Stock Picks

ST Engineering: Buy (DMG, 30 Sep 08)
ST Engineering's US shipyard VT Halter Marine has secured a US$393m (S$558m) deal with the US Navy for the Phase II of the Egyptian Navy's Fast Missile Craft (FMC) project. The second phase will start immediately and delivery of the first FMC is expected by mid 2012. The company also reported that another US$13.5m was added to Phase I due to work scope alterations. This contract to build three FMCs and the additional award bring the total contract value for this project to US$642m. The first phase of work was obtained on 1 Dec 05 involving functional design work. But subsequent contract modifications and changes in the scope of work led to another US$456m worth of work. This is not expected to have an impact on the company's financials in the near term. At S$2.60, ST Engineering is trading at 15.1x FY08 earnings (lower end of the P/E band) and offers a dividend yield of 6.6%. Based on our dividend discount model, our target price for the stock stands at S$3.41.

China Hongxing: Upgrade to Outperform (CIMB, 29 Sep)
We now upgrade Hongxing to Outperform as we believe that concerns over its aggressive expansion and potential gross margin decline have been factored into its share price, which has fallen 35% in the last one month. Hongxing's latest trade fair in August featured 120 new footwear models and more than 360 apparel and accessory designs. During the fair, Hongxing secured orders worth Rmb1.2bn (+46% y-o-y), for delivery in 1Q09, beating our expectations of Rmb 960m. Earnings for the rest of the year should be bolstered by a strong order book. We have rolled over our target P/E from CY09 to CY10, but are now applying 8x instead of 10x in view of risks surrounding global growth and inflation. Our target price remains intact at $0.53

CapitaLand: Hold (OCBC Research, 29 Sep)
While we may see near term headwinds for CapLand to recycle its capital, we still remain positive about its capital recycling business model over the over the long term. Recent newsflow suggests that there are still interests in Asia investments by private equity (PE) funds. Even if this comes to a standstill, CapLand still has other sources of funding such as banks, its sponsored REITs and divestment of its assets to third party. Recent news of China Vanke cutting prices of its developments and PBOC's call for tightening of lending to developers had sent negative signals on the health of the China property market. Sentiments for property developers with exposure in China could remain fragile but CapLand's balanced exposure to different parts of China should allow it to better handle price decline in any particular area. Its revenue visibility in Singapore remains healthy over the mid-term. CapLand's S$4bn of Singapore residential property sales in 2006/07 should continue to provide revenue visibility over the next 2 financial years. However, take-up for new launches had been slow so far, in-line with the weak market sentiment towards property. With no foreseeable catalyst in sight for a recovery in appetite towards higher priced properties, we think take-up for CapLand's target launches for the year ahead will remain weak.Based on our RNAV of S$5.29 and pegging a discount of 30% to its RNAV, we derive a fair value of S$3.71 for CapLand.

CapitaLand: Underperform (CSFB, 29 Sep)
We downgrade CapLand from neutral on more conservative valuations with a S$2.78 target price based on 20% discount to new end-09 RNAV of S$3.47. With equity and debt funding scarcity, and gaps in seller and buyer expectations, its championed business model of capital recycling could slow down significantly, warranting lower valuations. A global slowdown renders its geographical and sector diversity less defensive. On the bright side, stress-tested 1.1x worst case gearing is not excessive, in our opinion. Near-term negative catalysts include potential write-downs, uncertainties on its retail franchise with departure of CapitaRetail CEO, and negative news flows from China.

Capital Commercial Trust: Underperform (CSFB, 29 Sep)
We downgrade CCT given its highest exposure to the prime office sector and hence more vulnerable to an economic slowdown, and will be most susceptible to declines in prime rents. In addition, CCT has enjoyed one of the highest revaluation gains (+57%) since IPO, and the reverse could happen if asset prices fall. Our sensitivity suggests that a 40% decline in asset values would translate to a hypothetical P/B of 1.3x at current share price and a hypothetical implied share price of S$1.17 at 1x P/B. Despite the macro risks, earnings could however hold up relatively better in 2008-09E from positive reversions, with highest upside from Raffles City Tower with 49% lease expiries in 09E. We estimate every 5 percentage point change to our assumed rental decline from 2008E-11E will result in a 0.5-2.5% change to our 2009- 10E DPU and 4.5% change to our new target price of S$1.26 (previous target price of S$2.79).

Capital Mall Trust: Underperform (CSFB, 29 Sep)
We are downgrading CMT to NEUTRAL from Outperform. Its office exposure could potentially increase further to 30% from the office developments to Tampines Mall and Funan DigitaMall. We also see concerns over an increased gearing and equity raisings from the potential early injection of ION Orchard. In addition, its CEO, Mr Pua Seck Guan, who is a key contributor to CMT.s success, has recently announced his retirement from 1 November 2008. We believe this is untimely given a difficult time for the REITs sector. We have cut our office rents assumptions and increased our cost of equity from 6.9% to 8.9%, resulting in a 0.7-1.7% cut in 2009-10E DPU to 16.1-17.7 Scts. We estimate every 5 percentage point change to our assumed rental decline from 2008-11E will translate to a 0.1-0.2% change to our 2009-10E DPU and a 0.3% change to our new target price of S$2.58 (previously S$3.50).

City Developments: Maintain Underperform (CSFB, 29 Sep)
We have reduced RNAV for CDL to S$8.07 from S$10.60, mainly by cutting its Singapore office capital values by 30%. Our S$7.26 target price (from S$9.54) is still pegged to 10% discount to RNAV. Being a proxy to the Singapore property market with its 79% RNAV exposure to the Singapore residential and office sector, we believe it is highly sensitive to the local economy. For every 10% fall in residential average selling prices and office capital values, RNAV will fall by 4.2% and 6.4% respectively. Its M&C hotel subsidiary.s market value (which makes up the rest of RNAV) has languished 37% year-to-date on uncertain economic and lodgings outlook in Europe and the US.

