rights issues and share placement deals has prompted some market talk of Hyflux being the next in line, given the relatively high gearing ratio of the Group. The company's management has however stated categorically that there will be no such development in the near future as they do not see the need for it. We agree with management that despite a net gearing ratio of 0.8x currently, there is no cause for concern. Even with a $300m Medium Term Note programme in place since June 2008, the Group has only drawn down $23m so far in the previous two months at the bankers' request. The rates were at 4-5%, which we believe is favourable. The share price of Hyflux Water Trust has risen 47% year-to-date to $0.52 currently. With the implied dividend yield moderating to a more realistic 10.7%, the trust is now in a better position to absorb yield accretive Build-Operate-Transfer (BOT) projects from Hyflux. This continues to be important to Hyflux's capital recycling strategy. Following the cessation of its Middle East joint venture with its Dubai partner, Istithmar in 2006, the latter has been selling down its 9.7% stake in Hyflux. Management believes Istithmar has exited completely, following some private placement deals recently. We believe this removes a major share price overhang. In its place, Japan Gas Corporation, whom similarly has a presence in Algeria, now owns 2-3% of Hyflux. We have rolled forward our valuation to FY10, lifting our target price to $2.63 in the process. Valuation for its international peers such as Veolia has improved substantially since our initiation report in April. Despite its smaller, we continue to believe Hyflux should be traded at a premium with its better growth potential and lower cost base.

Singapore Airlines: Buy (Kim Eng, 16 June)
SIA has posted a sharp drop in passenger traffic, down 22.8% year-on-year (yoy) for the month of May. This was at the height of concerns over the H1N1 swine flu pandemic, which saw discretionary travel affected. As a result, passenger load factors fell by 7.8 ppts to 66.9%, despite SIA's planned passenger capacity cutback of 13.9% to mitigate lower demand from the weak global economy. Cargo posted a load factor of 61.2, on the back of a 20.7% reduction in loads, matched by a 21.4% drop in capacity, to actually post a yoy improvement of 0.5 ppts. While cargo numbers continue to look weak, they indicate that the business may have bottomed out, with a consecutive improvement of 2.1% in cargo carried. We believe that the worse of the H1N1 flu scare may be over, as air travel returns to non-crisis conditions. For passenger traffic, we therefore expect June loads to show some improvement, not only on the back receding H1N1 fears, but also due to June school holiday demand, as well as moderate improvement of economic conditions. A recent check of SIA's airfares on its website also indicates a lower level of discounting. We are leaving our full year load factor and yield assumptions unchanged, and maintaining our FY10 earnings forecasts at S$865m. This implies that we expect SIA to post a fairly decent profit, mainly due to reduced overheads, such as jet fuel. We also maintain our Buy call on SIA, with a target price of S$13.20, based on 1.1x book value. Despite weak business conditions, SIA is well equipped to weather the downturn, and investors continue to recognise the quality of this blue chip investment.

Singapore Airlines: Sell (UOB Kay Hian, 16 June)
SIA traffic numbers continued to deteriorate as passenger traffic fell 23% and cargo 21%. Passenger load factor (PLF) fell 7.8 ppt to 66.9 % as traffic decline outpaced capacity cuts. However load factors for cargo traffic improved 0.5% as capacity cuts were slightly larger than the traffic decline. We have opined for some time that SIA's passenger traffic is unlikely to stage a significant rebound, given competitive pressure. The weak April and May traffic numbers which show a collective 20% drop in traffic support our bearish stance. SIA also indicated that the spread of the Influenza A virus will impinge on demand for air travel. May’s load factor at 67% suggests that airline operations are making a loss. In 1Q09, breakeven PLF was 70.5%. Assuming the same breakeven level, SIA would have lost 3.6 cents for every passenger km flown, which works out to be S$213m. Traffic or breakeven load factor has to improve in the coming months or we would have to lower our estimates further.Our recommendation on SIA remains a SELL with a $9.80 price target.

Hong Leong Finance: Buy (DMG, 16 June)
HLF started its sequential loan book contraction from 2Q08, when banks were still growing their loans. As of Mar 09, HLF contracted its loans 3.7% year-on-year while the systemic loan grew 8.6%. This reflects HLF's conservatism, which is a big positive in the current recessionary environment. Our recent checks with management suggest that loans could remain weak as developers will repay their loans upon TOP of their projects but not many are embarking on new land acquisition We forecast HLF loan to contract 5.4% in FY09. About 30% of HLF loan book is to the building and construction space and 18% for housing loans. This high exposure is on account of the Hong Leong Group's participation in the Singapore property market. The recent housing sale sentiment improvement will also translate to higher asset quality for HLF. We are maintaining our earnings forecasts, and have assumed FY09 provisions of S$38m, sharply higher than FY08's estimated S$10m (out of the total S$55m, Lehman Minibond Notes, which is one-time, account for S$45m). If provisions were lower than our forecasts, then HLF earnings could surpass our forecasts. Valuation remains attractive with HLF is trading at a P/NTA of 0.8x (based on Mar 09 NTA of S$3.16/share). Our $3.20 price target is pegged to 1.0x of 2009 NTA. Assuming a 49% payout ratio, 2010 dividend yield is a fairly respectable 4.7%.

Hong Leong Finance: Neutral (UBS, 15 June)
HLF is now trading at 13.1x earnings and 0.87x book after having rebounded 71% from the lows of March. This represents mid-cycle valuations and we think further upside will be limited given the absence of significant earnings catalysts. Also, we believe the company is unlikely to return to its high dividend payout policy in a recession. Given the lack of a catalyst in the near term, we downgrade the stock from Buy to Neutral rating. In Q1, loan growth was down by 11.7% from a year ago and we think this trend will remain throughout 2009 as HLF has high exposure to real estate and hire purchase. This concentration also poses higher provisioning risk, especially with car loans as their value falls in a recession. In recent years, HLF's high dividend payout had been one of the key attractions but we believe given the economic slowdown, the company is unlikely to revert back to that policy this year. We estimate the payout will be 25%, translating into a yield of only 1.9%. We revise our price target from S$2.60 to S$2.90 as we roll over our estimates to mid 2010 to reflect a 12-month outlook. We derive our price target using the Gordon Growth model, with an ROE of 6.6% and COE of 6.7% (previously 7.7%).

Armstrong: Hold (Kim Eng, 15 June)
We are reducing 2009 forecast by 19% as we understand Peugeot sales have been affected by political tensions between China and France over Tibet since last year. In fact, China recently banned sales of Renault cars in apparent retaliation against Paris granting honorary citizenship to the Dalai Lama. Armstrong supplies a high value part, the door shield system, to Dongfeng Peugeot-Citroen Auto (DPCA) in China. Still, we expect Armstrong’s China auto business to be the only segment to show growth this year while overall auto sales decline will be less than expected. China auto sales have exceeded forecasts in Jan-May, +21% year-on-year (yoy) to 4.96m units. Also, Armstrong has been approved by a major customer in China for a large car seat-related part. Investment will not be substantial but the payoff could be significant as the part is higher in value than the door shield systems, its highest value part to-date. Also, Armstrong is on track for 2Q09 to be far stronger than 1Q09 ($0.7m net profit, -83% yoy), as it has been experiencing a pickup in orders from all businesses since March, most notably its automotive plants in China and Thailand, while HDD has exceeded previously revised down expectations. There should also be a partial writeback of provision for forex loss as the US$ has fallen from the peak of 1.55 in 1Q09. On the bright side, we also do not expect Armstrong to be affected by GM’s recent bankruptcy filing in the US, as direct customer Shanghai GM only accounts for less than 0.5% of total sales. In fact, it is likely that there would be no impact at all as GM is doing well in China and has a strong 50% partner in SAIC (Shanghai Automotive Industry Corp). However, if VW is affected, then there would be an impact as VW accounts for 10% of auto sales. Despite the latest development over Peugeot, the market already expects 2009 to be a weak year hence there should be no adverse reaction in the share price. However, we downgrade our recommendation to Hold with a lower target price of $0.20 (still based on 12x P/E), due to lack of other positive catalysts.

Cambridge Industrial Trust: Buy (DMG, 15 June)
We have upgraded CREIT to a BUY, with a projected total return of 23.4%. Our DDM-backed target price of S$0.40 reflects a 10.2% discount to its RNAV of S$0.44. CREIT’s current FY09F – 10F yields of ~ 13% represent attractive premiums vs. its industrial peers (9.0%), S-REITs (8.2%) and 10-yr bonds (2.8%). While the credit market has eased, external growth should remain stymied in the near to medium term for S-REITs, as capital preservation and tenant retention remain their focus. Coupled with a shift in investors' preference from defensives to cyclicals, we expect CREIT to benefit from a renewed interest in S-REITs with relatively higher yields, which are backed by solid organic drivers. Valuation also appears cheap at 0.49x P/B, vis-à-vis S-REITs (0.68x) and industrial REITs (0.87x). We expect rising cap rates to exert upward pressure on CREIT's 39.9% gearing, although this should be mitigated by its low portfolio rents (S$0.85 psf pm) and sturdy occupancies (> 99%) vis-à-vis the industrial sector. As such, we view positively management's intention to pare down gearing, which we think could be through asset divestments and / or equity fund raising. Our RNAV of S$0.44 / share assumes a cap rate of 8%, implying revaluation losses of S$230.2m and gearing of 52.1%. Fresh equity of S$165.5m would need to be raised for management's goal of 30% gearing. Despite diluting DPU by 36–45%, any equity overhang should be removed. Aside from Olivine Magnetics’ eviction in Sep 08, new tenant defaults have not surfaced. We believe this reflects the quality of CREIT's rental income, underpinned by long lease expiry periods (up to 15 years) and high amount of security deposits (16 months rental per tenant).

