by CIMB-GK (10 Dec)
SEMBCORP Marine has secured a $200 million contract to convert a VLCC to a FPSO for Modec, a Japanese EPCI (engineering, procurement, construction and installation) player. Delivery is planned for Q1 2011.
We believe that the outlook for the production segment is more positive than rig-building. Oil exploration and discoveries have accelerated in the past few years, driven by an unprecedented spike in oil prices. Therefore, we believe that the demand for production-related equipment remains to support the recent oil discoveries.
Upstream reported that SMOE, SembMarine's subsidiary, together with an Italian contractor Saipem, is bidding for a US$600 million EPCI processing platform contract from Premier Oil's Gajah Baru gas project in West Natuna Sea, Indonesia. The contract is expected to be finalised by end-2008.
We believe that the production segment in the offshore & marine value chain would be less susceptible to credit volatility as FPSOs and offshore platforms are typically owned and operated by oil companies with stronger financial track records.
No change to our forecasts as this win is within our order-book assumptions. Total order book is now about $10 billion. SembMarine remains our top pick in the offshore & marine sector for its strong balance sheet (net cash) and attractive dividend yields. The stock is cheap at its historical low of 6x CY10 PE. Stronger-than-expected order wins could provide stock upside.
-Research Report by CIMB-GK (10 Dec)
Showing posts with label Research Reports. Show all posts
Showing posts with label Research Reports. Show all posts
Thursday, December 11, 2008
Thursday, December 4, 2008
Commodities Sector Research Report
by OCBC INVESTMENT RESEARCH (3 Dec)
COMMODITIES have gone through a roller-coaster ride in 2008 and are likely to fall victim to further volatility in 2009 along with the broad market. 2009 presents a challenging macro outlook. Moving into next year, we believe that several macro factors could continue to weigh on the sector's outlook.
These include the shaky global macroeconomic outlook, softening demand from manufacturers and consumers, a prolonged credit drought and falling commodities prices.
While the near-term outlook is likely to remain muted, coordinated government policies could help to stabilise the overall climate in the medium term. For instance, China has recently announced a four trillion yuan (S$888 billion) stimulus package and an interest rate cut to boost the cooling economy. Large-scale spending such as these will help to bolster the demand for commodities such as steel and energy, albeit in the further future.
Commodities have been proven to outperform the stock market in times of crisis. Nevertheless, as demand for commodities is a function of the global economy, we expect the sentiment for these stocks to recover only when macroeconomic pessimism fades. As such, we are NEUTRAL on the sector.
At current valuations, the risk-reward profile of some stocks has grown attractive for long-term investors who are prepared to ride out the volatility.
-Research Report by OCBC INVESTMENT RESEARCH (3 Dec)
COMMODITIES have gone through a roller-coaster ride in 2008 and are likely to fall victim to further volatility in 2009 along with the broad market. 2009 presents a challenging macro outlook. Moving into next year, we believe that several macro factors could continue to weigh on the sector's outlook.
These include the shaky global macroeconomic outlook, softening demand from manufacturers and consumers, a prolonged credit drought and falling commodities prices.
While the near-term outlook is likely to remain muted, coordinated government policies could help to stabilise the overall climate in the medium term. For instance, China has recently announced a four trillion yuan (S$888 billion) stimulus package and an interest rate cut to boost the cooling economy. Large-scale spending such as these will help to bolster the demand for commodities such as steel and energy, albeit in the further future.
Commodities have been proven to outperform the stock market in times of crisis. Nevertheless, as demand for commodities is a function of the global economy, we expect the sentiment for these stocks to recover only when macroeconomic pessimism fades. As such, we are NEUTRAL on the sector.
At current valuations, the risk-reward profile of some stocks has grown attractive for long-term investors who are prepared to ride out the volatility.
-Research Report by OCBC INVESTMENT RESEARCH (3 Dec)
China Milk Research Report
by DMG & PARTNERS SECURITIES (3 Dec)
IN November, the Chinese government overhauled the entire dairy industry to improve safety at every step of the value chain. From cow breeding to the end product that customers consume.
We believe that China Milk is going to benefit from this because they have extremely high quality standards and supervision at every stage of the value chain.
China Milk feeds its herd the best quality feed, which it grows itself. The fertiliser used to grow the animal feed is also from its own herd. This insures that there are no dangerous chemicals being added to the crops. In our view, we believe that the Chinese government should base quality standards using China Milk as an example.
The exposure of many problems existing in quality control and supervision of the industry has dampened China's global reputation. However, we believe that the rebuilding process of its dairy industry will only make China's dairy sector more attractive in the long term.
-Research Report by DMG & PARTNERS SECURITIES (3 Dec)
IN November, the Chinese government overhauled the entire dairy industry to improve safety at every step of the value chain. From cow breeding to the end product that customers consume.
We believe that China Milk is going to benefit from this because they have extremely high quality standards and supervision at every stage of the value chain.
China Milk feeds its herd the best quality feed, which it grows itself. The fertiliser used to grow the animal feed is also from its own herd. This insures that there are no dangerous chemicals being added to the crops. In our view, we believe that the Chinese government should base quality standards using China Milk as an example.
The exposure of many problems existing in quality control and supervision of the industry has dampened China's global reputation. However, we believe that the rebuilding process of its dairy industry will only make China's dairy sector more attractive in the long term.
-Research Report by DMG & PARTNERS SECURITIES (3 Dec)
Tuesday, December 2, 2008
Semb Marine Research Report
by BNP Paribas (2 Dec)
LOWER but not low oil prices: We believe it is reasonable to question the general outlook for the oil industry following the recent news about potential order cancellations at Keppel Corp.
For Sembcorp Marine (SembMarine), we are concerned if the offshore orders would decline drastically and coupled with order cancellations would decimate the order books.
Seadrill, a client of SembMarine, is facing difficulties in getting financing for some of its offshore orders with SembMarine. This is resulting in a potential order cancellation by Seadrill.
Analysis of Seadrill's financials gives us a better picture of the underlying situation. Seadrill's profit & loss and cashflow positions are good, indicating strong underlying business fundamentals. For Q3 2008, net profit increased 211 per cent y-o-y to US$69 million. Operating cashflow stood at US$730 million (up 12 per cent y-o-y).
It was poor corporate finance decisions that led to difficulties. Net gearing in Q3 2008 was 163 per cent, up from 122 per cent q-o-q. There are also other factors working against it - total return swaps, aggressive off-balance sheet financing and large equity investment stakes.
Oil prices have now declined for the fifth month since its high of US$147 per barrel in July 2008 and yet rig utilisation and day rates are still strong. Our positive argument for SembMarine is dependent on the recovery of overall market sentiment and not earnings.
Also, lower oil prices at US$50-60 per barrel are not only sustainable for oil producers, they ensure that costs for most economic activities will be lower in 2009. We believe cost deflation will be the first step in market sentiment recovery.
Lower oil prices will not only keep demand alive but also keep alternative energy out, and make it easier for producers to undertake long-term exploration decisions. This in turn will ensure SembMarine stays sustainably busy.
Valuation presents opportunity; SembMarine continues to trade well below the historical period of 1997-2003. Our TP remains at 12 times 2009 PE. The dividend yield is attractive at levels above 10 per cent.
-Research Report by BNP Paribas (2 Dec)
LOWER but not low oil prices: We believe it is reasonable to question the general outlook for the oil industry following the recent news about potential order cancellations at Keppel Corp.
For Sembcorp Marine (SembMarine), we are concerned if the offshore orders would decline drastically and coupled with order cancellations would decimate the order books.
Seadrill, a client of SembMarine, is facing difficulties in getting financing for some of its offshore orders with SembMarine. This is resulting in a potential order cancellation by Seadrill.