Keppel Land: Underperform (CSFB, 29 Sep)
We downgrade KepLand to Underperform from Neutral, on lower office values and high exposure to Vietnam (7% of assets) and China (17%), which are seeing more severe price cuts than expected. We cut our target price to S$2.48 (from S$5.04), pegged to a 30% (from 10%) discount to our new 2009E RNAV of S$3.54 (from S$5.60). Near-term headwinds include potential provisioning mainly for its China and Vietnam projects, involvement in greenfield Tianjin Eco city project, and slowing sales in its high-end residential projects in Singapore.

Wing Tai: Maintain Underperform (CSFB, 29 Sep)
Despite its underperformance, Wing Tai continues to be the most exposed to Singapore high-end residential prices, where we see more negative news flows. Its RNAV falls a further 12% and 2.8% for every further 10% fall in Singapore residential prices and office capital values respectively. It also has substantial downside to our bear RNAV of S$0.77, assuming 2005 physical price levels.

CapitaMall Trust: Buy (OCBC, Research, 25 Sep)
While the completion of 651,000 sqm of retail space between 3Q08 and 2011 would inevitably put downward pressure on rental rates, we think strong retail mall managers can still ride out the tough period through well-executed asset management and enhancement. Change in management raises concerns but we think the transition should be a smooth one. Going forward. We do not see significant change in the fundamentals of CMT's retail malls, but we are lowering our fair value to S$3.05 (previously S$3.21) after raising our office cap rate from 4.5% to 5% and lowering our rental forecasts for office spaces. Share price could stay depressed for a while as market awaits further clarity on the direction of CMT under the new CEO. We are keeping our BUY rating for CMT.

China Milk: Buy (DMG, 25 Sep)
Management revealed to us that the main reason why Chinese dairy farmers and dairy companies could be adding the chemical melamine is because of poorer quality of raw milk. High cost of animal feed by as much as 30% could be the cause for farmers to add melamine. What makes China Milk different from the recent companies that have been hit with this scandal is that it has the ability to control quality at every step of its value chain. Firstly, China Milk own their own herd of about 21,000 in total. Furthermore, the company produces and grows about 75% of their own feed which has helped reduced operating cost by about 54% to 56% if they were to buy feed from external sources. Finally, China Milk uses the waste from its cows as fertiliser to grow their own crops. This eliminates concerns about chemicals that could contaminate animal feed. We have a price target of S$1.00 based on 6.5x FY09 P/E which implies an upside of 113% from current levels. The company is currently trading at 3.0x FY09 P/E and 2.7x FY10 P/E which is considerable lower compared to its regional peers of 14.8x FY09 P/E based on consensus.

Cambridge Industrial Trust: Buy (DMG, 25 Sep)
With the softening of residential prices, investors have been concerned if industrial rents would follow suit. For CIT, 46.0% of leases due for fixed rental increases had edged up by 5% in Jul 08, suggesting improved overall portfolio rentals (now at S$0.85 psf per month, which is reasonably below market rents) going forward. As for the broad sector, URA 2Q08 statistics also exhibited that industrial rents for the whole island rose 2.3% quarter-on-quarter, while capital values gained 4.1%. S-REITs have not been spared from the unfavorable economic outlook and weakened across-the-board sentiments, falling 37.3% year-to-date. CIT remains one of the highest yielding REITs, trading at FY08 – FY09 yields of 12.5 – 13.0% (sector: 8.7 – 9.3%). This represents a premium of 930 – 980 basis points (bps) over the SGS 10-yr Government Bond Yield of 3.2%. We are viewing CIT as more of a yield play for now, as the key catalyst to its share price approaching our current fair value largely hinges on its S$337m worth of ST debt being successfully refinanced, which is expected in end-FY08. Maintain BUY at S$0.79.

Indofood Agri Resources: Buy (DMG, 24 Sep)
Indofood Agri's management has reiterated that their expansion plans are still on track. Despite lowering their targeted new plantings for oil palms this year due to heavy rains in 1Q08, we believe that IFAR can still achieve their longer term target of 250,000 ha of planted area by 2010. Meanwhile, it is expanding its refining capacity in Medan to 170,000 tonnes/year from 52,500 tonnes by 4Q08. They are also constructing a new refinery in Jakarta with capacity up to 420,000 tonnes/year by end 2009. When this new refinery is completed, the existing refinery in Jakarta, with a capacity of 250,000 tonnes/year, would cease operations. This is because the new refinery is located nearer to the port and hence, would ensure a reduction in transportation costs for the company as well as assist in smoother logistics planning.The lower band of the average historical P/E ratios that the Singapore, Indonesia and Malaysia palm oil plantation companies were trading at are about 7x, 7x and 11x respectively. Based on our CPO (crude palm oil) price assumption of RM2,600/tonne for FY09 (current spot price is around RM2,270/tonne), IFAR trades at 3.8x our FY09F earnings (way below the historic lows). We are maintaining our buy rating and fair value of S$2.65.

Thomson Medical Centre: Buy (DMG, 24 Sep)
Thomson Medical Centre (TMC) has entered into an MOU to develop a women and children hospital in Hanoi, Vietnam. TMC will be appointed project and management consultant, to oversee the development. The demand for women and children healthcare services in Vietnam remains strong. TMC's plans to further inject its O&G and paediatric expertise into the Vietnam private healthcare space would allow it to tap into the healthy market potential in Vietnam. This in turn, would allow it to strengthen its presence in Vietnam and enhance its brand name. This would be TMC's second hospital project in Vietnam. Its first hospital project in Binh Duong Province is expected to be completed in 3Q 2009. TMC will also be providing hospital consultancy and management services to the hospital for five years from the date it commences operations. TMC also has the intention to acquire up to 25% equity stake in both hospitals which would also help contribute to earnings. We are lowering our fair value to S$0.68 from S$0.76 as its peers are trading at a lower PE valuation, given the current market. At the current price of S$0.58, this presents a potential upside of 17.8%.