Chartered Semiconductor: Sell (OCBC Research, 15 June)
Chartered Semiconductor had revised its revenue guidance upwards on the back of an incremental improvement in business, mainly from its mature technologies. 2Q09 revenue is now expected to come in at around US$338-348m (previous guidance: US$321-333m), while its net loss is likely to narrow to US$45-53m (previous guidance: US$54-64m). Utilization rate expectation, likewise, is raised to 59-63% from 55-61% as guided previously. This set of revised projections mean that 2Q09 revenue may grow at a faster 38.6-42.7% QoQ (31.6-36.5% QoQ previously) and that the net loss position is likely to improve significantly from US$98.8m seen in 1Q09. In just the last three weeks, we also note that at least two industry watchers had raised their 2009 global semiconductor sales forecasts amid better-than-expected 1Q09 IC sales and views that the market had probably bottomed. Gartner, for example, now expects the 2009 industry revenue to fall to 22.4%, slightly better than its 24.1% decline projected in February. This was joined by estimates from World Semiconductor Trade Statistics (WSTS) and Semiconductor Industry Association (SIA), which were projected to hit a similar 21.3-21.6% decline. The most optimistic forecasts, in the range of 13-17% decline, came from VLSI Research and IC Insights. We think that these developments, though widely anticipated, are positive signs for a possible earlier-than-expected breakeven in Chartered’s profitability and may herald a sooner-than-expected recovery in the semiconductor industry. Indeed, both WSTS and SIA, project that global sales are likely to rebound in 2010, with growth of approximately 6.5-7.3%. We are now raising our FY09 revenue forecast by 9.6% to reflect the improvement in Chartered’s 2Q09 business and a possible better outlook. In line with the strong re-rating in the semiconductor industry, we are also applying a 0.6x FY09F NTA to our fair value from 0.4x previously. While our fair value is raised from S$0.80 to S$1.40 (adjusted for share consolidation), we believe the sharp rally in its share price could have caused it to run ahead of its fundamentals. Noting that an increasingly high unemployment rate worldwide may hamper consumer spending and in turn the global semiconductor demand, we think that it is an opportune time for investors to lock in profit now than to bear any possible downside risks.

Goodpack: Buy (OCBCResearch, 12 June)
Goodpack is principally engaged in the business of renting its multi-modal, returnable metal box system, known as Intermediate Bulk Container (IBC), used for the packaging, transporting and storage of cargoes. We believe Goodpack, as the world's largest provider of IBCs, will be able to achieve economies of scale, greater trade-lane matching opportunities and present a high barrier to entry for its competitors. With prices for packaging material on the rise over the past few years and the recent implementation of International Phytosanitary Measure (ISPM 15) regulation requirement, Goodpack is also poised to ride on the growing preferences by customers to switch from traditional packaging solutions to its IBC packaging. We like Goodpack for its strong earnings margin, market leadership and sturdy growth profile. While the group's business is inevitably being affected by the current poor macroeconomic conditions, we expect the group to resume its positive growth in profitability in FY10-12, where the global economy is widely expected to improve and customers begin to take up more leases of Goodpack's IBCs. As such, we initiate coverage on Goodpack with a BUY rating and S$1.14 fair value, based on a Discounted Cash Flow (FCFE) model. Our fair value implies a 13.1x FY09F EPS and 11.6x FY10F EPS; though it may appear high, we note that it is still significantly lower than the average PER of 19.9x seen during the 2003-04 SARS crisis.

Mermaid Maritime: Buy (DBS Research, 12 June)
Mermaid provides niche tender rig drilling to the production phase of offshore oilfields in SE Asia. These contracts are typically long-term in nature, and stretch 2-5 years. We expect growth of this business to be underpinned by: 1) Higher utilisation of its tender rigs, with mandatory servicing after every five years completed in mid-2008, 2) Impending rig delivery by early FY10, and 3) Re-pricing of tender rig contract up by 27-33%. Mermaid also operates a fleet of subsea vessels/equipment and tender rigs, and an experienced group of in-house/sub-contracted divers to provide customised services to its clients. We expect Mermaid to deliver 60% net profit CAGR in the FY10-11 periods (FYE Sept). Note that Mermaid's recurring net profit is projected to dip 20% year-on-year in FY09 to Bt933.6m, due to a one-off poor 2Q09. Despite committed capex for one tender rig and two vessels, Mermaid's net gearing is a healthy 0.3x in FY09-10. We are initiating coverage on Mermaid with a BUY recommendation, with a fair value of S$0.85, based on 7x and 10x blended FY09/10 PE for its subsea engineering business and drilling services respectively.

Chartered Semiconductor: Buy (DBS Research, 12 June)
Chartered's management has raised sales guidance to US$343m (+41% qtr-on-qtr) compared to previous expectation of US$327m (+35% q-o-q) growth. In line with the higher revenue. Net loss is expected to narrow by approximately US$10m to US$49m vs previous guidance of US$59m. Chartered is seeing incremental improvement in their business, coming from mature technologies and now expect wafer shipment to increase approximately 60% compared to 1Q09. News is positive to Chartered and coincides with our view that semicon recovery is underway. We believe this uptrend is likely to continue until the season peak in Q3 as OEMs and retailers stock up ahead of the buying season. This also implies that production and shipment for Q3 will surpass that of Q2. Reiterate Buy with TP of S$3.50. We will tweak our earnings forecast upward slightly but the impact will not be significant to book value. Hence, we are maintaining our TP of S$3.50, which is based on mid-cycle valuation of 1.3x P/B.

SPH: Buy (DMG, 12 June)
The market is speculating that SPH may hold back on paying out the earnings from Sky@eleven till the money comes in upon TOP, dragging payout ratio down to 70% (90% in FY08). In our view, that is unlikely and we expect payout to be at 90%. SPH has stated that it will pay out a "high percentage of recurring earnings" and not cashflow. It has the capability to do so, given its healthy balance sheet (net gearing of 12%) and low capex requirements. We believe that default risk is low for the project, and have gotten even lower with the revival of the property market. CDL's The Arte, which is also located in the Thomson area, saw keen interest and units were sold at an average of S$1,000 psf (S$975 psf for Sky@eleven). Should buyers default, SPH actually stands to benefit as it has already collected the first 20% as down payment. Contributions from Sky@eleven account for 30-35% of dividends over the next two years. In FY11, there will no longer be any contributions coming through from property development after TOP. We believe that Paragon, which has seen its rental space expand 6% to 700,000 sq ft after its recent renovation, will partially make up for the vacuum. We have assumed a 10% average rental growth to S$14.9 psf/month by 2011, which we believe to be a conservative figure given the successful remaking of Orchard Road. This will raise rental from Paragon by 17% from FY08. Coupled with its core newspaper business, SPH should be able to dish out at least S$320m in dividends (or S$0.20 per share) post Sky@eleven, and more during good years. At current share price, this works out to a palatable yield of 6.3%. Maintain Buy with price target at $3.40.

Chartered Semiconductor: Buy DMG, 12 June)
Chartered Semiconductor revised its outlook upwards for the 2Q and is now expecting revenue and net loss of c. US$343m and c. US$49m respectively, an improvement as compared to its previous guidance of US$327m and US$59m. Average selling prices (ASPs), however, are now forecasted to be lower at around US$912 (from US$918 previously) although utilization rates are anticipated to improve by 3 ppt to about 61%. We continue to subscribe to the view that the technology industry has most likely bottomed out in 1Q09 and that any recovery in the electronics sector should therefore be first felt in the semiconductor space, given that semiconductors are regarded as the frontrunner of the whole technology cycle. Just recently, Gartner also announced that it now expects global computer chip sales to fall 22.4% in 2009 YoY to US$198b, an improvement from its previous estimate of a 24.1% drop. Likewise, the Semiconductor Industry Association (SIA) is also looking for worldwide chip sales to decline 21.3% YoY in 2009 although it is forecasting for a 6.5% growth in both 2010 and 2011. We have adjusted our earnings forecasts to reflect these new developments although we are still expecting losses for the chip foundry in 2009 and 2010. Currently valued at 1.05x FY09 P/B and assuming that it trades up to the 20% discount of the industry average of 1.5x FY09 P/B at 1.2x, we maintain our BUY recommendation on Chartered but reduce our target price to S$2.66 (from S$2.78 previously).

ST Engineering: Neutral (Nomura, 11 June)
STE is likely to be a beneficiary of a new Boeing fee on non-licensed converted cargo aircraft. We believe the recent sell-down in STE shares is overdone, expect earnings growth to resume in FY10F and see a continued generous dividend payout. With its strategic MRO (maintenance, repair & overhual) facilities in the US and its home market, STE should see more third-party work as major airlines and low-cost carriers increase outsourcing to improve profitability. As Singapore's key defence contractor, STE is positioned to benefit from any increase in defence spending by Singapore and/or its allies. STE is a leading aircraft MRO group in Asia (top-10 globally and in Asia Pacific). An S$11bn orderbook provides some earnings visibility, while dividend yields remain relatively attractive at above 6%, and an above-25% ROE for FY09-11F remains commendable. Target price at S$2.72

Asia Travel: Buy (Kim Eng, 11 June)
According to the recent Visa poll, Singaporeans are ranked top online spenders in the Asian-Pacific region in 2008, followed by spenders in Hong Kong and India. Online shopping in these regions saw the largest qoq increase in 4Q08, growing by at least 30%. Demand was particularly high for online tickets, online travel agents and travel accommodation. The trend to shop online looks sustainable with 81% of the respondents stating interests to shop online in the next 12 months. Indeed, AST is a direct beneficiary to the rising demand in online spending, given its niche positioning in the online travel segment. In fact, AST has been able to record improvement in profitability and room nights in 1H09 (Sep 08 – March 09) despite the gloom in the weak travel industry, thanks to the unstoppable switch to its online travel platform. Not resting on laurels, the group continues to enhance the appeal and scalability of its fully integrated online book engine. In time to come, AST will be the world's first to launch flights with multiple stopovers from one departure point. AST has a good head start in doing so due to its long established physical presence across 8 countries globally. AST has recently expanded into the video content space through acquiring the remaining 49.9% stake in Star-Travel.com. Star-travel has an inventory of over 7,000 hours of travel programmes and destinations footages which will enable AST to produce mini destination videos for its hotel partners. With the sizable exclusive hotel contracts on hand, we estimate AST could readily add $20m through video production. In addition, its collaborations with renowned high-traffic websites (such as YaHoo and Jobstreat.com) are cost efficient means to boost bookings. AST is well positioned to be a key beneficiary of global recovery. Besides, its market capitalization is still below the replacement cost of its fully integrated, real time online booking engine. Its valuations are even more attractive after price correction, trading at 50% discount to peers. Reiterate Buy with target price maintained at $0.60.