Analysis of Seadrill's financials gives us a better picture of the underlying situation. Seadrill's profit & loss and cashflow positions are good, indicating strong underlying business fundamentals. For Q3 2008, net profit increased 211 per cent y-o-y to US$69 million. Operating cashflow stood at US$730 million (up 12 per cent y-o-y).
It was poor corporate finance decisions that led to difficulties. Net gearing in Q3 2008 was 163 per cent, up from 122 per cent q-o-q. There are also other factors working against it - total return swaps, aggressive off-balance sheet financing and large equity investment stakes.
Oil prices have now declined for the fifth month since its high of US$147 per barrel in July 2008 and yet rig utilisation and day rates are still strong. Our positive argument for SembMarine is dependent on the recovery of overall market sentiment and not earnings.
Also, lower oil prices at US$50-60 per barrel are not only sustainable for oil producers, they ensure that costs for most economic activities will be lower in 2009. We believe cost deflation will be the first step in market sentiment recovery.
Lower oil prices will not only keep demand alive but also keep alternative energy out, and make it easier for producers to undertake long-term exploration decisions. This in turn will ensure SembMarine stays sustainably busy.
Valuation presents opportunity; SembMarine continues to trade well below the historical period of 1997-2003. Our TP remains at 12 times 2009 PE. The dividend yield is attractive at levels above 10 per cent.
-Research Report by BNP Paribas (2 Dec)
Tuesday, November 25, 2008
Market starts week on weak note
by CONRAD TAN (25 Nov)
UOB and DBS are main drags on STI; gains by heavyweights SingTel and KepCorp help limit index's losses
STOCKS here started the week on a sour note yesterday as two of the world's biggest banks scrambled to raise capital, adding to fears that the unfolding economic crisis worldwide is taking its toll on even the biggest names.
The Straits Times Index (STI) finished 41.81 points or 2.5 per cent lower at 1,620.29, after slumping 2.6 per cent earlier in the day. United Overseas Bank (UOB) and DBS Group were the main drags on the index.
Around the region, bank stocks suffered after Standard Chartered Bank said it would raise £1.8 billion (S$4.1 billion) through a rights issue to boost its capital base and the US government agreed to bail out Citigroup by injecting US$20 billion into it and insuring up to US$306 billion of its troubled assets.
Here, UOB finished 3.8 per cent lower at $11.26, DBS fell 3.4 per cent to $9.27 and OCBC Bank ended 1.1 per cent down at $4.55.
In a report yesterday, DBS analysts said they remain 'cautious' on the local banking sector, despite the boost from the government's initiative announced last week to support lending to small and medium-size enterprises (SMEs).
'We believe this move by the government will ease credit worries, alleviate default risk of SMEs and restore confidence in the availability of credit to SMEs,' they said. Still, 'the key concerns ahead would be the extent of asset quality weakness the banks might face'.
Olam International, a supplier of agricultural commodities worldwide, led yesterday's blue-chip declines in percentage terms. It fell 7 per cent to 93 cents, revisiting last Wednesday's low. The stock has slumped 66.9 per cent this year amid a broader slide in commodity-related stocks, as the world's biggest economies tip into recession, hurting demand for a range of commodities.
But Hong Kong-based Noble Group, which manages global supply chains in food, energy and metals, defied the broader market yesterday, rising 0.7 per cent to 74.5 cents after slumping badly last week. For the year, the stock is still down 63.2 per cent.
Chinese shipyard operator Cosco Corp was the second-biggest loser in percentage terms among STI members, falling 6.8 per cent to 68 cents.
Of the STI's 30 component stocks, 25 fell, four rose and one finished unchanged. Index heavyweights SingTel and Keppel Corp were among the gainers, which helped limit the STI's losses. SingTel rose 1.2 per cent to $2.48 and KepCorp finished 0.2 per cent higher at $4.61.
Outside the STI, the broader market was also weak. Losing counters outnumbered gainers 284-108 overall, with 930 counters unchanged, excluding warrants and bonds. Trading volume was abysmally low.
Just 790.4 million units worth $650.3 million changed hands, compared with Friday's volume of 1.17 billion units worth $971.6 million. That includes warrants and bonds but excludes shares traded in foreign currencies.
CapitaCommercial Trust fell 8.2 per cent to 73 cents after the property trust said on Friday it was pursuing its refinancing needs with several financial institutions. A Reuters report that day suggested the trust had asked four banks to arrange $580 million in refinancing.
The FTSE ST All-Share index, which tracks 268 of the most liquid stocks listed here, fell 2.5 per cent yesterday, while the UOB Catalist index of stocks on the second board dipped 1.5 per cent.
Elsewhere in the region, most stock indices also ended lower, except in Japan where markets were closed for a public holiday. Hong Kong's Hang Seng Index slid 1.6 per cent.
-Research Report by CONRAD TAN (25 Nov)
UOB and DBS are main drags on STI; gains by heavyweights SingTel and KepCorp help limit index's losses
STOCKS here started the week on a sour note yesterday as two of the world's biggest banks scrambled to raise capital, adding to fears that the unfolding economic crisis worldwide is taking its toll on even the biggest names.
The Straits Times Index (STI) finished 41.81 points or 2.5 per cent lower at 1,620.29, after slumping 2.6 per cent earlier in the day. United Overseas Bank (UOB) and DBS Group were the main drags on the index.
Around the region, bank stocks suffered after Standard Chartered Bank said it would raise £1.8 billion (S$4.1 billion) through a rights issue to boost its capital base and the US government agreed to bail out Citigroup by injecting US$20 billion into it and insuring up to US$306 billion of its troubled assets.
Here, UOB finished 3.8 per cent lower at $11.26, DBS fell 3.4 per cent to $9.27 and OCBC Bank ended 1.1 per cent down at $4.55.
In a report yesterday, DBS analysts said they remain 'cautious' on the local banking sector, despite the boost from the government's initiative announced last week to support lending to small and medium-size enterprises (SMEs).
'We believe this move by the government will ease credit worries, alleviate default risk of SMEs and restore confidence in the availability of credit to SMEs,' they said. Still, 'the key concerns ahead would be the extent of asset quality weakness the banks might face'.
Olam International, a supplier of agricultural commodities worldwide, led yesterday's blue-chip declines in percentage terms. It fell 7 per cent to 93 cents, revisiting last Wednesday's low. The stock has slumped 66.9 per cent this year amid a broader slide in commodity-related stocks, as the world's biggest economies tip into recession, hurting demand for a range of commodities.
But Hong Kong-based Noble Group, which manages global supply chains in food, energy and metals, defied the broader market yesterday, rising 0.7 per cent to 74.5 cents after slumping badly last week. For the year, the stock is still down 63.2 per cent.
Chinese shipyard operator Cosco Corp was the second-biggest loser in percentage terms among STI members, falling 6.8 per cent to 68 cents.
Of the STI's 30 component stocks, 25 fell, four rose and one finished unchanged. Index heavyweights SingTel and Keppel Corp were among the gainers, which helped limit the STI's losses. SingTel rose 1.2 per cent to $2.48 and KepCorp finished 0.2 per cent higher at $4.61.
Outside the STI, the broader market was also weak. Losing counters outnumbered gainers 284-108 overall, with 930 counters unchanged, excluding warrants and bonds. Trading volume was abysmally low.
Just 790.4 million units worth $650.3 million changed hands, compared with Friday's volume of 1.17 billion units worth $971.6 million. That includes warrants and bonds but excludes shares traded in foreign currencies.
CapitaCommercial Trust fell 8.2 per cent to 73 cents after the property trust said on Friday it was pursuing its refinancing needs with several financial institutions. A Reuters report that day suggested the trust had asked four banks to arrange $580 million in refinancing.