China Chemical Fibre Sector: Buys (Kim Eng, 18 Sep)
Li Heng, China Sky and Fibrechem stand out with good cash management. We like them for their low working capital to sales ratio, low gearings, positive free cashflows and strong net margins. They are well placed to enjoy organic growth, and will not have to slash their R&D budgets. Indeed, they could become even bigger players in this industry. But what they are still lacking is a clear dividend payout policy, though Fibrechem has been consistently paying out interim and final dividend since its listing. The chemical fibre players are trading below the normal range in terms of forward PER and PB valuations. We see value emerging, as the SGX-listed chemical fibre plays are trading at an average FY09 PER of 2.4x. Some are already trading below book value; Li Heng is the priciest at 1.4x forward PB. We are maintaining our Buy recommendations for Li Heng, China Sky and Fibrechem, but we are applying a lower PER multiple to blended FY08/09 earnings estimates. We have lowered our target prices for China Sky and Fibrechem to $0.92 and $0.56; and that of Li Heng from $0.88 to $0.75. China Sky is the most attractive at 2.1x FY09 PER. Near-term catalysts include the timely launch of new SR-HOY/FDY products in 2H08 and successful machinery upgrades at Qingdao Zhongda by October. For Li Heng, capacity addition and upward integration are expected only in 3Q09. The catalysts for Fibrechem appear in 4Q08/1Q09 as it awaits accreditation for microfibre, and fine-tunes its microfibre for a potential high-margin wallpaper.

FerroChina Limited: Buy (OCBC Research, 18 Sep)
FerroChina has corrected heavily since its S$1.50 high in Jun 08 and is trading at an extremely discounted valuation of 2.8x FY08F PER, 1.8x FY09F PER and 0.7x FY08F P/NTA. Its closest peers (Angang and Maanshan) trade at an average of 4.2x FY08F PER and 4.2x FY09F PER. Despite its difference as a value-add processor with solid fundamentals, we think that the market will inevitably continue to peg it with its upstream, vertically integrated peers that have experienced a significant de-rating. As such, we re-peg our valuations to 4x (prev. 9x FY08/09) FY09 PER and derive a fair value of S$1.24 (prev. S$2.36). A positive re-rating of the Chinese steel sector will incentivise us to revisit our valuation.

Rotary Engineering: Buy (OCBC Research, 18 Sep)
Rotary has announced that it has secured a S$37.9m contract from Technip Italy to build Neste Oil's new generation bio-fuel plant in Tuas which involves the erection of 11 storage tanks. Work has started and is expected to be completed by the end of 2009. While we are still positive on Rotary's prospects in view of projects in Singapore and Middle East, contract flow has been slower than expected. We currently maintain our BUY call with fair value of S$1.11 but with a view to adjust our estimates should contract flow fail to meet our projections.

Straits Asia Resources: Buy (OCBC Research, 18 Sep)
Straits Asia Resources Ltd (SAR) has provided an operations update. In a nutshell, the average selling price for 2009 coal contracts has been raised to US$112.60/ton as compared to US$70.50/ ton in 2008. It is on track to meet its production target of 9.0Mt of coal in 2008, which have been fully priced and committed, despite reports of heavy rainfall. It is poised to benefit from growing demand for thermal coal – one of the cheapest forms of energy. It is sheltered from short term price fluctuations of coal as its contracts are locked in six-12 months in advance. We continue to like SAR for its low production cost and order book visibility. We maintain our BUY rating and S$4.66 fair value estimate on the stock.

SPH: Buy (UOBKayHian, 16 Sep)
Traditionally, SPH's share price would see a rally in the one month leading up to its final results announcement which is due in mid- October, in anticipation of the stock's final dividend. Worth a bet. With annual dividend yield at 7%, we reckon there is limited downside in share price. We are forecasting a final tax-exempt DPS of 20 cents (an interim DPS of 8.0 S cents was paid following 2QFY08 results), which translates into a net yield of 4.9% within a month. Despite slowing advertising revenue (AR) growth in line with Singapore's decelerating GDP growth, SPH is one of the best defensive stocks in Singapore given its virtual monopoly in print media. Earnings contributions from its Sky@eleven residential property development and expansion of the Paragon shopping mall at Orchard Road should buffer group earnings in the current global economic downturn. Rising newsprint cost will be less of a threat after the US Presidential Elections in November and on lower oil prices. SPH’s share price has proven to be relatively defensive to market's extreme volatility. We believe it is now timely for investors who are taking a defensive stance to accumulate SPH before the stock’s final dividend announcement. Our earnings forecasts and target price remain unchanged. Our target price of S$4.70 is based on our sum-of-the-parts valuation of S$4.73.