ST Engineering: Sell (UOB Kay Hian, 11 June)
In the clearest sign that a recovery is unlikely to materialise in 2009, the International Air Transport Association (IATA) has raised full-year losses for global airlines to US$9 billion from US$4.7b. Asia Pacific carriers are projected to turn in losses of US$3.3b while North American carriers are projected to record losses of US$1b. IATA also expects passenger traffic to decline 7% in 2009 and cargo traffic to decline 17% year-on-year (yoy). IATA's assessment has negative implications for ST Engineering's (STE) aerospace division which derives 90% of its revenue from Asia Pacific and North America. Given the dire forecast, we now do not expect margins to improve in 2H09. As such, we have cut our 2009 estimate by 9.6% and 2010's by 8%. We are also mindful that any further weakness in the US dollar would impact ST Aerospace (ST Aero) in 2H09, given that MRO billings are in US dollars. Earnings, however, could be lifted by the improvement in learning curve for ST Aero's freighter conversion programme for FedEx's 87 B757-200s. The initial batch of eight aircraft delivered over a nine-month period recorded losses and there is a possibility that the 10-12 aircraft to be converted in 2009 could achieve marginal profitability as ST Aero moves up the learning curve. The electronics segment is expected to mark milestone contributions from Land Transport Authority's (LTA) Circle Line and Taiwan's MRT project in 2009. Contributions from this division and regular defence-related work are expected to partially buffer the decline in the aerospace division. Still, we expect a 10% fall in net profit for 2009 and for earnings to rebound in 2010 on the back of higher aerospace contributions from China, as well as further milestone contributions from the electronics and land system divisions. The aersospace division accounted for 50% of pre-tax profit in 2008 and in 1Q09, the division reported a 52% decline in pre-tax profit, while group net profit fell 31%. We expect the aerospace division to drag down group earnings for 2009 but that will be partly offset by other divisions. We now project a 13% yoy decline in net profit for 2009. Our numbers are below consensus forecast. Our previous fair price of $2.14 was based on 14x average two-year forward earnings. Using the same methodology, we now lower our fair price to $2.04. We have also lowered our dividend payout for 2009 and 2010 to 13.6 cents and 15.0 cents from 14.8 cents and 16.0 cents previously. Maintain SELL.

ST Engineering: Buy (Deutsche Bank, 10 June)
STE has seen strong order inflows from its military business and we expect this strength to continue. Sensitive in nature, military orders by the Singapore Armed Forces are often not disclosed but the difference between FY08 and 1Q09 order books (considering 1Q09 recognized total) suggests new orders worth about S$1.2bn were won in 1Q09, the bulk of which we think are liekly military related. STE manufactures products that are well regarded as indicated by the successful UK Bronco sales, continued orders for its 40mm ammunition, and the group previously being the front-runner for potential Indian howitzer order (now put on hold pending an investigation of a retired ordnance official by the Indian authorities). According to STE, its participation followed India's processes. Effective on or after 15 April 2009, for operators of aircraft converted by non-Boeing licensed converters, a fee of US$150-250k/year/plane will be charged by Boeing. ST Aerospace, being a Boeing licensed partner, will fall under a special category with lower fees paid by operators. This move is positive in our view as it effectively raises the price of work done by non-licensed players and may lead to future potential business flowing to licensed parties such as ST Aero. STE is sitting on a record order book of about S$11bn (as at 1Q09), providing healthy long-term visibility. The group is in a net cash position which places it strongly for any potential M&A activities. Our DDM-based target price of S$3.00 is based on a 7.4% cost of equity, (2.6% RFR and 4.8% ERP). Downside risks relate to project execution, greater-than-expected US$ depreciation, and worse-thanexpected aircraft grounding. Maintain Buy on what we see as attractive valuation.

Jardine Cycle & Carriage: Sell (DMG, 11 June)
Preliminary data indicates that new motorcar unit sales in Indonesia declined 34% year-on-year (yoy) in May (or -6.1% m-o-m) to 32,500 units. This was despite the central bank cutting key interest rates by a further 25 basis points in May to 7.25%. The data seems to reaffirm our earlier view that consumers are still cautious and are not spending on automotives. We are expecting domestic motorcar unit sales in FY09 to decline 25% after the strong sales achieved in FY08. This is expected to be dragged down by the global economic slowdown. We expect Astra to achieve a market share of 56% for motorcar unit sales in FY09, given its consistent performance in the first four months of the year. Indonesia cut its benchmark interest rates by yet another 25 basis points in Jun 09 (the seventh consecutive month) to 7.0% and maintains that there is still room for further reductions as the nation’s inflation slows. We maintain our view that demand for automotives are not likely to surge even if interest rates continue to decline, due to protracted global economic downturn. We are maintaining our estimates of a 22% and 20% decline in Astra’s FY09 motorcar and motorcycle unit sales respectively. Based on SOTP valuation, we have a target price of S$11.50. Maintain Sell.

Yangzijiang: Fully valued (DBS Group Research, 10 June)
The shipbuilding industry is not expected to turnaround soon. Unlike consumer and manufacturing industries, where recovery could be expected by 2H09, the new orders for newbuilds are not expected to flow in materially till 2011, in view of the huge order backlog and bleak shipping outlook. Year-to-date, there were only two orders of handymax vessels placed. In fact, there could well be more cancellation of contracts, which has virtually gained momentum in April. The cancellations and deferments as well as price cut for existing orders would be a drag on shipbuilders' revenue stream and profitability in 2010. We have built in 25% cancellations / deferments of Yangzijiang's current order book of US$6.7 billion and assumed new order wins of US$50m a year in 2009-2010. Yangzijiang's share price soared by about 80% after it posted record 1Q results. It is now trading at a notable premium of more than 20% over the Korean shipbuilders. This appears overdone to us given Korean yards' larger market capitalization and stronger execution. This should suggest limited upside to share price in the near term. In addition, the anticipated correction of the Baltic Dry Index (BDI) in coming weeks should impose additional downward pressure on Yangzijiang's share price as well, in view of its high correlation with BDI (0.68). We advise investors to take profit. We are leaving our earning forecasts intact. However, our target price is raised to S$0.68, on a higher multiple of 6.5x 09PE vs 5x previously, which is in line with the average valuation for Korea and HK-listed peers. This translates to 2.0x P/Bv, in line with the historical average P/Bv for Korea shipbuilders.

CapitaLand: Buy (Kim Eng, 10 June)
At the recent launch of the Raffles City brand in Ningbo, CapitaLand's management announced its intention to increase the Group's asset allocation into China to between 40-45% over the next few years, up from 26% in FY08. The Group remains on the lookout for distressed assets in China. To support funding needs for new and existing projects in China, CapitaLand also signed cooperation agreements with Bank of China and Industrial and Commercial Bank of China to obtain a credit limit allocation of up to RMB25b (S$5b) to fund CapitaLand's various business operations across China. We view this as positive accreditation of CapitaLand's presence in the Chinese market. CapitaLand's launches in Foshan and Chengdu this year have been well received, with small average selling price (ASP) increments with subsequent launches. CapitaLand is looking at replenishing its landbank in Shanghai and Beijing. CapitaLand had increased its stake in Gillman Heights from 50% to 60% in mid-May, and could possibly launch the new project for sale by 2H09. With construction costs easing, we estimate the breakeven price to be around $753 psf, with an ASP of about $900 psf. CapitaLand may also re-launch Latitude at Jalan Mutiara at an ASP of about $1600 psf. We view the move to increase its asset allocation into China positively, as CapitaLand already has a 15-year track record in the ever-growing Chinese market. Even sentiments in the Singapore residential property market have improved, suggesting the possibility of more sales in 2H09 and 2010. We reiterate our BUY recommendation, with a target price of $4.24, pegged to a 10% premium to our RNAV of $3.85.

CapitaLand Ltd: Hold (OCBC Research, 10 June)
CapitaLand (CapLand) has announced that it had secured RMB25b (S$5b) of credit lines from two Chinese banks – Bank of China and Industrial and Commercial Bank of China. While the securing of new credit lines is positive for CapLand's China operations, we believe that CapLand's strong balance sheet and strength in capital management have already been reflected in its share price. At current price level, we believe that accretive acquisitions will be the key for re-rating of CapLand's shares. We have raised our RNAV estimate of CapLand from S$2.95 to S$3.34, on the back of improved valuations of its listed investments and lower discount rate. Our RNAV discount on CapLand (previously 30% discount) has also been removed, on the back of better outlook for its China operations. As such, our fair value of CapLand has now been raised from S$2.43 to S$3.34. We maintain our HOLD rating on CapLand.