The FTSE ST All-Share index, which tracks 268 of the most liquid stocks listed here, fell 2.5 per cent yesterday, while the UOB Catalist index of stocks on the second board dipped 1.5 per cent.
Elsewhere in the region, most stock indices also ended lower, except in Japan where markets were closed for a public holiday. Hong Kong's Hang Seng Index slid 1.6 per cent.
-Research Report by CONRAD TAN (25 Nov)
STI likely to consolidate further
by Ken Tai Chee Ming, CMT senior technical strategist, KELIVE RESEARCH (25 Nov)
BASED on Elliot Wave theorem, the Straits Times Index is currently trending in Wave-B downtrend of its Wave-4 cycle. At the macro front, the decline in commodity and oil prices is making a positive impact on the US external deficit and US dollar strength.
Coupled with the rising aversion to global risk, there is anecdotal evidence to suggest that US capital outflow to Asia is slowing down somewhat as funds re-balance their weightings in favour of US dollar assets.
If this prognosis is accurate, then Asian markets will likely consolidate further as the US dollar strengthens. For Singapore, MAS's shift towards a zero appreciation policy for the Sing dollar on Oct 9 had led to speculative shorts on the Sing dollar.
To date, the Sing dollar/US dollar exchange rate has depreciated from $1.47 to $1.53; the next resistance to watch is $1.543, followed by $1.592. We believe currency exchange levels will have a deterministic role in this phase of the STI's consolidation with index support at 1,570.
While it could be a wait before the Wave-C rebound arrives, potentially, a breakout of the recent 1,933 high achieved this October is plausible.
-Research Report by Ken Tai Chee Ming, CMT senior technical strategist, KELIVE RESEARCH (25 Nov)
BASED on Elliot Wave theorem, the Straits Times Index is currently trending in Wave-B downtrend of its Wave-4 cycle. At the macro front, the decline in commodity and oil prices is making a positive impact on the US external deficit and US dollar strength.
Coupled with the rising aversion to global risk, there is anecdotal evidence to suggest that US capital outflow to Asia is slowing down somewhat as funds re-balance their weightings in favour of US dollar assets.
If this prognosis is accurate, then Asian markets will likely consolidate further as the US dollar strengthens. For Singapore, MAS's shift towards a zero appreciation policy for the Sing dollar on Oct 9 had led to speculative shorts on the Sing dollar.
To date, the Sing dollar/US dollar exchange rate has depreciated from $1.47 to $1.53; the next resistance to watch is $1.543, followed by $1.592. We believe currency exchange levels will have a deterministic role in this phase of the STI's consolidation with index support at 1,570.
While it could be a wait before the Wave-C rebound arrives, potentially, a breakout of the recent 1,933 high achieved this October is plausible.
-Research Report by Ken Tai Chee Ming, CMT senior technical strategist, KELIVE RESEARCH (25 Nov)
Technical view on ST Index
by DMG AND PARTNERS SECURITIES (25 Nov)
STRAITS Times Index (STI): Edging closer to the 1,391 level.
We have previously noted that the STI is set to fall due to the Symmetrical Triangle pattern that had formed. While the STI did eventually drop 10.7 per cent to its intraday low of 1,570 during the previous week, we had underestimated the magnitude of the decline as we had expected the index to 'consolidate with a bearish tone' - the breakout move out of the Triangle had taken place slightly earlier than we have anticipated.
We had also mentioned that the break below the 1,600-1,717 region would imply that the index is set to target the 1,391 mark to complete the 161.8 per cent move of Wave A. While this view remains and with the STI still in the midst of a Wave C, we now note that this level should be attained by January.
As for our weekly short-term view for the STI, we believe that any rebounds should be shortlived. With the potential bearish moving average crossover on the MACD chart looming, the breakout move from the Triangle looks poised to continue. Additionally, the 14-day RSI is still hovering above the 30 level, suggesting that the STI is not yet oversold.
Support is set at the 1,570-1,580 area which is in line with the lower bollinger band while resistance is derived at the 1,760-1,770 range as depicted by the confluence of the 14- and 21-day moving averages.
-Research Report by DMG AND PARTNERS SECURITIES (25 Nov)
STRAITS Times Index (STI): Edging closer to the 1,391 level.
We have previously noted that the STI is set to fall due to the Symmetrical Triangle pattern that had formed. While the STI did eventually drop 10.7 per cent to its intraday low of 1,570 during the previous week, we had underestimated the magnitude of the decline as we had expected the index to 'consolidate with a bearish tone' - the breakout move out of the Triangle had taken place slightly earlier than we have anticipated.
We had also mentioned that the break below the 1,600-1,717 region would imply that the index is set to target the 1,391 mark to complete the 161.8 per cent move of Wave A. While this view remains and with the STI still in the midst of a Wave C, we now note that this level should be attained by January.
As for our weekly short-term view for the STI, we believe that any rebounds should be shortlived. With the potential bearish moving average crossover on the MACD chart looming, the breakout move from the Triangle looks poised to continue. Additionally, the 14-day RSI is still hovering above the 30 level, suggesting that the STI is not yet oversold.
Support is set at the 1,570-1,580 area which is in line with the lower bollinger band while resistance is derived at the 1,760-1,770 range as depicted by the confluence of the 14- and 21-day moving averages.
-Research Report by DMG AND PARTNERS SECURITIES (25 Nov)
Monday, November 24, 2008
More than just rig builders
by VINCENT WEE (24 Nov)
LOOKING at the one-year price charts of SembCorp Marine, Keppel Corp and the benchmark crude oil grade, a close correlation appears.
Both SembMarine and Keppel Corp hit highs of $4.61 and $12.34 respectively on June 2, when the price of crude oil was on an unprecedented uptrend and just a month before it hit an all-time high of over US$147 in July.
When the oil price started sliding below US$100 per barrel after that high point, the stock prices of the two counters followed suit. And when oil prices briefly spiked back up above US$100, the stock prices of the two counters mirrored this movement, albeit on a much smaller scale.
With oil falling below US$50 last Thursday, the prospects for the two counters look poor if investors were to assume that the correlation will hold. However, the fundamental question that needs to be asked is if that rationale for the correlation was valid in the first place.
Firstly, new order announcements have slowed, not stopped, in the second half. Keppel Offshore and Marine managing director and chief operating officer Tong Chong Heong was recently quoted as saying that the group had 'not yet reached a point of panic' because most of its projects were properly funded and the yards had work all the way till about 2012 to 2013 with a net order book of $13 billion as at Sept 30.
Trying to pin down an oil price at which continued investment in new rigs will stop is at best an academic exercise. But the fact remains that demand for oil will continue to rise and so will the demand for rigs needed to find that oil.
According to a recent report by Ocean Shipping Consultants, even in a low case (price) scenario, offshore oil production is forecast to increase by 39 per cent between now and 2020.
The other key fact is that even as oil demand increases, the supply of rigs will not keep pace. Over 65 per cent of the global mobile rig fleet is over 25 years old and should be due for scrapping but owners have deferred this due to high current charter rates. New building orders account for just 20 per cent of the current offshore rig fleet.
Secondly, while both companies are known as rig builders accounting for more than two-thirds of global newbuilds and while it seems that the big rig deals with impressive headline numbers have tapered off, it should be realised that this is not all that they can do. For example, each of them are also recognised ship repair and conversion yards in their own right.
In fact, the margins on some of the other less attention-grabbing jobs they undertake are actually better than the rig jobs. Repair and conversion jobs see average margins of 25-30 per cent while the usual margin on a rig newbuild is no more than 10 per cent.
Nonetheless, contracts continue to trickle in and the type of jobs being secured seem to be indicating just such a shift.