Cosco Corp: Downgrade to Neutral (Merrill Lynch, 12 Sep)
Since Cosco's foray into the ship building business in 2007, share price performance shows a strong correlation to order wins. We expect new orders to slow in 2H08 due to yard capacity constraints, moderating demand for dry bulk newbuilds and the group's slower than expected expansion into the moil & marine (O&M) sector. We forecast new orders for Cosco to be US$1.3bn in 2008, down 78% from highs in 2007 but gradually picking up to US$1.8bn in 2009 and US$2.8bn in 2010. We also expect Cosco to see declining margins due to a combination of cost escalation and changes in forecast revenue mix. We believe consensus earnings estimates are too aggressive and that Cosco has the potential to disappoint. Despite the severe 71% drop in share price year-to-date, we see no potential near term re-rating catalysts. We expect limited order wins in 2H08, margin pressures, potential order cancellations and delivery delays together with uncertainty regarding management change to continue to overhang share price performance. We cut our earnings estimates and reduce our price objective from S$4.80 to S$1.75/share. We have also increased our volatility rating from medium to high. Cosco is currently trading at FY09E P/E of 8.5x, which is below its 10 year historical average of 15x P/E but remains midway between Singapore and Korean peers. Cosco has underperformed its regional peers with O&M exposure including both the Singapore and Korean yards.

C&O Pharmaceuticals: Buy (DMG Research, 12 Sep)
C&O recorded a 44.0% YoY increase in FY08 net profit, contributed by the increase in margins in its exclusive products and the new exclusive distributorship it had secured for Meiact and Europharm cough syrup, which yielded higher profit margins. Going forward, management intends to focus on higher-margin C&O branded products to drive the business. Its exclusive products are expected to be the key growth drivers for the Group in FY09. C&O's strong distribution network was given yet another stamp of confidence and recognition, when it secured the exclusive distributorship for Helixor® A (a widely accepted cancer drug in Europe) at the beginning FY09. We estimate earnings of HK$127.3m (EPS: 19.2 HK¢) for FY(Jun)09. At S$0.26, C&O is trading at 7.4x forward P/E. Ascribing a 9x P/E, we arrive at a 12-month target price of S$0.32 for the stock.

Gallant Venture: Buy (OCBC Research, 12 Sep)
Gallant Venture has achieved a record high order book of S$67.1m as of 1 Sep 08, suggesting that revenue from land sales could surge by more than five-fold in FY09 compared to last year. However, we are adopting a more cautious stance on its future outlook as concerns on global economic challenges could pose threats to the property market and tourism industry. Gallant, which expects to incur over S$200m in capex over the next two years, could also face challenges obtaining funding in light of today's tight credit market, potentially impeding its development progress. While its plans to transform Bintan into a lively tourist destination are still on track, the process could take longer than expected due to weakening sentiment. We now peg an RNAV discount of 20% (vs. 10% previously) to reflect the softer property market outlook, deriving a fair value estimate of S$0.81. Nevertheless, we are keeping our Buy rating as Gallant's long-term growth plans remain intact.

Silverlake Axis: Buy (OCBC Research, 12 Sep)
Silverlake Axis has announced that it plans to seek shareholders' approval for a share buyback mandate which will allow the company to make purchases from time to time of up to a maximum of 10% of its issued share capital. According to management, the move is a way to effectively return surplus cash to shareholders over and above its ordinary capital needs and also one of the ways through which it can increase shareholder value by enhancing ROE (return on equity) and NTA (net tangible assets) per share. We believe the move will act as a support for its shares which has been oversold in the wake of the credit crunch situation in the US. We understand that while some contract negotiations have taken longer than usual to complete, our checks on the ground suggest that the banks have pared their budgets but have not pulled the plug on their IT spending, especially for mission-critical items such as core banking upgrades and son on. As such, we do not expect the order pipeline for Silverlake Axis to dry up completely, although we cannot rule out any possible delays, thus resulting in lumpy earnings. We have already factored this into our estimates and this is also reflected in our fair value of S$0.42.

Golden Agri: Buy (OCBC Research, 12 Sep)
Golden Agri Resources (GAR) has been picked as one of the two new inclusions in the first review of the STI index – the other being Jardine Matheson Holdings. Both of them will replace Thai Beverage and Yangzijiang Shipbuilding Holdings from 22 September. We expect the move to give GAR a better profile among fund managers who use the index as a performance indicator. Meanwhile, we are in the process of reviewing our estimates and assumptions in the wake of the recent slide in CPO (crude oil prices). Until then, we retain our BUY rating and S$0.71 fair value.

Sembcorp Marine: Hold (Kim Eng, 11 Sep)
Despite dropping by 9% in the past month, Sembcorp Marine's (SMM) share price has been a relative outperformer in the marine sector. In comparison, shares of Keppel Corp (-24%) and Cosco Corp (-26%) have declined more sharply. While the argument holds that SMM has a purer exposure to the robust offshore sector, we highlight that comparatively high valuations still place SMM at risk of a de-rating, particularly on negative news. Hence, we are downgrading SMM to a HOLD. Our earnings outlook remains positive for SMM, with core earnings CAGR of 11% over the next 3 years and a continuously growing orderbook that now stands at US$10bn. However, we are adopting a more conservative 14x FY09 PER multiple, which is still at a premium to its peers, so as to reflect its better product mix. This yields a fair value of $3.54, which we adopt as our near-term target price.

Sembcorp Marine: Outperform (CIMB, 11 Sep)
SembMarine has announced that it has secured a contract from Egyptian Offshore Drilling Company to build two jack-up rigs for US$425m.The rigs will be delivered in 4Q2010 and 1Q2011 respectively. This contract brings SembMarine's year-to-date new orders to about S$5b, almost matching its record of S$5.4b in 2007. The average contract per rig of US$213m is comparable to the last similar jack-up rig secured in Jul 08 from Egyptian Drilling Company at US$220m, suggesting the jack-up market has not softened. We expect more orders from the Middle East as there is a deep shortage of shallow-water jack-ups there. Our earnings estimates remain unchanged as the current contract falls within our total order-win assumptions. We believe the recent pullback in its share price presents a good entry point. Key catalysts could include orderbook build-up and margin expansion. Our target price: S$5.25.