City Developments: Buy (DMG, 10 June)
The South Beach Consortium (SBC), equally owned by City Developments (CDL), Istithmar and El-Ad, has secured an S$800m syndicated 2-yr bank loan and S$400m 5-yr convertible notes. Both loans are secured loans and will refinance the S$1.2b bridge loan (Jun 09 expiry) for buying the South Beach Project land parcel in Sep 07. DBS, OCBC, UOB, HSBC and Sumitomo Mitsui are the syndicated loan's providers, while CDL and Hong Kong property developer Nan Fung Group will subscribe for S$195m and S$205m of the convertible notes respectively. Interest cost was not revealed, but we estimate all-in margin to range from 3.0 – 3.5%, based on REITs' recent debt refinancing exercises. The refinancing of another substantial loan (after Suntec REIT: S$825m, CDLHT: S$350m and CCT: S$160m) further indicates that credit markets have eased, which is good news for the real estate sector. While we view the refinancing exercise and introduction of a new established foreign investor positively for CDL, concerns remain over the possible exit of Istithmar and El-Ad. Earlier this year, Istithmar was reported to be looking at offloading assets to generate cash for its parent – Dubai World to help pay its debts. During 2H08, El-Ad had also deferred the construction of Plaza casino-Hotel in Las Vegas and deferred payment of an S$625m loan used to buy its land. To date, both companies have yet to provide clear indication of their financial status and priority of projects under their portfolio.Net gearing of CDL would only inch up to 0.49x (currently 0.47x) upon subscription of the S$195m convertible notes, which is still healthy in our view. CDL’s 33% stake equates to S$0.15 per share (assuming project completes by end-2016), accounting for only 1.5% of our S$10.28 base case RNAV. We continue to favour developers with sizeable Singapore residential exposure. Reiterate BUY on CDL at S$12.34, pegged at 20% premium to base case RNAV.

City Developments: Sell (OCBC Research, 10 June)
CDL has announced that the South Beach Consortium had secured a 2-year S$800m secured term loan financing from a syndicate comprising of DBS Bank, UOB, OCBC, HSBC and Sumitomo Mitsui Banking Corporation. The term loan will be used to refinance part of the S$1.2b bridging loan facility maturing in June 2009 – the remainder of the bridging loan will be refinanced through the issuance of 5-year S$400m secured convertible notes. Investors of the convertible notes include a wholly-owned subsidiary of CDL that will subscribed up to S$195m of the principal and 3 other investors related to the Nan Fung group of companies. Nan Fung is one of the most established property developers in Hong Kong. The refinancing news came as no surprise as CDL had earlier said that negotiations for refinancing was already in process and with a group of strong investors in the consortium. We also view the issuance of convertible note positively as the debt maturity profile of the consortium will improve following the refinancing of the bullet S$1.2b loan with new loans of 2-year and 5-year maturities. CDL had also updated that the consortium is still reviewing and refining its plans for the development. But due to valuation reasons, we maintain our SELL rating on CDL with a fair value of S$5.69.

Midas Holdings: Buy (Kim Eng, 9 June)
In an interview with Business Times recently, management highlighted that it is considering building a fourth production line as it bids for more rail contracts in China. We believe this would be dependant on overall contract order flow as well as the utilisation rate for its third production line once it is ready by 1st quarter 2010 A fourth production line would probably add 10,000 tonnes or 33% to the existing 30,000 tonnes/ annum (including third line) capacity. However, we believe any concrete plans for this would only materialize after the third line is up and running. This means the earliest completion date would likely be in 2H2011, taking into account previous expansions. We have not factored this into our forecasts, but our preliminary estimates suggest this could potentially add around $60million in revenue and $13 million in net profits once it is fully operational. We also believe such a line would involve capital expenditure of around $40 million which can be funded by a combination of cash and debt. Management is currently chasing $200m worth of contracts to supply aluminium alloy profiles for use in the manufacturing of high-speed and metro trains in China. This includes projects such as the Beijing-Shanghai high-speed railway line and metro projects in Shanghai, Hangzhou, Guangzhou and Xian. We believe the probability of new contract announcements will increase as the third production line comes onstream. Customers are unlikely to commit new orders without the production capacity in place. Furthermore, we note that the third line is for a different profile size from existing lines and customers may require some trial sample. Our target price ($0.82) and forecasts remain unchanged.

CapitaMall Trust (CMT): Buy (UOB Kay Hian, 9 June)
CMT achieved an occupancy rate of 99.5% in 1Q09, which is impressive as there is no visible impact from the economic turmoil. It benefitted from a flight to quality to well located malls. CMT's core tenants are professional players with long-term plans for the Singapore market. Top tenants include BHG, Cold Storage and NTUC Fairprice. Renewals and new leases for 169,233sf of space signed in 1Q09 were 1.3% higher than preceding rental rates. We like CMT for its quality portfolio of retail malls in Singapore at both suburban locations and downtown core. It has developed capabilities in retail management and asset enhancement initiatives. We have raised our FY10 and FY11 DPU forecasts by 6.1% and 13.0% to 8.7 cents and 7.8 cents respectively after factoring in contribution from Jurong Entertainment Complex (JEC), which will be completed in 2H11. We also expect occupancy rate to taper off to 94% (previous: 88%) and retail rentals to correct 12% (previous: 15%). Upgrade to BUY with target price of S$1.70, based on the Dividend Discount Model (required rate of return: 7.4%, growth: 2.5%).

SMRT: Buy (OCBC Research, 9 June)
After months of grueling trial runs and safety checks, the Circle Line Stage 3 (CCL3) was finally opened for passenger service on 28 May 2009. SMRT Corporation, the operator of CCL, is excited about the growth opportunities the new rail line will provide. According to management, this orbital line, which essentially links up the existing radial lines, is likely to lead to offer better connectivity, higher ridership for the group, and reduced travel time and fares for commuters. Apart from the higher ridership growth that SMRT is expected to enjoy, the group also said that successful operation of the CCL would further build on its widely-proven track record and better position itself for opportunities both locally (e.g. bid for Downtown Line) and overseas. In fact, during our visit to SMRT's Kim Chuan (CCL) Depot a month ago, management revealed that the depot has been strategically built to be able to house 70+10 trains – enough capacity for trains meant for the Downtown Line. Should the group win the bid to operate the new network, it has already in place plans for achieving synergies with its main lines. This, in our view, is a clear testimony of SMRT's far-sighted goals and dedicated management team. We see SMRT as a stock offering good growth potential but it has to a certain extent been neglected as investors switch from defensive to higher-beta plays. Despite our seemingly over-optimistic view on the group, we note that our FY10-12F earnings are not aggressive (still 1-4% below consensus). With consistently generous dividend payouts of at least 60%, backed by strong operating cash flows, we keep our BUY rating and S$1.81 DDM-derived fair value on SMRT.

SC Global: Hold (Phillip Securities, 9 June)
SC Global has reported 1Q FY2009 revenue of S$33.0m (+32% year-on-year) and net profit of S$10.5m (-45% yoy). Revenue was higher due to the consildation of revenue from AVJennings Ltd, which became its Australian subsidiary in December 2008. Net profit was lower because of higer administrative and operating expenses from AVJennings Ltd. SC Global is expected to remain profitable because it has achieved large sales of its residential projects in 2006 and 2007, and revenue will be recognized as construction progresses. Net profit is expected to increase from S$40.7m in FY2009F to S$203.8m in FY2010F based on the percentage of completion of its projects. After that, net profit is likely to fall to S$128.5m in FY2011F as most of its projects have already been completed in FY2010F. SC Global highlights that it is encouraged by the increase in private home sales in Singapore and Australia. It is currently in the planning and design stage for its projects at Ardmore Park and Sentosa Cove. Furthermore, it expects to remain profitable as it recognises revenue from projects that have been sold. We are maintaining our hold recommendation as SC Global has not launched properties for sale recently. Moreover, the luxury property market in Singapore has not registered sales above S$2,500 per square foot for the past three months. However, due to the improvement in buying sentiment for the property market, we are raising the fair value from S$0.67 to S$1.13. This is based on 50 percent discount to the RNAV of S$2.26.

Singapore Exchange: Buy (DBS Group Research, 8 June)
SGX's average daily volume and value rose to 3.2bn and S$2.3bn in May-09 respectively (Apr-09: 1.8bn; S$1.3bn). Even for the past week, volume and value appear sustainable and high at 3.1bn and S$2.2bn respectively. Annualised velocity up to May-09 was 78%. We further raise our volume and value assumptions for FYJun10 to 2.5bn and S$2.4bn (from 1.8bn and S$1.7bn) respectively, amidst the market rally, which we believe is sustainable. Hence, our earnings for FYJun10-11 are raised by 16%. The upcoming 4QFYJun09 results would be the strongest for SGX in this financial year. Year-to-date Jun09 average daily volume and value at 1.4bn and S$1.2bn respectively, has run ahead of our arlier assumptions of 1.2bn and S$1.1bn. We are tweaking our FYJun09 volume and value assumptions to match this, given that it is less than a month away from the financial yearend. Our FYJun09 earnings is revised up by 5%. SGX is currently trading at 17x forward PE and is still the cheapest stock exchange in the region. In view of the bullish market sentiment, we further raise our TP for SGX to S$9.10 based on 20x forward PE and 85% velocity assumption. Our target PE is derived from a correlation with market velocity, similar to our valuation methodology for HKSE. Reiterate Buy.

ST Engineering: Sell (DBS Vickers, 8 June)
STE along with 6 other supplies were short-listed to supply howitzers in a deal worth US$1 billion. This has been put on hold as the Indian Defense Ministry investigates alleged corruption. STE is not directly implicated and the company was reported as saying that it had not contravened regulations imposed by governments. ST Kinetics was reportedly a front runner and competing with Israeli and US defense industries.- The fact that ST Kinetic( STE's land system division) was short-listed and reportedly a front runner to secure the contract, which was contested by first tier defense contractors is a major vote of confidence in the ST Kinetics capability and its "Pegasus" howitzer. No Impact on stock price but watch out for announcements. STE had not announced that it was in negotiations to supply the howitzer and thus the expectations of such a contract is not in the price. We are neutral on this news. We have a Sell recommendation on the stock with a $2.14 price target.