Keppel announced several conversion and fabrication contracts worth a total of $340 million last week. SembMarine's most recent contract for the first in a series of LNG carrier life extensions was just last month.
DMG and Partners analyst Serene Lim notes in a recent report on SembMarine that 'the repair and conversion business division is counter-cyclical in nature'.
'In this weak credit market whereby we could possibly expect slowing new order momentum, we believe this non-rig building segment is likely to bring in relatively stable revenue stream.'
' We noted that historically, these combined revenue contributions from repair and conversion projects had been increasing through these years, $1.4 billion in FY05, $1.5 billion in FY06 and $1.9 billion in FY07,' she adds, maintaining her 'buy' call and a target price of $2.49.
OCBC Investment Research's Kelly Chia, meanwhile, resumed coverage of Keppel with a 'buy' call also and a fair value price of $5.20.
-Research Report by VINCENT WEE (24 Nov)
LOOKING at the one-year price charts of SembCorp Marine, Keppel Corp and the benchmark crude oil grade, a close correlation appears.
Both SembMarine and Keppel Corp hit highs of $4.61 and $12.34 respectively on June 2, when the price of crude oil was on an unprecedented uptrend and just a month before it hit an all-time high of over US$147 in July.
When the oil price started sliding below US$100 per barrel after that high point, the stock prices of the two counters followed suit. And when oil prices briefly spiked back up above US$100, the stock prices of the two counters mirrored this movement, albeit on a much smaller scale.
With oil falling below US$50 last Thursday, the prospects for the two counters look poor if investors were to assume that the correlation will hold. However, the fundamental question that needs to be asked is if that rationale for the correlation was valid in the first place.
Firstly, new order announcements have slowed, not stopped, in the second half. Keppel Offshore and Marine managing director and chief operating officer Tong Chong Heong was recently quoted as saying that the group had 'not yet reached a point of panic' because most of its projects were properly funded and the yards had work all the way till about 2012 to 2013 with a net order book of $13 billion as at Sept 30.
Trying to pin down an oil price at which continued investment in new rigs will stop is at best an academic exercise. But the fact remains that demand for oil will continue to rise and so will the demand for rigs needed to find that oil.
According to a recent report by Ocean Shipping Consultants, even in a low case (price) scenario, offshore oil production is forecast to increase by 39 per cent between now and 2020.
The other key fact is that even as oil demand increases, the supply of rigs will not keep pace. Over 65 per cent of the global mobile rig fleet is over 25 years old and should be due for scrapping but owners have deferred this due to high current charter rates. New building orders account for just 20 per cent of the current offshore rig fleet.
Secondly, while both companies are known as rig builders accounting for more than two-thirds of global newbuilds and while it seems that the big rig deals with impressive headline numbers have tapered off, it should be realised that this is not all that they can do. For example, each of them are also recognised ship repair and conversion yards in their own right.
In fact, the margins on some of the other less attention-grabbing jobs they undertake are actually better than the rig jobs. Repair and conversion jobs see average margins of 25-30 per cent while the usual margin on a rig newbuild is no more than 10 per cent.
Nonetheless, contracts continue to trickle in and the type of jobs being secured seem to be indicating just such a shift.
Keppel announced several conversion and fabrication contracts worth a total of $340 million last week. SembMarine's most recent contract for the first in a series of LNG carrier life extensions was just last month.
DMG and Partners analyst Serene Lim notes in a recent report on SembMarine that 'the repair and conversion business division is counter-cyclical in nature'.
'In this weak credit market whereby we could possibly expect slowing new order momentum, we believe this non-rig building segment is likely to bring in relatively stable revenue stream.'
' We noted that historically, these combined revenue contributions from repair and conversion projects had been increasing through these years, $1.4 billion in FY05, $1.5 billion in FY06 and $1.9 billion in FY07,' she adds, maintaining her 'buy' call and a target price of $2.49.
OCBC Investment Research's Kelly Chia, meanwhile, resumed coverage of Keppel with a 'buy' call also and a fair value price of $5.20.
-Research Report by VINCENT WEE (24 Nov)
Thursday, November 20, 2008
Singapore Strategy
by DMG & Partners Securities (19 Nov)
TARGETING survivors: Some corporates may not have banks' support through this rough patch. The market remains concerned about the impact of global economic deterioration on corporate earnings.
Investors are closely scrutinising companies that have overstretched via massive borrowings to fund their growth, or have yet to generate sufficient operating cash flow, as these corporates are at the highest risk of breaching bank covenants if business conditions worsen further.
On the other hand, there are corporates whose balance sheets are strong. Even with the deterioration in business conditions, banks will continue to support these corporates for their working capital and capital expenditure needs.
These are the companies that are seen to survive this downturn. When economic conditions eventually improve, these companies could return to similar levels of profit or even exceed their previous peak profit levels.
Over the past few weeks, we have reviewed the financial forecasts and TPs for all the stocks under our coverage. With the cuts in TPs, we now arrive at a fair Straits Times Index (STI) target of 2,080 over the next 12 months.
However, in the short term, we see further weakness which could bring the STI to as low as 0.95 times P/B, or a 1,560 level. With the downside of about 10 per cent from the current STI level and difficulty in pinpointing the exact bottom, we recommend investors to start nibbling at stocks that will survive this crisis.
We have identified the following big-cap stocks which we believe will ride through the crisis and emerge stronger:
CapitaLand ('buy', TP: $3.05): At current levels, CapitaLand is trading at a 24.4 per cent discount to its end-Q3 2008 NAV of $3.60. During past crises, CapitaLand has been trading at 40-60 per cent discount to NAV. Taking the view that CapitaLand is now of a different stead compared to then, we have pegged our RNAV base-case value of $5.05 to a 40 per cent discount, implying end-2009 fair value of $3.05.
Risks include further tightening of credit markets and more macroeconomic dampeners. Catalysts include more government measures to prop up domestic residential property markets and further timely divestments or acquisitions.
ComfortDelGro ('buy', TP: $1.63): Plunging crude oil prices will stimulate earnings.
Sembcorp Marine ('buy', TP: $2.49): Sustainable amid challenging conditions. Our earnings forecasts have factored in slowing new order momentum.
Singapore Press Holdings ('buy', TP: $4.35): Over the years, SPH has successfully diversified its business, moving into magazines, property and the Internet. Recurring income in the current two financial years should be aided by the property segment, thanks to high rentals for its flagship Paragon mall as well as its sold-out Sky@eleven project.
StarHub ('buy', TP: $2.68): There have been some concerns over its gearing, but a closer look at its financials would bring comfort to investors. Net gearing for the company stood at 7.6 times in Q3 2008, which ranks it among the highest in the market.
However, there was a capital repayment of $1.1 billion, which resulted in shareholders' equity shrinking to a mere $103 million. If not for this, the net gearing would have only been 0.7 times - a decent figure, given that StarHub paid out dividends of $621 million in 2005-07, and declared another $230 million this year. The cash it generates is also more than sufficient to repay its debts.
ST Engineering ('buy', TP: $2.83): Robust financials, good cash flows from operations, long-term prospects still bullish, and orders remain strong.
United Overseas Bank ('buy', TP: $16.00): Conservative loan expansion over the past four years will keep non-performing loans contained. Our earnings forecasts have factored in huge loan provisions. Interest income should be cushioned by its relatively high loan-to-deposit ratio.
Other mid-cap stocks that also deserve attention are:
Ascendas Reit ('buy', TP: $1.75): Its present price presents a good entry point for investors to buy into a strong sponsor-backed industrial Reit with quality assets and an established track record, as well as stable income backed by long lease tenures.