Parkway Holdings: Fully valued (DBS Research, 11 Sep)
Over the last few years, Parkway's valuation premium to the market has widened to a high of 150% in mid-07 on positive view of the healthcare sector such as aging and rising population, and promoting Singapore as a medical hub. Realistically, as global economic growth slows, we think admissions growth could slow as consumers become more careful in their spending. For private healthcare providers, we could see slower growth as consumers opt for public hospitals instead (to enjoy more subsidies), opt for less costly procedures or wards, delay or opt out of elective surgeries, and slowdown in foreign patients. We trimmed our FY09F earnings down by about 4% on lower growth assumptions. We still like Parkway for its regional presence in the healthcare sector such as the building of a new 500-bed hospital in Mumbai and expansion in Malaysia via Pantai. These new facilities would come on stream only around 2011/12; but, in the meantime, we see cost pressures for Parkway for its 1H08 results as it preps up for expansion. Rental for its three Singapore hospitals also weighs down margins. As we peg our valuation to 17x on its core earnings, based on a 40% premium to the market, we have revised our target price to S$1.85.

Chartered Semiconductor: Hold (OCBC Research, 11 Sep)
Chartered Semiconductor has largely maintained its guidance for 3Q08 financial performance, but is now expecting the sales to come near the lower range of its US$469-481 million projection, due to changes in customer delivery schedules. Noting the recent sell-down in Chartered, we believe investors has pre-empted the debilitating outlook following a number of negative news flow on the semiconductor industry. In addition, the recent cut in Chartered's debt rating to junk status has likely raised worries about the health of the company as well as potentially higher interest rates that it might encounter. In light of the poorer sentiment and a likely market downturn, we have also pared our FY08-09 forecasts. Using a lower valuation we have derive a fair estimate of S$0.47. While it may seem attractive to accumulate the stock, we caution investors of another possible correction as its semicon peers (Philadelphia Semicon Index) has already suffered a 9.5% dip compared to Chartered's 2.38% decline since the start of Sep 2008. As such, our Hold rating remains.

AusGroup Ltd: Buy (OCBC Research, 11 Sep)
AusGroup has been awarded a A$30 million labour supply contract for the Blacktip offshore gas field project in Australia. AusGroup will provide skilled construction personnel for installation and pipelay work. With this new contract, AusGroup's order book stands at A$282m. AusGroup had recently released a rather disappointing set of 4Q08 results, where it booked a 3.3% gross margin versus a 17.8% margin in FY07 and a 16% margin for 9M08. We expect results to truly start materializing only in 2HFY09 and beyond. We reiterate our Buy rating and a fair value estimate of S$0.60, both on industry outlook and the current low price – AusGroup is trading at 31 S cents, or only 6x FY09 earnings. The key catalyst for re-rating will be an improvement in its performance over FY09 and a re-building of its gross margin.

S-CHIP: (UOB KayHian, 10 Sep)
The Singapore stock market now trades at 1-year forward PE of 12.1x, 30% below its long-term (1997-2008) PE mean of 17.6x. The market's PE valuation has fallen below the -1 standard deviation level, which historically suggests a "buy zone". Given S-chips' short track record but strong correlation with the Straits Times Index (FSSTI), we use the latter as a proxy to the former's performance and believe S-chips are trading at attractive levels. Our top five picks Beauty China, China Hongxing Sports, Synear Food, China Farm Equipment, and Li Heng Chemical Fibre. Three of these are well-established consumer stocks as we still favour branded players given the ongoing robust consumption in China.

SC Global: Hold (DBS Research, 10 Sep)
SC Global announced that it has sold all the 30 units released in Phase 1 of the Martin No. 38 development at an average selling price (ASP) of $2130 per sq ft (psf). Prices The ASP achieved so far is ahead of the group's earlier announced expected price of $2000psf and above our current assumption of $1800 psf. Breakeven for this development is estimated at $1162 psf. Assuming the higher ASP for the entire development, the group should rake in better than expected revenue and would have locked in about 57% of the entire development cost. However, take up at the two earlier launched projects – Hilltops and The Marq on Paterson Hill had remained relatively unchanged at 13% and 41% sold to date, indicating that the high-end segment remains challenging. As such catalyst for a re-rating of SC Global is still lacking in the near term. Maintain Hold with a target of S$1.02.

Tiong Woon: Buy (DMG Research, 10 Sep)
For its next growth driver, Tiong Woon would be focusing on providing ship repair services for tug boats and barges its 64-ha fabrication yard in Bintan. Its management's decision to take on more ship repair jobs versus ship building contracts is due to the relatively higher margins, quicker turnaround time as well as lower working capital required. It plans to construct another slipway, costing S$0.6m in the yard for ship repair which will enhance operational efficiency by reducing congestion and improving the speed of vessels moving in and out of the yard. We expect Tiong Woon's gross gearing to ease off from its current 90% in FY08 to approximately 66% in FY09. We remain positive on the group's exposure to the still buoyant oil and gas and petrochemical sectors as well as their niche position as one of the few specialised contractors that support these industries. We maintain our buy rating and fair value of S$0.56, based on industry average of 6x prospective P/E.

SGX:Sell (DMG Research, 9 Sep)
Securities market turnover remained weak in Aug08, averaging a daily S$1.20b. This may be marginally lower than Jul08's S$1.25b, but is a sharp collapse from the peak of S$3.03b in Oct07. We believe there will be further softness in securities market turnover going ahead. In the recent FY08 results release, SGX declared a final dividend of 29¢ per share. This will go ex-dividend on 8 Oct 08. Though this may provide some temporary support to share price, we believe SGX could experience significant share price weakness after the ex-dividend date. Our FY10 net profit forecast has also been cut to S$348.5m, from S$405.9m. We have also cut our target price from S$6.00 to S$5.20, derived from 16x of FY10 EPS – SGX traded at 16x P/E in FY05, when securities market turnover contracted 15% year-on-year.