FSL Trust: Hold (OCBC, 8 June)
FSLT has announced that unitholders holding around 155.5m units or 30.9% of the total number of issued units have elected to receive 1Q distributions in units. With these proceeds, FSLT will prepay a total of US$7.8m, or roughly 46% of 1Q cash earnings and 1.5% of total loans. In FY09, FSLT could potentially pay off US$16-31.2m or 3.1-6.1% of total loans. We note that this amount is still small compared both to total loans and to our expectations of the quantum of the decline in vessel values. FSLT now has more options, in our opinion – we believe it may prefer to keep the scheme in play rather than making further cuts in the distribution payout. Deterioration in the external environment, or adverse feedback from the lenders could of course tilt this decision the other way. Our new fair value estimate is S$0.58 (up from S$0.45 previously). This values FSLT at a 30% discount to our 'normal' case discounted FCFE value of S$0.83 (10% discount rate). We believe this is a fair reflection of the shipping environment today.

CapitaLand: Overweight (JP Morgan, 7 June)
CapitaLand has announced another Raffles City integrated development project in Ningbo, a major port city in Zhejiang province, China. The complex is expected to be completed in 2012, with a 97,900sqm of GFA comprising a 50,000sqm shopping mall, a 30,000sqm office tower and a 20,000sqm tower with serviced residences. The site on which this project will be built was acquired in 2005 and is in the heart of Ningbo, adjacent to the group's Summit Residences project, an 850-unit development expected to be completed in 2010. Group has signed credit allocation agreements with Bank of China and ICBC of up to RMB25billion (S$5.3billion) that would give CapitaLand China Holdings and its subsidiaries and affiliates such as the 9 managed real estate private equity funds, CapitaRetail China Trust and Ascott Residence Trust (collectively “CCH group”) access to onshore debt funding in RMB. Terms and conditions of loans to CCH group under the credit allocation agreements would be mutually agreed before the loans are drawn down, but these agreements ensure CCH group access to debt funding for at least the next 3 years. S$6.5billion of capital employed in China, 26% of group assets at end 08 book value, but this could rise towards 40-45% of group assets within the next 2-3 years (as management have guided) as large scale projects such as the Raffles City complexes (now 5 in China: Shanghai, Beijing, Chengdu, Hangzhou and Ningbo) add to the total. The group's 58 retail malls (operational or under development) in China would also contribute to this growth in the exposure and capital employed. Overweight with price target at $3.85

SingTel: Buy (DMG, 5 June)
We spoke to SingTel's spokesperson following a Bloomberg article suggesting that the telco was seeking US$4b in funds to "protect its stake in Bharti Airtel". He said that the article was "misleading" and "very wrong". The fact is that SingTel did engage a financial adviser, but it was for the purpose of assessing the potential merger between Bharti and South-Africa based MTN, and not specifically to look into fund raising. Bharti would acquire 49% shareholding in MTN, and MTN would in turn acquire a 36% stake in Bharti. The combined entity would create an operator with revenue of more than US$20b and combined customer base of 200m users. Both parties have agreed to discuss the potential transaction exclusively till 31 Jul 09, which if successful, will make it the world's third largest mobile phone company. Post-merger, SingTel's stake in the Bharti will be reduced from 30% to 19%, while SingTel's EPS is estimated to slide by 1.5%in FY11. We believe that should Bharti require funds for this merger, SingTel will stand ready to support. Based on our estimates, Bharti may need to raise up to US$4b if the deal goes through. According to the media in India, Bharti will fund the acquisition through debt, but assuming half the amount is through equity, SingTel may have to fork out US$600m.This would raise SingTel's net gearing from 28% to 32%, still very manageable given its strong balance sheet. We are maintaining our BUY call on SingTel, with a SOTP-driven price target of S$3.17.

KS Energy Services: Hold (OCBC Research, 5 June)
KS Energy has proposed to undertake a renounceable non-underwritten rights issue of up to 92.747m warrants at an issue price of S$0.20 for each warrant. Each warrant carries the right to subscribe for one new ordinary share at an exercise price of S$1.40 on the basis of one warrant for every four existing ordinary shares. This will raise about S$18.2m in net proceeds from the warrants issue. Although this does not seem very substantial compared to the group's cash level (about S$70.6m as at 31 Mar 09), proceeds from the exercise of warrants are considerable (about S$118m assuming full exercise and minimum subscription scenario). This will provide additional financial flexibility for the group. We are raising our fair value estimate to S$1.36 (prev S$1.10) based on 9x FY09F PER for the distribution business and 10x peg for drilling and related businesses due to the recent re-rating of the sector, but maintaining our rating at HOLD

Keppel Corporation: Sell (UOB Kay Hian, 4 June)
It is reported that Skeie Drilling & Production ASA (Skeie) – a client of Keppel's subsidiary Keppel FELS – has failed to make a milestone payment of US$37m on one of the three jack-ups due on 31 May as the company has become insolvent. Skeie. One of the three jack-ups was ordered by Skeie in late-06 with the other two in early-07. The value of the shipyard contracts totalled US$1.16b (about S$1.78b). Assuming a construction period of 36 months and based on their respective delivery dates, we estimate the three jack-ups are possibly 50-70% completed. At this juncture,we have no details of the payments already collected by Keppel FELS. The outstanding shipyard contract values that are yet to be recognised in the Profit & Loss Account possibly amount to 10% of Keppel's orderbook of S$9.5b as of end-March. Unlike SembCorp Marine's generic Friede & Goldman ExD semi-submersible rigs for the Larsen group of companies (PetroMena, PetroProd and Larsen Oil & Gas) which also face payment default risks, we are unable the ascertain the current market value of the KFELS N Class jack-up which is not a standard jack-up. Keppel may need to fund the remaining construction cost (estimated at S$1b) of the jackups before they can find new buyers. Including Keppel's commitment of S$373m in Keppel Land's 9-for-10 rights issue at S$1.09/share, its cash requirements would utilise most of the S$1.47b proceeds from the sale of Singapore Petroleum Company (SPC). Investors who hope for a special dividend payout could end up in disappointment. Our fair price of S$5.90 has factored in the proceeds of the SPC sale and sustainable O&M contract wins of S$3b per annum in the longer term, which translates into an annual O&M net profit base of S$250m. We value Keppel's shipyard business at a PE of 15.0x (i.e. pre-offshore oil & gas boom valuation) of this net profit base.

Raffles Medical Group: Buy (Kim Eng, 4 June)
Founded as a two-clinic practice in 1976, Raffles Medical Group (RMG) now operates the largest local network of 65 General Practice clinics. Its flagship, Raffles Hospital, was established in 2001. Its impressive performance was reflected by the fact that it broke even within two years. In fact, the Group has been a model of consistency since its listing in 1997, registering double-digit profit growth almost every year. We believe a congruence of factors such as an aging population, coupled with the influx of foreign immigrants, has benefited the private healthcare sector. Moreover, this year, the government introduced means testing in public hospitals, with the aims of increasing its efficiency in allocating subsidies and potentially shifting demand towards the private sector. The employee remuneration model is a key criterion for healthcare providers. We believe RMG's Group Practice Model, in which all its medical professionals are employees of the Group, is a more scaleable model and gives it a higher operating leverage than peers. We expect its staff cost as a percentage of revenue to continue declining. Licensed for 380 beds, Raffles Hospital is capable of ramping up its capacity from its current 200 operational beds. This is in contrast to a potentially tight private sector supply, with new beds only by 2013. With a strong financial position, this is an opportune time for RMG to expand overseas, where it has previously been more conservative than its peers. Even with just organic growth, we expect net profit to increase 14% CAGR over the FY09-FY11 period. Its strong cash position could prompt M&A activities as well as an increased dividend payout. Our Free Cash Flow to Equity (FCFE) target price of $1.38 implies 20x FY09 estimated earnings. Since 2002, RMG has traded at a P/E trough of 13x and a peak of 29x.

First Resources: Sell (DMG, 4 June)
FR management's target for new planting in FY09 is 12,500 ha. Of the target new planting area, approximately 6,500 ha would be in Riau and the remaining 6,000 ha would be in West Kalimantan. The targeted new planting for FY09 is an increase of 40.7% YoY from FY08's addition of 8,887 ha to its planted area. As at end Mar, total planted hectarage is 97,501 ha – 2,260 ha was added in 1Q09. We think that FR's FY09's planting target is achievable. This is because in 2Q08 alone, FR achieved additional new plantings of 4,408 ha. Assuming FR achieves a similar new planting pace for 2Q09 and 3Q09 and taking into consideration that it has already achieved 2,260 ha of new planting in 1Q09, it need only to hit 1,424 ha in 4Q09 for the target to be met. FR's biodiesel plant's capacity is 250,000 tonnes per annum and is expected to be commissioned by mid 2009. The viability of the plant is dependent on spread between crude oil and palm oil, as well as the differential taxation between crude palm oil (CPO) and biodiesel in Indonesia. With crude prices still relatively low, we do not think that producing biodiesel is economically viable at this point in time. On a bright note, the US$40m plant includes a refining unit and a biodiesel unit. Hence, the refining unit is still able to convert CPO to RBD palm oil, should there be a positive spread between selling RBD palm oil and CPO. Fertiliser costs, while off from its peak in the recent months, still remained higher than previous years. Management does not expect prices of fertilisers to ease significantly from current levels, given the YTD run-up in crude oil and CPO prices. Even with relatively high fertiliser costs, management has guided that they still expect to continue maintaining their relatively low cost of production of US$200/tonne. We are maintaining our CPO price assumption of RM1,900/tonne for FY09. Using a P/E of 10x forward earnings, our fair value for FR remains at S$0.42. With the stock trading at S$0.70, we maintain our SELL call on the stock from a valuation perspective

Keppel Corp: Buy (DMG, 4 June)
Skeie Drilling and Production (SKDP), a customer of Keppel Corporation (Keppel), is intending to file for bankruptcy. At risk is payment for three large N-Class drilling rigs due in 2010/11. We did a quick check with Keppel’s management. The payment received for the three rigs are 40%, 50% and 35% respectively vs. work completion of 40%, 40% and 10% as expected delivery dates are 2H10, 2H10 and 1H11. Hence, we believe that Keppel is still in cash positive position, ie. cash advances exceeds all expenses incurred on the rigs, to-date. However, Keppel has yet to recognise about S$1.2bn (14% of current orderbook) and this could potentially have 3% and 8% impact on FY09 and FY10 earnings respectively. We believe this could possibly be the final remains of potential order cancellations as Keppel's remaining customers are financially strong and macro environment turns for the better. Buy maintained though we believe the share price is likely to be pressured, at least in the near term.