China Milk ('buy', TP: $0.52): The company is able to generate consistent free cash flows over the years. We believe China Milk can ride through this crisis well.
Indofood Agri Resources ('buy', TP: $1.12): Indofood Agri has the ability to obtain refinancing for its short-term debt, despite the current credit tightening environment. While lower crude palm oil prices will affect earnings, this is partially mitigated by Indofood Agri's growing cooking oil & fats segment.
Li Heng Chemical Fibre ('buy', TP: $0.685): With capital expenses fully budgeted for, and at least another one billion yuan ($224 million) worth of operating cash inflow from H2 2008 to FY2009, the group should be able to withstand any further repercussions from the credit crisis and a slowdown in its business environment.
Raffles Medical Group ('buy', TP: $0.77): Strong operating cash flows should help it face challenges ahead. It has a healthy patient load, a diversified patient base, and a healthy balance sheet.
Venture Corp ('buy', TP: $7.40): Venture has managed to generate quarterly revenue and core operating profit exceeding $900 million and $66 million, respectively, since Q1 2007. While the prospects for Venture may have taken a step back in recent times due to the global economic downturn, we do believe that the present selldown in its share price appears over-extended.
-Research Report by DMG & Partners Securities (19 Nov)
TARGETING survivors: Some corporates may not have banks' support through this rough patch. The market remains concerned about the impact of global economic deterioration on corporate earnings.
Investors are closely scrutinising companies that have overstretched via massive borrowings to fund their growth, or have yet to generate sufficient operating cash flow, as these corporates are at the highest risk of breaching bank covenants if business conditions worsen further.
On the other hand, there are corporates whose balance sheets are strong. Even with the deterioration in business conditions, banks will continue to support these corporates for their working capital and capital expenditure needs.
These are the companies that are seen to survive this downturn. When economic conditions eventually improve, these companies could return to similar levels of profit or even exceed their previous peak profit levels.
Over the past few weeks, we have reviewed the financial forecasts and TPs for all the stocks under our coverage. With the cuts in TPs, we now arrive at a fair Straits Times Index (STI) target of 2,080 over the next 12 months.
However, in the short term, we see further weakness which could bring the STI to as low as 0.95 times P/B, or a 1,560 level. With the downside of about 10 per cent from the current STI level and difficulty in pinpointing the exact bottom, we recommend investors to start nibbling at stocks that will survive this crisis.
We have identified the following big-cap stocks which we believe will ride through the crisis and emerge stronger:
CapitaLand ('buy', TP: $3.05): At current levels, CapitaLand is trading at a 24.4 per cent discount to its end-Q3 2008 NAV of $3.60. During past crises, CapitaLand has been trading at 40-60 per cent discount to NAV. Taking the view that CapitaLand is now of a different stead compared to then, we have pegged our RNAV base-case value of $5.05 to a 40 per cent discount, implying end-2009 fair value of $3.05.
Risks include further tightening of credit markets and more macroeconomic dampeners. Catalysts include more government measures to prop up domestic residential property markets and further timely divestments or acquisitions.
ComfortDelGro ('buy', TP: $1.63): Plunging crude oil prices will stimulate earnings.
Sembcorp Marine ('buy', TP: $2.49): Sustainable amid challenging conditions. Our earnings forecasts have factored in slowing new order momentum.
Singapore Press Holdings ('buy', TP: $4.35): Over the years, SPH has successfully diversified its business, moving into magazines, property and the Internet. Recurring income in the current two financial years should be aided by the property segment, thanks to high rentals for its flagship Paragon mall as well as its sold-out Sky@eleven project.
StarHub ('buy', TP: $2.68): There have been some concerns over its gearing, but a closer look at its financials would bring comfort to investors. Net gearing for the company stood at 7.6 times in Q3 2008, which ranks it among the highest in the market.
However, there was a capital repayment of $1.1 billion, which resulted in shareholders' equity shrinking to a mere $103 million. If not for this, the net gearing would have only been 0.7 times - a decent figure, given that StarHub paid out dividends of $621 million in 2005-07, and declared another $230 million this year. The cash it generates is also more than sufficient to repay its debts.
ST Engineering ('buy', TP: $2.83): Robust financials, good cash flows from operations, long-term prospects still bullish, and orders remain strong.
United Overseas Bank ('buy', TP: $16.00): Conservative loan expansion over the past four years will keep non-performing loans contained. Our earnings forecasts have factored in huge loan provisions. Interest income should be cushioned by its relatively high loan-to-deposit ratio.
Other mid-cap stocks that also deserve attention are:
Ascendas Reit ('buy', TP: $1.75): Its present price presents a good entry point for investors to buy into a strong sponsor-backed industrial Reit with quality assets and an established track record, as well as stable income backed by long lease tenures.
China Milk ('buy', TP: $0.52): The company is able to generate consistent free cash flows over the years. We believe China Milk can ride through this crisis well.
Indofood Agri Resources ('buy', TP: $1.12): Indofood Agri has the ability to obtain refinancing for its short-term debt, despite the current credit tightening environment. While lower crude palm oil prices will affect earnings, this is partially mitigated by Indofood Agri's growing cooking oil & fats segment.
Li Heng Chemical Fibre ('buy', TP: $0.685): With capital expenses fully budgeted for, and at least another one billion yuan ($224 million) worth of operating cash inflow from H2 2008 to FY2009, the group should be able to withstand any further repercussions from the credit crisis and a slowdown in its business environment.
Raffles Medical Group ('buy', TP: $0.77): Strong operating cash flows should help it face challenges ahead. It has a healthy patient load, a diversified patient base, and a healthy balance sheet.
Venture Corp ('buy', TP: $7.40): Venture has managed to generate quarterly revenue and core operating profit exceeding $900 million and $66 million, respectively, since Q1 2007. While the prospects for Venture may have taken a step back in recent times due to the global economic downturn, we do believe that the present selldown in its share price appears over-extended.
-Research Report by DMG & Partners Securities (19 Nov)
Wednesday, November 19, 2008
Singapore Strategy
by CIMB-GK RESEARCH (18 Nov)
THE Q3 2008 earnings season has just concluded. Despite marked-down expectations by our analysts, the number of companies with earnings misses still outnumbered those that sprang positive surprises by 2:1.
Sectors that disappointed this quarter were banks, transport, telcos, manufacturing and S-chips. Sectors that beat expectations were plantations and offshore and marine. In the past three months, we had pulled down our expectations for Straits Times Index (STI) EPS growth.
We now expect STI earnings to contract 6.3 per cent y-o-y in 2008 and 13.7 per cent y-o-y in 2009. The bulk of our earnings cut came in October/November - we chopped our estimates for STI 2008 EPS by 8 per cent and 2009 EPS by 27 per cent in that period. Whether these expectations are low enough remains to be seen. STI earnings fell on average 28 per cent in 1997/98, 2001 and 2003.
Few places to hide in a global recession: In the past three months, the MSCI Singapore Free Index fell 39 per cent. In Singapore, the banking, property, real estate investment trust (Reit), multi-industry, plantations, transport and manufacturing sectors underperformed the index.
The two worst-hit sectors were plantations and transport, as commodity prices went into free fall and the shipping sector suddenly saw demand evaporate, largely from the developed world. Only telcos, media and services outperformed the index.
Our top picks: As the STI attempts to find its floor in the next six to nine months, stocks that we like are either stable, cash businesses that provide decent yields despite recessions or stocks that will emerge from this recession for the better, benefiting from a strong balance sheet now or in a position to emerge as leaders in their industries. The opportunity to pick these stocks at marked-down valuations is their key attraction.