ST Index, banks, offshore & marine, commodity stocks (DBS Research, 5 Sep)
The fall below the crucial 2660 support on the STI should trigger a downside move towards 2300. While there may be a minor rebound off 2550, expect this to be feeble and resistance at 2620-2660 to cap it. The sell-down towards 2300 should be led by the large cap commodity and offshore & marine (O&M) stocks. Bank shares, which have held well relative to the STI in recent weeks, should also pull the STI lower. For banks, we see downside for OCBC to $7.36, resistance $7.95. UOB has downside to $16.52, resistance $18.66.
Coal stock Straits Asia Resources has downside to $1.65, resistance $2.10. Dry Bulk shipper STX Pan Ocean has downside to $1.63-$1.73, resistance at $2.21-$2.35. We maintain our bearish view for Wilmar International, the short-term downside level is $2.70-$2.90. Rig builders, shares of Keppel Corp have downside to $8.20 while SembCorp Marine should head lower to $2.95-3.05.
Following the review of the banking sector, we conclude that operating profit margin is the main component driving return on equity (ROEs) for banks. Further expansion of ROEs for banks could arise from (1) active capital management strategies, (2) lower provision expenses and (3) management of assets and liabilities to ensure optimal use of capital. Despite having a more diversified earnings base geographically and segmentally, we believe the stickiness in ROE upside arises from relatively higher capitalisation of Singapore banks. UOB's ROE is higher compared to its peers, but we think OCBC has more room for ROE expansion. We have a Buy call on OCBC with target price (TP) at S$9.60 but maintain Hold for UOB with TP at S$21.20.

Technology Sector: Neutral (OCBC Research, 5 Sep)
For the past few weeks, SGX-listed companies had been turning in their report cards for quarterly and year-end results. Under our coverage of 10 tech companies, eight firms had reported their results, but only three exceeded our earnings estimates. More alarmingly, all the three companies who surpassed our net income figures were helped by lower effective tax rate, tax benefits and other non-operating/exceptional items. Excluding these, net profits then would have been flat or have missed with our projections. Generally, industry watchers have also suggested a rather mixed outlook for the tech sector, citing pockets of bright spots amidst a slowing global economy. On our side, we are taking a conservative stance on the tech companies under our coverage after sensing the negative effects from the global slowdown and a more challenging operating environment. We are still NEUTRAL on the technology sector, but now with an eye to make further adjustment should the situation worsen. Under our coverage, we have BUY for Bright World, Jurong Tech, Karin Tech, Miyoshi, Valuetronics, WesTech and Z-Obee as the recent sell down has again presented an attractive entry point for these companies and HOLD for Chartered, Micro-Mechanics and Willas-Array.

Rickmers Maritime: Buy (OCBC Research, 5 Sep)
Rickmers Maritime (RMT) has accepted delivery of its 12th vessel, MOL Dedication, the second of 13 additional vessels RMT is contracted to buy over from 2008-2010. Newbuild MOL Dedication will be time chartered to Japan's Mitsui O.S.K. Lines Ltd (MOL) for a 10-year period. It is the second of five 4250-TEU containerships costing US$72m each that will be chartered to MOL. The first, MOL Dominance, was delivered in June 2008. The remaining three MOL vessels are also expected over 2H08. Full impact of the first MOL vessel and contributions from the remaining four should increase RMT's 2H revenue, which makes up 56.1% of our full-year estimate. We believe RMT can avoid the equity markets this year, but will need to tap new equity over FY09-11 to satiate its aggressive growth plans and the repayment schedule on its debt facilities. Maintain Buy with S$1.22 fair value.

Indofood Agri Resources: Buy (Kim Eng, 4 Sep)
We believe that the stock has been oversold in tandem with the recent decline of Crude Palm Oil (CPO) prices. Despite lower CPO prices, Indofood is still able to extract healthy margins through its low cost of production from its plantations, while being a beneficiary of its market leading position for branded cooking oil in the Indonesian market.  We are forecasting core net profit of Rupiah 1,959.5 billion for FY08, which implies 162% earnings growth for the year. Our target price of $1.65 is derived from a valuation of 8.2x FY09 core earnings, which is in line with the mean valuation of its Malaysian, Indonesian and Singapore-listed peers. Indofood also recently proposed to obtain a mandate from shareholders in order to make purchases of up to a maximum of 10% of its own shares. Clearly, management sees value in its own share price at current levels, and any potential share buy-backs would serve to further limit the downside on the stock. We also do not entirely discount the possibility of the major shareholders privatising IFAR at current valuations – its price-to-book ratio stands at 0.8x (1.0x excluding goodwill), with a free float of 24%.

Swiber Holdings: Buy (DBS Research, 3 Sep)
Swiber has entered into a set of five agreements for the sales and leaseback of five deepwater vessels that is currently undergoing construction. This latest agreement will release US$225m cashflow back to Swiber upon delivery of the vessels in for 3Q09 and 3Q10. It will net the group a capital gain of US$18m. We expect the sales-and-leaseback agreement to strengthen Swiber's balance sheet, and to alleviate any lingering concern on financing constraint for its new deepwater drilling business. We reiterate that the counter is deeply oversold, given: 1) Its stronger than expected year-to-date financial performance and good progress on its key Brunei Shell project, 2) The doubling of orders pipeline to US$3.6b as of August 2008 vs. February 2008, and 3) Upside potential to our new orders win assumption of US$400m and US$500m in 2009. Maintain Buy with fair value at S$3.49.