SIA Engineering Company: Hold (OCBC Research, 4 June)
SIAEC positions itself as a premier MRO (maintenance, repair, overhaul) centre. However, this does not mean that it will not fall under pressure to drop its rates or take on additional “value added services” which uses more manpower to secure contracts. We are advocating caution as we expect all of its operating units to register a decline in revenue due to weaker air travel. This wariness extends to its Associate and joint ventures which have been strong contributors to the group. We have used a DDM and P/E blend to factor in typical investor expectation of good yields along with an attention to earnings that also drive its share price. The stock is currently trading significantly above SARS level valuations and we are mindful that today's economy is in a more limpid and prolonged economic downturn than 2003-2004. This will lead to sustained depression of air travel and thus MRO activity. Initiate coverage with a HOLD rating and fair value estimate of S$2.95. We are advocating entry at about S$2.60.

K-REIT: Buy (UOB Kay Hian, 3 June)
Credit crunch has abated. Availability of funding via bank loans has improved significantly. There is a slight improvement in the credit spread that banks charge, although the quantum is not obvious in management's opinion. Management sees an advantage in the longer tenures of 5-7 years provided by commercial mortgage-backed securities (CMBS). Cost of borrowings for long-dated CMBS is not as prohibitive, compared with bank loans, as the yield curve is not as steep. K-REIT has a S$190m CMBS that matures in May 2011. K-REIT revalues its investment properties once a year and the next valuation will be conducted in Dec 09. The company has been conservative in valuing its assets and usually marks prices to the lower end of the market range. It values Prudential Tower at S$2,066psf, Keppel & GE Towers at S$1,347psf, Bugis Junction Towers at S$1,265psf and One Raffles Quay at S$2,213psf. The risk of severe markdowns in asset values is quite low, especially given the recent rebound in transaction prices for strata office space. K-REIT has the lowest gearing of 27.6% among office REITs (CapitaCommercial Trust: 30.7% post-rights issue, Suntec REIT: 34.4%). Financial risk is low as the next refinancing is an unsecured floating rate loan of S$391m from Keppel Corporation due Mar 2011. Maintain BUY with target price at S$1.16, based on a dividend discount model (required rate of return: 7.7%, growth: 2.5%).

Neptune Orient Lines (NOL): Buy (Phillip Securities, 3 June)
NOL is proposing a renounceable underwritten rights issue at the issue price of S$1.30 for each rights share on the basis of three rights share for every 4 existing ordinary shares. The net proceeds are approximately S$1.401bil after deducting fees and expenses. Approximately 50% of the net proceeds will be used for the repayment of debts. The balance will be used for investments, general corporate and working capital purposes and/or further repayment of debts. The rights issue reduces the need to acquire bank loans to meet its operating and capital expenditures. It also reduces its net debt to equity ratio from 0.8 to 0.0 for FY2009F. However, it leads to lower earnings per share for all shareholders and dilution of interests for shareholders who do not take up the rights issue. We like the rights issue as it allows NOL to tap the existing shareholders for cash to reduce its debts and improve its cash position. We upgrade our recommendation from sell to buy and raise the fair value fromS$1.14 to S$2.12, which works out to 1.2 time book value for FY2009F.

Neptune Orient Lines: Hold (OCBC Research, 3 June)
NOL has proposed a three-for-four rights issue priced at S$1.30 each. The issue is expected to raise net proceeds of S$1.4b, half of which will be used to repay debts and the balance will be earmarked for acquisitions and general corporate purposes. The rights issue will improve NOL's gearing from 0.45x to just 0.02x. More importantly, the issue will enhance NOL's financial flexibility and enable it to acquire distressed assets, putting it in a stronger position to ride on the industry's recovery. While we remain cautious on the shipping industry's outlook, NOL's stronger financial position and enhanced likelihood of inorganic growth have prompted us to raise our rating to HOLD. Our fair value has been raised to S$1.63 (from S$0.815) based on 0.8x FY09F NTA, in line with its peers.

Neptune Orient Lines: Outperform (Credit Suisse, 2 June)
NOL has announced a bigger-than-expected S$1.44 bn rights issue, which we think is actually not a bad deal. This improves its balance sheet, reduces interest expense and gives it more financial flexibility to acquire distress assets for long-term growth. Moreover, we think there is now less risk of further equity raising and with the overhang now gone, market should be refocusing on NOL's potential recovery. The operating environment remains challenging and we expect losses in FY09-10, but we think the equity market is well aware of that, and the sequential rate and demand improvement will be the positive catalysts. We have cut NOL's FY09-10 losses by 29-55% to US$585 mn and US$165 mn on lower interest expense. NOL's current ex-right price implies a 12-month forward price-to-book ratio (P/B) of 0.9x. Our new target price of S$2.00 (from S$1.36) implies an ex-right price of S$1.70, which is based on target forward P/B of 1.0x, below historical average P/B of 1.1x. With 19% upside from our new target price, we upgrade NOL to an OUTPERFORM.

Neptune Orient Lines: Buy (Citi Research, 2 June)
We upgrade NOL to Buy (from Sell) as we believe that (1) funding risks have abated; (2) container shipping rates and volumes have bottomed and (3) NOL share price re-rating is set to continue.Our (cum-rights) target price of S$2.25 (from S$0.90) is based on 1.3x FY09E PB, similar to levels seen in the early 2002 recovery. Accretive acquisitions, if any, could provide further upside to the share price and valuations. Container shipping now at an inflexion point with time charter rates lower than 1999 and 2002 levels and showing signs of bottoming. Volumes, as reflected in ports throughput data, also appear to be bottoming. Global economic indicators further support our view that we are at an inflexion point with the worst behind us. Historically, NOL's PB multiple has risen well above the mean of 1.1x when rates bottomed and then began to recover. When volumes and rates rose together (1999, 2004-2005, and 2007) PB rose to at least 1.5x, when rates rose but volumes lagged (2002) PB rose to c.1.3x. We deem the current shipping recovery profile as similar to 2002 with signals likely to be mixed with a positive bias. We expect volumes to pick up as trade resumes and for rates to show an accelerating up trend as over-supply gradually clears.

Neptune Orient Lines: Sell (UBS, 2 June)
NOL plans a 3 for 4 rights issue at $S1.30 per share to raise $US1billion. The issue is to be fully underwritten. Temasek has committed to subscribe to their entitlement and will backstop the entire rights issue via a sub-underwriting agreement. We don't think a capital increase will surprise consensus although the modest discount to the current share price is likely to be perceived as encouraging. The proceeds of the issue will be initially used to reduce debt and strengthen working capital; this should take on-balance sheet net debt to roughly zero. Management expects the challenging operating environment to present attractive investment opportunities although we don't expect any major acquisitions in the near-term. While there appears to be some stabilisation/modest recovery in global container volumes, rates remain under pressure on most trade lanes and in some case market rates are loss-making. We continue to believe the container sector faces a protracted down-cycle. NOL remains a Sell with a price target of S$1.00.

MAP Technology: Sell (DMG, 3 June)
MAP Technology (MAP) has announced that it is no longer proceeding with the sale of its subsidiary M&J Technologies (engaged in the design and manufacture of External HDDs) to Fujilink Technology due to funding issues pertaining to the latter. Additionally, it was also revealed that MAP has US$11m worth of trade debts owed by Fujilink which MAP "will vigorously pursue and recover". We were of the opinion that MAP's move to divest of M&J for US$32m was a good one as the latter commands generally low gross margins (which we estimate to be at 5%) as compared to MAP's other business segments. Now that the US$19.6m exceptional gain is no longer forthcoming and coupled with the fact that MAP could see a reduction in its working capital as US$11m worth of accounts receivables may not be recovered, we therefore are expecting MAP to decrease its dividend payout ratio for the current year as compared to 2008. We have altered our earnings forecast accordingly to reflect the potential contributions of M&J in FY09 and FY10 while stripping out the US$19.6m exceptional gain. Dividends have also been adjusted downwards – note that other downside risks to MAP's share price still exist in the form of the unresolved issue over Jurong Tech which has 73.1m shares of MAP. Currently trading at 12.6x FY09F P/E and assuming MAP trades down to the industry average of 10.5x, we alter our target price to S$0.16 (from S$0.22 previously) and maintain our SELL recommendation.