In the former category, the stocks include MobileOne (M1), Singapore Post, ComfortDelGro, Cerebos Pacific, Parkway Life Reit, Sembcorp Marine, Singapore Press Holdings and SP Ausnet. In the latter category, our favoured stocks are Parkway Holdings, CapitaCommercial Trust, Wheelock Properties, City Developments, Venture Corp, Singapore Exchange and Wilmar.
For the next six months, our preferred sectors are media, S-Reits and telcos. The sectors we are wary of are banks, property, transport and consumer discretionary.
We view recent rallies as relief rallies from oversold positions. As the market grapples with the realities of a recession, we expect the STI to lose ground and find a floor anywhere between 1,200 and 1,600 - recession P/B levels.
As companies streamline their cost structures and as governments pump-prime in zest and cut interest rates to near zero in the coming months, we expect the seeds to be sown for an eventual recovery from H2 2009. By our estimation of the typical duration of a recession, a market bottom in mid-2009 seems likely. Our end-2009 STI target is set at 2,040, based on a bottom-up methodology.
-Research Report by CIMB-GK RESEARCH (18 Nov)
THE Q3 2008 earnings season has just concluded. Despite marked-down expectations by our analysts, the number of companies with earnings misses still outnumbered those that sprang positive surprises by 2:1.
Sectors that disappointed this quarter were banks, transport, telcos, manufacturing and S-chips. Sectors that beat expectations were plantations and offshore and marine. In the past three months, we had pulled down our expectations for Straits Times Index (STI) EPS growth.
We now expect STI earnings to contract 6.3 per cent y-o-y in 2008 and 13.7 per cent y-o-y in 2009. The bulk of our earnings cut came in October/November - we chopped our estimates for STI 2008 EPS by 8 per cent and 2009 EPS by 27 per cent in that period. Whether these expectations are low enough remains to be seen. STI earnings fell on average 28 per cent in 1997/98, 2001 and 2003.
Few places to hide in a global recession: In the past three months, the MSCI Singapore Free Index fell 39 per cent. In Singapore, the banking, property, real estate investment trust (Reit), multi-industry, plantations, transport and manufacturing sectors underperformed the index.
The two worst-hit sectors were plantations and transport, as commodity prices went into free fall and the shipping sector suddenly saw demand evaporate, largely from the developed world. Only telcos, media and services outperformed the index.
Our top picks: As the STI attempts to find its floor in the next six to nine months, stocks that we like are either stable, cash businesses that provide decent yields despite recessions or stocks that will emerge from this recession for the better, benefiting from a strong balance sheet now or in a position to emerge as leaders in their industries. The opportunity to pick these stocks at marked-down valuations is their key attraction.
In the former category, the stocks include MobileOne (M1), Singapore Post, ComfortDelGro, Cerebos Pacific, Parkway Life Reit, Sembcorp Marine, Singapore Press Holdings and SP Ausnet. In the latter category, our favoured stocks are Parkway Holdings, CapitaCommercial Trust, Wheelock Properties, City Developments, Venture Corp, Singapore Exchange and Wilmar.
For the next six months, our preferred sectors are media, S-Reits and telcos. The sectors we are wary of are banks, property, transport and consumer discretionary.
We view recent rallies as relief rallies from oversold positions. As the market grapples with the realities of a recession, we expect the STI to lose ground and find a floor anywhere between 1,200 and 1,600 - recession P/B levels.
As companies streamline their cost structures and as governments pump-prime in zest and cut interest rates to near zero in the coming months, we expect the seeds to be sown for an eventual recovery from H2 2009. By our estimation of the typical duration of a recession, a market bottom in mid-2009 seems likely. Our end-2009 STI target is set at 2,040, based on a bottom-up methodology.
-Research Report by CIMB-GK RESEARCH (18 Nov)
Wednesday, November 12, 2008
Noble Group 3Q Results
by OCBC INVESTMENT RESEARCH (11 Nov)
STELLAR performance despite challenging landscape: Noble Group impressed with a stellar set of Q3 2008 results. Net profit surged 145.3 per cent y-o-y to US$148.8 million despite a general softening in demand for commodities.
This was achieved on the back of a 66.3 per cent y-o-y growth in revenue to US$9.4 billion. Excluding one-off gains, net profit would still have risen by 115.6 per cent to US$130.8 million. The group's results were commendable except for losses recorded by the metals, minerals & ores (MMO) segment.
MMO reported a loss of US$8.8 million at the gross level due to a sudden and sharp fall in demand for steel, aluminium and iron ore. Looking ahead, this segment should no longer drag on group's profitability in Q4 2008 as residual steel and iron ore stock account for less than 2 per cent of the group's inventories.
The strong showing from its other segments was more than sufficient to offset losses incurred by the MMO segment, proving the merits of Noble's diversification across various asset classes. Overall gross profit margin improved to 4.01 per cent (from 3.61 per cent in Q3 2007), while net profit margin strengthened to 1.6 per cent (from 1.1 per cent in Q3 2007).
Noble quashed concerns over its funding profile by reporting an increase in its cash levels to US$1.1 billion in September (versus US$0.8 billion in June). Easing commodity prices helped to ease working capital requirements and strengthened its cash position.
We note that only 30 per cent or US$1 billion of the group's debt will mature within the next 18 months, and this can easily be repaid using its current cash holdings. The remaining 70 per cent of its debt will mature in 18 months to seven years, and hence poses no immediate concerns to the group. Furthermore, net gearing after adjusting for its readily marketable inventories stands at a modest 4 per cent.
Recommendation: We have raised our FY2008 earnings estimate by 18 per cent following Noble's strong Q3 2008 showing. Our valuation parameter, however, has been trimmed to 10 times (from 12 times) to reflect the risk of a prolonged recession and credit crunch, which could hurt demand for commodities.
-Research Report by OCBC INVESTMENT RESEARCH (11 Nov)
STELLAR performance despite challenging landscape: Noble Group impressed with a stellar set of Q3 2008 results. Net profit surged 145.3 per cent y-o-y to US$148.8 million despite a general softening in demand for commodities.
This was achieved on the back of a 66.3 per cent y-o-y growth in revenue to US$9.4 billion. Excluding one-off gains, net profit would still have risen by 115.6 per cent to US$130.8 million. The group's results were commendable except for losses recorded by the metals, minerals & ores (MMO) segment.
MMO reported a loss of US$8.8 million at the gross level due to a sudden and sharp fall in demand for steel, aluminium and iron ore. Looking ahead, this segment should no longer drag on group's profitability in Q4 2008 as residual steel and iron ore stock account for less than 2 per cent of the group's inventories.
The strong showing from its other segments was more than sufficient to offset losses incurred by the MMO segment, proving the merits of Noble's diversification across various asset classes. Overall gross profit margin improved to 4.01 per cent (from 3.61 per cent in Q3 2007), while net profit margin strengthened to 1.6 per cent (from 1.1 per cent in Q3 2007).
Noble quashed concerns over its funding profile by reporting an increase in its cash levels to US$1.1 billion in September (versus US$0.8 billion in June). Easing commodity prices helped to ease working capital requirements and strengthened its cash position.
We note that only 30 per cent or US$1 billion of the group's debt will mature within the next 18 months, and this can easily be repaid using its current cash holdings. The remaining 70 per cent of its debt will mature in 18 months to seven years, and hence poses no immediate concerns to the group. Furthermore, net gearing after adjusting for its readily marketable inventories stands at a modest 4 per cent.
Recommendation: We have raised our FY2008 earnings estimate by 18 per cent following Noble's strong Q3 2008 showing. Our valuation parameter, however, has been trimmed to 10 times (from 12 times) to reflect the risk of a prolonged recession and credit crunch, which could hurt demand for commodities.