Olam International: Buy (UBS, 3 Sep)
Olam grew sales 49% year-on-year (y-o-y) to S$8.11b in FY08 surpassing its medium-term 18% target. This was 13.2% and 14.5% higher than consensus and UBS estimates respectively. Net earnings grew 53.8% to S$167.7m, which was 20.3% and 25% higher than consensus and UBS estimates respectively. Olam grew volumes sales 30.6% across all four business segments (edible nuts, confectionery and beverage, food stables and fibre/wood products), while profitability increased through a 43.3% and 9.7% growth in net contribution and net contribution per tonne to S$504m and S$102 respectively. Consequently, net margins increased to 2.1% from 1.9%. Despite an overall global slowdown in growth and equity markets, management reiterates its 25% earnings forecast in 2008-10. Growth is expected to be derived from higher volume sales driven by a continuously growing world population as well as recent upstream acquisitions. Our 12-month price target is S$3.75. We assume S$2b of acquisitions being completed by FY10.

Suntec REIT: Buy (OCBC Research, 3 Sep)
Suntec REIT has announced that it has acquired another 3498 square feet (sf) of strata-titled office space in Suntec City Office Tower One for about S$7.7m. This works out to a price of about S$2200 psf. The purchase was funded with the proceeds from a Nov 2006 private placement earmarked for this purpose. With this latest buy, Suntec has now acquired about 61,500 sf of strata-titled office space in Suntec City. The two most recent buys prior to today were transacted in January '08 for an average price of S$2278.4 psf, or 3.51% higher. Suntec did not disclose what yield the strata space is earning. We have a BUY rating on Suntec with a S$1.71 fair value estimate

SingTel & Starhub: Buy (OCBC Research, 3 Sep)
SingTel has announced the pricing for its mio TV's Season Pass, which was touted to offer broadcasts of top-rated US TV shows as early as 24 hours after their US telecast. The service will be available from 8 Sep. Subscribers to SingTel's Season Pass can expect to pay an average of S$2.68/episode on a per-season basis, with each series costing between S$16.05 and S$69.55, depending on the number of episodes. While the move should help garner more subscribers for its mio TV platform, it is unlikely to lead to any big boost to its overall revenue. Hence we are leaving our estimates unchanged and maintain our BUY rating on SingTel with S$3.85 fair value. Meanwhile, rival StarHub is also offering a similar service for four shows – the three CSI franchise ones – and Numb3rs from Sep 22. It will announce the pricing at a later date. Also maintain BUYon StarHub with S$3.19 fair value.

Hupsteel: Buy (DBS, 3 Sep)
Hupsteel has reported a good set of FY08 results, with topline and bottom line growing by 53% and 45% year-on- year (y-o-y) respectively, to S$433.7m and S$45.1m. This was boosted by an exceptional 4Q,which saw record earnings of S$18.7m (+77% y-o-y, +73% q-o-q). The group also proposed dividends of 2.5 cents. Its topline growth was driven by sustained demand for the group's structural steel products, stemming from predominantly the marine sector, with the group reporting a picking up of demand from the construction sector; demand for pipes and fittings also continued to see steady growth. The gross profit margin expansion (up 3.8 percentage point y-o-y; 7.1 ppt quarter-on-quarter) seen in 4Q08 was the result of the group's ability to achieve better selling prices from more spot sales. Net gearing stands at a comfortable level of about 0.2 times. Our FY09 and FY10 net profit estimates have been adjusted upwards by 19% and 10% to S$49.8m and S$53.0m respectively to account for the sustained robust demand for the group's products. Rolling over our valuation to FY09F EPS, and using a near-trough valuation of 5 times forward PE, our fair value is now S$0.40 (prev S$0.57).

Offshore & Marine Sector: Overweight (DMG Research, 3 Sep)
Both Ezra Holdings (Ezra) and Swiber Holdings (Swiber) have ambitious growth strategies and aggressive fleet expansion plans well-panned out over the next two years. In this tight credit market, we express our concerns over the debt leveraging for these aggressive expansion plans of the offshore marine players, particularly Ezra and Swiber. We do acknowledge that our fears may be unwarranted, allayed by the still buoyant engineering & procurement (E&P) climate and active drilling activities. Nevertheless, in view of the general market weakness, the offshore marine players have seen P/E valuation compression from 13 times (Apr 08) to 7.9 times (currently). We are adjusting our valuation parameter to 8.7 times (10% premium from consensus) to reflect this general market weakness. We believe that the recent market softness indicates that the market is already factoring in the higher risk-reward profile of these offshore marine players. But with downside risk more evident amid the tight credit market, our revised target prices are S$2.30 (from S$3.21 previously) for Ezra and S$2.17 (from S$3.37 previously) for Swiber, translating to potential upsides of 30% and 63% respectively.

Singapore banks: Overweight (DMG Research, 3 Sep)
With the slowdown in Singapore economic growth, we expect more investors to closely scrutinise banks' asset quality going ahead. Our examination of the 1997/98 financial crisis experience suggests that a prudent lending policy in the few years prior to an economic downturn does lead to higher-than-industry-average asset quality when the downturn occurs. This is evident from UOB's conservative lending from 1993 to 1996, which led to it having a lower non-performing loan (NPL) ratio than its peers upon the onset of the 1997/98 crisis. For the current situation, we believe low interest rates and positive Singapore GDP growth for 2008 and 2009 will enable the Singapore banks to tackle the situation well (versus the 1997/98 experience of interest rate spike and economic recession in the region). Singapore banks have high loan loss coverage ratios and adequate capital to withstand the possible asset quality deterioration. Taking into consideration heightened asset quality concerns by the market, we have lowered our target prices for all three banks but maintain our OVERWEIGHT call on the the banks, bearing in mind their balance sheet strength. Our top pick remains OCBC, which has a lower asset quality risk and has more-than-sufficient capital to ride through the weaker economic growth ahead. Our recommendations: DBS: Neutral (Target price: S$18.80); OCBC: Buy (TP: S$9.60); UOB: Buy (TP: S$22.30)