SPH : Buy (Kim Eng, 2 June)
SPH has gained 12.1% over the last three months but still underperformed the market by 25.1%. This laggard is closing the gap as the market sees the "green shoots" of an economic recovery. Print ad revenue to-date declined only 12.7% year-on-year (yoy) compared to our full-year assumption of a 25% decline. Hence, our earnings estimates have a good potential for upside should the signs of recovery continue into 2H09. The average page count in May for the Saturday editions of The Straits Times showed a robust month-on-month (mom) recovery. We also observed an improvement in job ads volume. However, we note that the pick-up is also attributable to 2Q and 3Q being seasonally busier hiring periods. Job ads volume, being the key driver of Classified and a leading indicator of Display ad demand, provide insights on the outlook of SPH. Job ads data in the coming months is therefore crucial. The recent optimism in the property market is reflected in the Classified as more property ads have surfaced, and big, coloured Display property ads are increasingly being placed. There is hope for more Display property ads to boost revenue as an increasing number of developers are reportedly preparing to launch new projects in view of the positive sentiments in the property market. The improvement in the performance of the capital markets in the last three months, if it continues, will benefit SPH’s bottomline as its $0.9b investible fund still has sizable exposures to equities (30.6%), bonds (20%) and investment funds (12.5%). The remaining 36.9% is held in cash and deposits. Our sum-of-the-parts (SOTP) target price is raised to $3.46, reflecting a lower equity risk premium for its core media business. Our earnings estimates remain intact. At an implied PER valuation of 12.4x, the core media business is still trading close to its ten-year trough. We maintain Buy, based on a potential price upside of 11.6% and dividend yield of 7.2%.

Pan Hong Property Group: Buy (DMG, 2 June)
For its latest quarter, Pan Hong posted a net loss of RMB 27.3m, due to RMB 42.0m of impairment charges and revaluation losses, as well as a plunge in residential units sold from Nanchang Honggu Kaixuan (NHK) Phase 1. Within a quarter, its pre-sales has surged 219.7% to RMB 503.6m as at 24 May 09. All its three existing projects in Nanchang, Huzhou and Hangzhou generated strong take-up, ranging from 48–95%. For Pan Hong’s projects in Huzhou and Hangzhou, we have tweaked our revenue recognition schedule to reflect the positive take-up, as well as 100% achieved sales by end-FY10. Inventory clearing time period for NHK Phase 2 has been shortened to two years (three years previously). To account for the recent easing price downtrend, we have also adjusted downwards our price decline for the subsequent six months (from -8.0% to -5.0%), but maintained our previous assumption of a price recovery beginning 1Q10 (+18.0% for three consecutive years). FY10F EPS thus increases by 13.7% to RMB 56.9¢. FY11 projections have now been introduced. The 17.5% year-on-year (yoy) jump in Jan–Apr 09's sold GFA (to 176.25m sqm) implies that buyers are now back in the hunt for properties. On the ground, management is also seeing improved sentiments and healthy level of inquiries for its unlaunched projects. With 2.4m sqm of residential landbank remaining, we believe Pan Hong is well positioned to benefit from the improved dynamics and strong real estate fundamentals within China's lower tier cities. In light of the improved buying sentiments and China's macroeconomic outlook, as well as Pan Hong's healthier balance sheet (net gearing = 0.17x vs. SGX-listed peers 0.43x), we are now applying a lower discount of 30% to its new base case end-FY09 RNAV of S$0.62. Upgrade to a Buy at S$0.43.

Olam International: Hold (OCBC Research, 2 June)
Olam has announced its proposal to place out 273.5m new shares to Temasek Holdings. The new shares have been priced at S$1.60, representing a 17.4% discount to the WAP on 29 May 09. Net proceeds of S$437.0m will be used to finance new capital expenditure and acquisitions. The enlarged equity base will enable Olam to expand its debt capacity by up to US$600m, allowing it greater financial flexibility for acquisitions. Temasek's capital injection will also help to ease the group's gearing. Management has kept intact its medium-term performance targets of 25% – 30% earnings CAGR and 20% ROE. We are leaving our earnings estimates unchanged, but our core FY09F EPS drops from 10.8 S cents to 9.3 S cents following our adjustment for the 16% dilution. We have raised our peg to 17x (from 15x), deriving a fair value estimate of S$2.01 (previously S$2.06). Given yesterday's sharp appreciation, we downgrade our rating to HOLD.

Armstrong Industrial: Neutral (DMG, 2 June)
While General Motors (GM) which is likely to file for bankruptcy is a customer of Armstrong, our checks reveal that the US automaker accounts for only 1.5% of Armstrong’s automotive revenue through GM Shanghai. We therefore believe that any negative impact on Armstrong pertaining to GM filing for Chapter 11 would be inconsequential. Moreover, while there is still no official statement as to whether GM Shanghai will be shut down, we believe that the likelihood is very low as we understand that GM's operations in Shanghai have been profitable. Also, GM Shanghai enjoys the strong backing of China's biggest domestic automaker Shanghai Automotive Industry Corp which has a 50% stake in this joint venture. The automotive sector accounts for 26% of total sales, with Denso and FAW Group as its top customers. From what we understand, sales to this segment are well spread across all customers with the highest accounting for less than 5% of total sales. Other major customers for the Group include Seagate, Western Digital, Daikin, Mitsubishi Electric and Sony. Given the limited impact, our earnings forecasts remain unchanged. With a palatable dividend yield of 5%, we maintain NEUTRAL with target price of S$0.18 assuming Armstrong trades down to its 5-yr historical average of 11.0x P/E.

Willas-Array Electronics: Hold (OCBC Research, 2 June)
WAE recently posted FY09 loss amid a difficult business environment. On top of a significant 24.3% year-on-year (yoy) decline in 2HFY09 sales to HK$937.8m, its performance was further exacerbated by write-offs on its intangible assets (HK$8.8m) and goodwill (HK$6.7m) relating to its 60%-owned ValenceTech acquisition in Sep 2006. This had subsequently dragged the group into 2HFY09 loss of HK$34.1m. For FY09, we note that WAE was also impacted by higher provisions of bad debt, forex losses, and margin erosion due to a deliberate move by management to clear excess inventory at lower prices. As such, while its FY09 revenue of HK$2.4b (-7.8%) was ahead of our sales projection of HK$2.1b, group's PATMI of HK$19.7m was closer to our estimate of HK$18.0m loss. Now in the red, WAE has skipped its dividend payout for FY09. However, this decision is highly anticipated, as cash preservation and liquidity is critical in the current operating landscape. With the financial crisis and uncertainties revolving around the H1N1 influenza, WAE cautions that difficult times remain although it has seen some signs of a mild recovery – not sure if it was just due to inventory replenishment or a real recovery in demand. On brighter note, management is confident of weathering the downturn, given its strong financial discipline and seasoned management team. Having successfully implemented several measures, including trimming its inventory level and operating costs, minimizing its bad debts exposure, and maintaining a healthy cash position (HK$303.7m cash balance, +54.8% from a year ago), WAE said it will continue to sharpen its operating efficiency, and look out for opportunities in the PRC to extend its market presence. While we are generally more optimistic in view of the recent improvements in WAE's customer orders and its debt ratio (net gearing fell to 0.31x from 0.63x in FY08), we note that there is still great uncertainty about the sustainability of demand, and that the group had breached one of the debt covenants after incurring loss for FY09 (to repay maximum HK$80m debt in worst case). To account for the still uncertain outlook, we pare our FY10F earnings by 32% but now use 0.4x FY10F BV (0.25x previously), in line with sector re-rating, to yield a S$0.09 fair value.

Singapore Post: Buy (Kim Eng, 1 June)
SingPost has acquired 30% of US-based Postea for US$9.4m cash and US$24.3m in the value of its intellectual property in SAM (Self-service Automated Machine) and SAMPLUS, POST21 retail system and vPOST online bill payment. SAM and SAMPLUS are 24-hour postal services kiosks that allow SingPost to reach customers at times when a trip to the post office is not possible or convenient. vPOST is one of South-east Asia's largest online shopping and shipping service providers. Postea, a company that develops and invests in new postal technologies, will "productise" SingPost's IP through its investees, such as Innovations Group, a systems integrator that is the prime contractor for the US Postal Service' Contract Postal Units kiosk program. The CPU kiosk is similar to SingPost's SAM kiosk and is hosted in convenient locations such as drug stores and supermarkets. In return, SingPost will be able to use Postea's technologies to further enhance its own IP. This move is significant as it is the first time that SingPost has put a value to the suite of hardware and software technologies it has used for years. We have raised our FY10 forecast by 20% as SingPost will recognise an exceptional gain of US$24.3m, the value Postea has agreed upon in exchange for the 30% equity sold to SingPost. On the balance sheet side, an intangible asset will be created for the value of the IP. While SingPost has not yet decided on an amortisation policy, we reckon it should be quite a long-lived asset hence the depreciation charge should be minimal. In addition, as the licensing agreement with Postea is not exclusive, there is future potential for value creation through the licensing of its intellectual property to other investors. We have raised our target price for SingPost to $0.98. In addition to valuing organic earnings at the low end of its long term historical valuations alone, we also attach a value of 3x to the intellectual property value created through the deal with Postea.