-Research Report by OCBC INVESTMENT RESEARCH (11 Nov)
Wednesday, October 22, 2008
Offshore and Marine Sector Research Report
by CIMB-GK RESEARCH (21 Oct)
IS the bubble bursting? Offshore & marine stocks have been under pressure for several months, falling by more than 70 per cent YTD.
The drop mirrors falling oil prices on the back of a troubled economy and shrinking demand, worsened lately by tight global credit which has increased insolvency risks among shipowners and offshore operators. Singapore big caps in the offshore & marine sector - SembCorp Marine and Cosco Corp - have not been spared in the stock sell-down.
We see more frantic sales of unchartered assets in the market where operators are pushing back their newbuild plans and starting to look for bargain units built for speculation.
A recent decision by Atwood Oceanics not to exercise its option for a third semi-submersible with Semb- Marine could be a key sign of the start of a rig downcycle. While we had expected orders to slow down even before the credit crisis, it now looks like the credit turbulence could hasten the slowdown of orders going into 2009.
Earnings growth for 2009 has been secured by orders but growth beyond that could be at risk if the order momentum decelerates faster than expected.
The adverse credit market has triggered occurrence of bankruptcies, unstable credit lines and higher lending spreads. We are cutting our order assumptions for 2009-10 by 13-44 per cent for SembCorp Marine. With our blanket cut, we are downgrading our earnings estimates by 6-12 per cent for SembCorp Marine.
Downgrade sector to 'neutral' from 'overweight'; SembMarine remains our top pick. Maintain 'outperform' on SembCorp Marine as it is trading below its 10-year trough valuation of about 10x P/E.
Maintain 'underperform' on Cosco.
-Research Report by CIMB-GK RESEARCH (21 Oct)
IS the bubble bursting? Offshore & marine stocks have been under pressure for several months, falling by more than 70 per cent YTD.
The drop mirrors falling oil prices on the back of a troubled economy and shrinking demand, worsened lately by tight global credit which has increased insolvency risks among shipowners and offshore operators. Singapore big caps in the offshore & marine sector - SembCorp Marine and Cosco Corp - have not been spared in the stock sell-down.
We see more frantic sales of unchartered assets in the market where operators are pushing back their newbuild plans and starting to look for bargain units built for speculation.
A recent decision by Atwood Oceanics not to exercise its option for a third semi-submersible with Semb- Marine could be a key sign of the start of a rig downcycle. While we had expected orders to slow down even before the credit crisis, it now looks like the credit turbulence could hasten the slowdown of orders going into 2009.
Earnings growth for 2009 has been secured by orders but growth beyond that could be at risk if the order momentum decelerates faster than expected.
The adverse credit market has triggered occurrence of bankruptcies, unstable credit lines and higher lending spreads. We are cutting our order assumptions for 2009-10 by 13-44 per cent for SembCorp Marine. With our blanket cut, we are downgrading our earnings estimates by 6-12 per cent for SembCorp Marine.
Downgrade sector to 'neutral' from 'overweight'; SembMarine remains our top pick. Maintain 'outperform' on SembCorp Marine as it is trading below its 10-year trough valuation of about 10x P/E.
Maintain 'underperform' on Cosco.
-Research Report by CIMB-GK RESEARCH (21 Oct)
Tuesday, October 21, 2008
Downside looks limited at this juncture
by KEN TAI CHEE MING,
technical analyst
KELive Research (21 Oct)
But the long-term downtrend for ST Index remains
OUR long-term view of the Straits Times Index (STI) has not changed; we maintain that the STI will likely consolidate around 1,665. For short-term traders, a trading window may now open up, given new peaks attained by the VIX index, which measures expectations of near-term market volatility.
Since the VIX index was made available by Prof Robert E Whaley, it has never exceeded 80 points. Even in crisis years such as 1998 and 2001, the VIX only managed to hit 49. Our optimism for a bear rally occurring is also supported by several technical indicators.
The RSI moved into an extreme oversold range in the first week of October. If the RSI holds above 19, a bullish divergence will be formed.
At a secondary level, the plus directional movement indicator remains below the minus directional movement indicator. The ADX is also declining, suggesting that negative momentum is easing.
In all, we believe that the downside is limited at this juncture as negative news is priced into the market, at least in terms of the economic fallout from the credit crunch.
Notwithstanding that, the long-term downtrend is not over. As the recession gets underway, the market will again adjust its sentiment based on the state of the economic data.
As oil and commodities trend lower, related stocks are also reflecting the downtrend. We see further weakness in STX Pan Ocean and Mercator as the Baltic Dry Index goes near six-year lows.
-Research Report by KEN TAI CHEE MING,
technical analyst
KELive Research (21 Oct)
technical analyst
KELive Research (21 Oct)
But the long-term downtrend for ST Index remains
OUR long-term view of the Straits Times Index (STI) has not changed; we maintain that the STI will likely consolidate around 1,665. For short-term traders, a trading window may now open up, given new peaks attained by the VIX index, which measures expectations of near-term market volatility.
Since the VIX index was made available by Prof Robert E Whaley, it has never exceeded 80 points. Even in crisis years such as 1998 and 2001, the VIX only managed to hit 49. Our optimism for a bear rally occurring is also supported by several technical indicators.
The RSI moved into an extreme oversold range in the first week of October. If the RSI holds above 19, a bullish divergence will be formed.
At a secondary level, the plus directional movement indicator remains below the minus directional movement indicator. The ADX is also declining, suggesting that negative momentum is easing.
In all, we believe that the downside is limited at this juncture as negative news is priced into the market, at least in terms of the economic fallout from the credit crunch.
Notwithstanding that, the long-term downtrend is not over. As the recession gets underway, the market will again adjust its sentiment based on the state of the economic data.
As oil and commodities trend lower, related stocks are also reflecting the downtrend. We see further weakness in STX Pan Ocean and Mercator as the Baltic Dry Index goes near six-year lows.
-Research Report by KEN TAI CHEE MING,
technical analyst
KELive Research (21 Oct)
Thursday, October 16, 2008
China Hongx Research Report
by CIMB-GK (15 Oct)
IN MID-NOVEMBER 2007, China Hongxing Sports placed out 400 million new shares at S$1.18 each to raise net proceeds of 2.3 billion yuan (S$493 million). The money was meant to fund its expansion plans.
Hongxing set aside 1.3 billion yuan from the proceeds to aid its distributors with the opening of 420 mid-sized stores from Q4 2007 till Q4 2008. The rationale for this was to secure key retail locations.
Under these arrangements, Hongxing secures leases for the distributors, who are obliged to pay first-year rentals in instalments over 12-15 months. After the first year, the leases are transferred to the distributors. These advancements are recorded as prepayments on Hongxing's balance sheet.
As at end-Q2 2008, Hongxing had advanced 962 million yuan to distributors to facilitate the establishment of 319 mid-sized stores. It had also collected 34 per cent of the 227.5 million yuan advanced in Q4 2007, in line with the 12-15 month repayment period. The last advancements to distributors will take place in the second half of 2008. Management says that the collection of advancements has been smooth.
Although we project negative free cash flow (FCF) for Hongxing for FY2008 due to the spike in its working capital and capital expenditure, we expect its FCF to turn positive in FY2009-2010, as the group starts to reap benefits from its expansion.
We project capital expenditure of around 480 million yuan over FY2008-2010, to be partly funded by placement proceeds. We believe that concerns over its negative FCF have been overplayed, given that it is still in a net cash position of about two billion yuan.
Earnings for the rest of the year should be bolstered by a strong order book of 1.5 billion yuan. Our TP remains based on eight times CY2010 PE, the lower end of its historical band.
-Research Report by CIMB-GK (15 Oct)
IN MID-NOVEMBER 2007, China Hongxing Sports placed out 400 million new shares at S$1.18 each to raise net proceeds of 2.3 billion yuan (S$493 million). The money was meant to fund its expansion plans.