Plantation Sector: Maintain Market Weight (UOBKayHian, 3 Sep)
Crude palm oil (CPO) prices is likely to adjust downward again due to lower crude oil price and the upward revision of rapeseed and sunflower seed production. The sharp decline in crude oil price after the less-than-expected damage from Hurricane Gustav will lead to the decline in CPO price. The strong correlation is due to the use of CPO as biodiesel feedstock. In our opinion, the sharp decline in prices could have factored in the higher-than-expected production from palm oil (evident by the widening price gap to soybean oil's and rape oil's). But as soybean oil and rape oil prices are relatively more stable to CPO's price, a correction is likely to come with the higher supply of soybean, rapeseed and sunflower seed. Any price correction of these edible oils would have an impact on palm oil as well.
There is no change to our sector recommendation as CPO price outlook still remains the sector's main growth driver. We maintain our negative price outlook for CPO on concern over high edible oils supply, a decline in demand and reversal in crude oil price. After the share price correction, CPO price could be due for a technical rebound. Among plantation stocks under our coverage, we prefer Indonesian plantation companies, which weak selling prices are buffered by their high production and strong double-digit growth.

Commodities Sector: Outperforming broad market (OCBC Research, 3 Sep)
Despite recent swings in commodity prices, the medium- to long-term growth profile for commodities remains intact. The sector continued to perform and even surpassed expectations. For instance, Noble Group Holdings (Noble) impressed with a 191% year-on-year (y-o-y) surge in 1H08 net profit, Olam International (Olam) posted a 54% growth in FY08 earnings, while Straits Asia Resources (SAR) dazzled with 1H08 earnings soaring 263% y-o-y. According to Noble, volumes remain robust despite fluctuations in spot market prices, which it is hedged against. It remains confident that demand for commodities will grow. Similarly, SAR has been riding on record high coal prices and is enjoying upward price revisions for its new contracts, owing to global demand-supply imbalances. It has raised its average selling prices (ASP) for 2009 delivery by 47% to US$104/t (vs. US$70.5/t in 2009). We believe that the commodities sector will continue to outperform the broad market in 2H08.
We continue to favour Noble (BUY, S$2.99) and SAR (BUY, S$4.66). Catalysts for these stocks include: (i) for Noble, the upcoming listing of its subsidiary, Donaldson Coal on the Australian Stock Exchange in 4Q08, which will enhance its cash position, and (ii) for SAR, the acquisition of coal interests in Madagascar and Brunei which will increase its reserves substantially and evolve it to a global coal player.

Wing Tai: Sell (Goldman Sachs, 2 Sep)
The share price is down 50% year-to-date (compared to 22% decline for the ST Index), but we see the share price retreat as justified in light of increasing risk to property prices and low take-up for high-end residential projects. Our negative view on Wing Tai stems from its reliance on high-end Singapore residential property, which we advise avoiding over the next 6 to 9 months. While Wing Tai will be a key beneficiary should there be an unanticipated return of bullish sentiment for high-end Singapore residential property, we do not expect such a scenario to pan out the remainder of this year or next year. However, we note that the group is entering challenging market conditions on firmer footing than it did in the previous property market downcycle, with gearing currently at 37%. Further, we view with caution the group’s foray into China, noting that the operating conditions there will likely become more challenging over the next 6 months and that newcomers will likely encounter teething difficulties. We have applied a 40% discount to end-June 2009E RNAV to derive our 12- month target price of S$1.12.

CAPITALAND: Buy (UOBKayHian, 2 Sep)
CapitaLand has announced the sale of its 30% stake in Menara Citibank in Kuala Lumpur to IOI Corporation Berhad in a deal that values the asset at RM733.6m (S$314.7m), and will recognise a gain of about S$22m, or 0.75 cents/share, upon completion of the divestment. CapitaLand plans to redeploy proceeds from the divestment to tap new opportunities in the growing Malaysian market in line with its asset productivity strategy. The sale of Menara Citibank does not have any material impact on 2008 EPS. We maintain our full-year 2008 earnings forecasts. In light of the renewed concerns over the US sub-prime crisis and global economic slowdown, we reduce our target price by 10% from S$7.15 to S$6.50 by pegging our target price at parity to 2009 RNAV of S$6.50. We see good value in CapitaLand after the recent selldown.

Capital Mall Trust: Buy (OCBC Research, 2 Sep)
The tight credit market has raised concerns that REITs could face a tougher time making yield-accretive acquisitions and thus resulting in slower distribution per unit (DPU) growth ahead. For CMT, investors should focus on its growth via asset management and enhancement instead, which can potentially generate between 8% to 25% return on investment. CMT had proven its astuteness in the area of asset enhancement initiatives (AEIs) and with its ongoing AEIs, CMT should still be able to grow its DPU even if there are no new future acquisitions and a freeze in rental rates. Based on our RNAV valuation, we peg the fair value estimate for CMT at S$3.21, at par to its RNAV, which provides a potential upside of 16.8% from its last price of S$2.75 and offers FY08 and FY09 distribution yields of 5.3% and 6.3% respectively. Share price has corrected 16.9% over the last 3 months, and CMT had underperformed the rest of the retail REITs and this brought its distribution yield closer to the rest of the retail REITs. We believe CMT deserves to trade at a premium to its peers, given its size advantage and visible growth from AEIs. We resume coverage on CMT with a BUY rating.