China Milk: Buy (UOB Kay Hian, 1 June)
The company has reported 4QFY09 net profit of Rmb53.5m, down 57.2% year-on-year (yoy). FY09 net profit came in at 382.5m, down 20.4% yoy. In contrast with the strong sales growth achieved in previous quarters, revenue for 4QFY09 recorded a 2.1% yoy dip. The qtr-on-qtr (qoq) decline was more severe at 17.5%. Growing consumer awareness of food safety, as well as more stringent government controls on the quality of dairy products arising from the melamine incident in China, has swelled costs for farmers keeping dairy cattle. These, together with higher feed costs, have dampened the demand for CMilk's products, as evidenced by lower sales volume and lower selling prices for 4QFY09. The unfavourable 4QFY09 results are in line with our expectation that Cmilk would be hit in the downturn in the domestic dairy industry in terms of lower raw milk selling prices and contraction in sales volume for all of the company's products. The short-term outlook remains challenging for Cmilk as we expect the company’s core businesses – bull semen and cow embryo – to face pricing pressure as well given that the low raw milk prices and high feed costs will force many dairy farmers and farms to reduce the size of their dairy cattle herds. CMilk has temporarily suspended the supply of its milk products to the Heilongjiang provincial government due to operational inefficiencies. The melamine incident in China has made it more arduous for the company to tap the original equipment manufacturing (OEM) processing business as most of the milk brands have reduced their production through OEM processing. The company is working towards accelerating its plan to launch its own fresh milk brand. As such, we expect minimal revenue contribution from the milk processing business for FY10. Overall, we expect CMilk's earnings to continue to decline for the coming financial year. For FY11, however, we expect the company to post strong earnings growth as the demand for CMilk's quality bull semen and cow embryo products should remain resilient in the long term. The company's bull semen and cow embryos will continue to play an important role in cattle genetics and milk yield improvement in China. In addition, given the recent outbreak of another mad cow disease in Canada, the Chinese government would be reluctant to lift the import ban on dairy livestock from North America in the near future. This should enable CMilk to further leverage on its strength as a supplier of high-yield Canadian dairy cow embryos.

Z-OBEE Holdings: Hold (OCBC Research, 1 June)
Z-OBEE Holdings FY09 results saw its revenue tipped US$103.6m (-13.4%), spot on with our sales forecast, whereas net income stood at US$3.9m (-61.4%), coming slightly ahead of our projection of US$3.3m. Going forward, management expects the general economic landscape to remain uncertain and challenging for the rest of 2009. Notwithstanding that, Z-OBEE will continue to expand its business cautiously and progressively, including enhancing the awareness and distribution network of its flagship VIM handsets. With strong cash hoard of US$34.5m (including fixed deposits and restricted bank balances), we believe Z-OBEE is definitely financially equipped to achieve its development plans. However, we are also mindful of the intense competition and fast-changing environment typical in the mobile handset industry. As the FY09 results were within expectations, we keep our FY10 forecasts unchanged, but apply 4x FY10F EPS (2x previously) to match a re-rating of the sector, hence deriving S$0.05 fair value.

Swiber Holdings: Sell (OCBC Research, 1 June)
Swiber plans to raise up to S$73.9m through a private placement by issuing up to 84m new ordinary shares at an issue price of S$0.88 per share. This price is at a 15.3% discount to the VWAP of S$1.0386 on 28 May 09 and represents about 19.9% of the group's existing issued share capital. The group intends to use the net proceeds for general working capital purposes, and this move will boost Swiber's cash position (US$35.8m as at 31 Mar 09). Like Swiber, we remain optimistic about the long-term fundamentals of the oil and gas industry but the crux lies in expanding fast enough to capture future business opportunities and ensuring adequate cash flow at the same time. Despite the dilutive effect of the placement, our fair value eases just slightly from S$0.66 to S$0.62, as we have raised our valuation from 6x to 7x FY09F core EPS to reflect the lower risk aversion in the market. But as the current price is still above our fair value, we maintain our Sell rating.

Swiber Holdings: Sell (DMG, 1 June)
Swiber has announced a proposed placement of 84m new ordinary shares at an issue price of S$0.88 per placement share to raise proceeds of S$73.9m. The new shares of 84m represent 19.9% of Swiber's existing issued ordinary share capital of 421.4m shares. As such, this placement deal will dilute FY09/10 EPS by 16%. In addition, net gearing will be lowered by 34ppt for FY09 to 0.62x following the completion of the placement. Swiber has estimated that it would raise net proceeds of S$71.8m (after deducting expenses), and the bulk of it would be used to fund working capital needs. We believe some cash may also be set aside for the repayment of Swiber's outstanding notes maturing in 3Q10 (US$71.2m) and 1Q11 (US$72m). We are relieved that Swiber's outstanding committed capex of US$318m is fully funded through sale-and-leaseback, secured bank loans and vessel disposal. Swiber has an orderbook of US$515m currently. While Swiber noted that it has submitted or intended to submit bids for contracts amounting to US$5b, we remain concerned over Swiber’s success rate to clinch new orders and Swiber's execution capabilities vis-a-vis its competitors. Over the past month, Swiber's share price (+119%) has outperformed the STI (+21%) and its US peers (+19%). We have raised our valuation parameter from 3x to 9x (30% discount to the global EPCIC peers' average of 12x) on FY10F recurring EPS as a result of sector re-rating. Thus, our target price becomes S$0.56 post completion of placement. We advocate investors to sell into strength, as we believe Swiber's share price will continue to be pressured, first by concerns over declining orderbook and execution capability, then by signs of weakness in earnings quality.

MacarthurCook Industrial REIT: Hold (Phillip Securities, 1 June)
The net property income (NPI) for FY2009 registered an increase of 48.5% to $36.9 million. DPU for the full year is 8.925 cents. Actual NPI is not far off from our estimates of $35.2 million. However DPU is 7.2% lower than our estimates. Fourth quarter DPU was 1.875 cents, which was 20% lower than the three preceding quarters of 2.35 cents, even though the fourth quarter DPU comprised retained distributions from first quarter through third quarter. Asset value declined 4.5% from $555.4 million in FY2008 to $530.3 million in FY2009. In addition, MIREIT took a $20 million provision to its balance sheet as it anticipates the decline in asset value of the IBP development building it will acquire upon completion of construction in fourth quarter 2009. NAV per unit fell from $1.29 in FY2008 to $1.09 in FY2009. MIREIT got a second extension on its debt to repay $201 million, extended to 31 Dec 2009 with an interest margin of 5%. It has another 1.5 billion yen due on 18 Dec 2009. Furthermore it still requires funding of $91 million for the IBP building. Current gearing is 41%. If the IBP building is to be debt-funded, gearing will rise to 47%. Although MIREIT has gotten an extension on its debt, the funding need is still present and pressing. Other than obtaining a straight bank loan, the other alternatives would be divesting assets or a equity fund raising. Selling assets in a value declining environment would not value eroding. We believe a rights issue is imminent and although highly dilutive, is the best solution to its funding needs from a long-term viewpoint. We estimate MIREIT would need to raise $100 million to fund its IBP acquisition. Gearing would also be lowered to 35%, which is a comfortable level. In our calculation, we assume a 1-for-1 rights, which would approximately doubles the issued units. MIREIT has maintained an occupancy rate of 98.6% as at 31 March 2009. We retain our top line assumptions, however we adjusted our borrowing cost to reflect the higher margin. We adjusted down our DPU forecast for FY2010F from 8.59 cents to 8.28 cents. If MIREIT raises equity through a rights offer, DPU would be diluted to 4.24 cents. MIREIT's share price has recovered in-line with the market, however we feel investors are still unclear of the refinancing plan and that will bog down investment sentiments in the REIT. We retain our Hold recommendation with a revised fair value of $0.39 as we lower our beta and increase cost of debt assumptions. We believe a re-rating is due for the REIT sector as most REITs had resolved their short term funding needs.

Chartered Semiconductor: Buy (DMG, 1 June)
It was initially reported by the Business Times that Chartered Semiconductor had received a S$2.45b bid from Advanced Technology Investment Company (ATIC) to purchase Temasek Holding's stake in the independent chip foundry at S$2.40-2.60 per share. This represents at least a 10.1% premium to its last traded price of S$2.18 on 28 May. Temasek currently has a 62.3% stake in Chartered after the latter's recent rights issue. Chartered soon came out to clear the air on the very day and said that it had not received such an offer from ATIC. Nevertheless, investors were skeptical despite the official announcement by Chartered as a sell-off in its shares did not materialise – the semiconductor foundry had actually closed up higher for the trading session. On the very next day, however, The Business Times reiterated its point and wrote another report that talks between Temasek and ATIC regarding Chartered have started, without quoting sources.
ATIC is a technology investment firm that was set up in 2008 and fully owned by the Government of Abu Dhabi. ATIC and one of Chartered's key customers – Advanced Micro Devices (AMD) – which had recently set up a 66:34 joint venture known as Globalfoundries to compete in the chip foundry space. With Temasek seemingly being more of a passive investor of Chartered, the latter would be able to leverage on the networking of ATIC and the expertise of Globalfoundries rather than compete with it as their relationship would be strengthened through AMD should the deal were to go through. Moreover, there could also be potentially more order flows from AMD to Chartered which the latter fully has the capacity to undertake since its utilisation rate remains below optimal levels. Besides AMD, however, we believe that this potential merger could also result in more tie-ups with IBM and Infineon Technologies, both of which are customers of Chartered. Just in Apr 09, IBM, Chartered, Globalfoundries, Infineon Technologies and a few other parties announced that they are jointly developing a complementary metal oxide semiconductor process technology which is expected to increase battery life for the next generation of mobile products. In our opinion, closer ties with Globalfoundries could therefore help Chartered improve its technological know-how which has historically been trailing market leader TSMC. Any downside risks to Chartered's share price would be minimal as it should be robustly supported by the "offer price" at S$2.40 which is already higher than its current price. Given the positive risk-to-reward ratio, investors should then keep their cards to their chests rather than accept the "offer" as the bullish sentiment arising from Chartered’s improved micro and macro outlook could possibility push its share price above its "offer price". At the reported offer price range of S$2.40 – 2.60, Chartered is valued at 1.1 – 1.2x FY09 P/B. Given the improving outlook, we believe Chartered deserves a higher valuation. We therefore upgrade the stock to a BUY with target price of S$2.78 (from S$1.80 previously) assuming Chartered trades up to the 20% discount of the industry average of 1.6x FY09 P/B at 1.28x.