Hongxing set aside 1.3 billion yuan from the proceeds to aid its distributors with the opening of 420 mid-sized stores from Q4 2007 till Q4 2008. The rationale for this was to secure key retail locations.
Under these arrangements, Hongxing secures leases for the distributors, who are obliged to pay first-year rentals in instalments over 12-15 months. After the first year, the leases are transferred to the distributors. These advancements are recorded as prepayments on Hongxing's balance sheet.
As at end-Q2 2008, Hongxing had advanced 962 million yuan to distributors to facilitate the establishment of 319 mid-sized stores. It had also collected 34 per cent of the 227.5 million yuan advanced in Q4 2007, in line with the 12-15 month repayment period. The last advancements to distributors will take place in the second half of 2008. Management says that the collection of advancements has been smooth.
Although we project negative free cash flow (FCF) for Hongxing for FY2008 due to the spike in its working capital and capital expenditure, we expect its FCF to turn positive in FY2009-2010, as the group starts to reap benefits from its expansion.
We project capital expenditure of around 480 million yuan over FY2008-2010, to be partly funded by placement proceeds. We believe that concerns over its negative FCF have been overplayed, given that it is still in a net cash position of about two billion yuan.
Earnings for the rest of the year should be bolstered by a strong order book of 1.5 billion yuan. Our TP remains based on eight times CY2010 PE, the lower end of its historical band.
-Research Report by CIMB-GK (15 Oct)
Wednesday, October 15, 2008
Cosco shares sink on analyst downgrade
by LYNETTE KHOO (15 Oct)
Higher risk of order cancellations, slower shipbuilding demand
(SINGAPORE) The sell- down in shares of Cosco Corp on credit concerns has left one of the last two non-penny S-shares on the brink of going under the one dollar mark.
Some dealers attributed the fall to a downgrade in target price by Credit Suisse to 55 cents from $1.20, with an 'underperform' rating.
Yesterday, Cosco shares held up above $1.20 in the morning trading session before plummeting in the afternoon session to close at a two-year low of $1, which was a 16.7 per cent slump from Monday. It was the second most actively traded stock with 78.42 million shares changing hands.
Credit Suisse analyst Haider Ali said in a report published yesterday that he expects Cosco shares to drift lower towards its estimated trough value of 55 cents on concerns over shipbuilding demand, risk of order cancellations and delivery delays.
'New contracts wins for Cosco Corp have already slowed dramatically; now the question is if they can deliver as per original plan,' Mr Ali said. 'Inadequate disclosure on dry bulk newbuild schedule and no announcements on successful delivery of dry bulk vessel to customer to-date (against 10 planned deliveries in 2008 and 41 vessels in 2009) heighten our concerns on execution risk.'
Analysts pointed out that the current credit condition could squeeze demand for new shipbuilding and raise the risk of order cancellations by clients that are held back by tighter credit lines.
'People are wary of shipbuilding companies in general, given the credit crunch,' said Macquarie Securities analyst Ashwin Sanketh.
'Financing shipbuilding is going to be a challenge now,' he added. 'All yards are seeing some order cancellation, whether it is Korean or Chinese. From that point of view, Cosco is no different from the other shipbuilding yards.'
Recent news of Cosco's Norwegian client MPF filing for bankruptcy also stoked more fears among investors who were already concerned about weak orderbook growth and rising competition, analysts said.
Any pull-out of contract would leave Cosco with only 10-30 per cent of the value of the contract that was received as deposit, Mr Sanketh estimated.
Cosco declined to comment on these concerns yesterday.
-Research Report by LYNETTE KHOO (15 Oct)
Higher risk of order cancellations, slower shipbuilding demand
(SINGAPORE) The sell- down in shares of Cosco Corp on credit concerns has left one of the last two non-penny S-shares on the brink of going under the one dollar mark.
Some dealers attributed the fall to a downgrade in target price by Credit Suisse to 55 cents from $1.20, with an 'underperform' rating.
Yesterday, Cosco shares held up above $1.20 in the morning trading session before plummeting in the afternoon session to close at a two-year low of $1, which was a 16.7 per cent slump from Monday. It was the second most actively traded stock with 78.42 million shares changing hands.
Credit Suisse analyst Haider Ali said in a report published yesterday that he expects Cosco shares to drift lower towards its estimated trough value of 55 cents on concerns over shipbuilding demand, risk of order cancellations and delivery delays.
'New contracts wins for Cosco Corp have already slowed dramatically; now the question is if they can deliver as per original plan,' Mr Ali said. 'Inadequate disclosure on dry bulk newbuild schedule and no announcements on successful delivery of dry bulk vessel to customer to-date (against 10 planned deliveries in 2008 and 41 vessels in 2009) heighten our concerns on execution risk.'
Analysts pointed out that the current credit condition could squeeze demand for new shipbuilding and raise the risk of order cancellations by clients that are held back by tighter credit lines.
'People are wary of shipbuilding companies in general, given the credit crunch,' said Macquarie Securities analyst Ashwin Sanketh.
'Financing shipbuilding is going to be a challenge now,' he added. 'All yards are seeing some order cancellation, whether it is Korean or Chinese. From that point of view, Cosco is no different from the other shipbuilding yards.'
Recent news of Cosco's Norwegian client MPF filing for bankruptcy also stoked more fears among investors who were already concerned about weak orderbook growth and rising competition, analysts said.
Any pull-out of contract would leave Cosco with only 10-30 per cent of the value of the contract that was received as deposit, Mr Sanketh estimated.
Cosco declined to comment on these concerns yesterday.
-Research Report by LYNETTE KHOO (15 Oct)
Tuesday, October 14, 2008
SGX Research Report
by Citi Investment Research (10 Oct)
Q1FY09 preview: Volatility has kept volumes ahead of forecast in Q1FY09 (September 2008 quarter), and hence the SGX could turn in a flat q-o-q profit of $91 million (Q4FY08: $91 million).
However a sharp fall in the Straits Times Index (STI), changes affecting CNX Nifty futures, and lower structured warrants suggest a weaker revenue outlook. STI's Oct 10 close at 1,948 suggests $920 million per day (our base-case forecast) at a 55 per cent velocity; that velocity may weaken if the STI falls further.
We maintain our FY09 profit forecast of $246 million pending the Q1 results announcement on Oct 15.
Bloomberg consensus expects FY09 net profit of $355 million, and EPS of $0.33. Citi's estimate is at 69 per cent of consensus, and remains at the bottom of the range.
-Research Report by Citi Investment Research (10 Oct)
Q1FY09 preview: Volatility has kept volumes ahead of forecast in Q1FY09 (September 2008 quarter), and hence the SGX could turn in a flat q-o-q profit of $91 million (Q4FY08: $91 million).
However a sharp fall in the Straits Times Index (STI), changes affecting CNX Nifty futures, and lower structured warrants suggest a weaker revenue outlook. STI's Oct 10 close at 1,948 suggests $920 million per day (our base-case forecast) at a 55 per cent velocity; that velocity may weaken if the STI falls further.
We maintain our FY09 profit forecast of $246 million pending the Q1 results announcement on Oct 15.
Bloomberg consensus expects FY09 net profit of $355 million, and EPS of $0.33. Citi's estimate is at 69 per cent of consensus, and remains at the bottom of the range.
-Research Report by Citi Investment Research (10 Oct)
Tuesday, September 16, 2008
This is no ordinary crisis
by KEN TAI CHEE MING,
technical analyst
KELive Research (16 Sept)
SOME observers thought the silver lining was in the sky following the 120-point rally on the Straits Times Index (STI) last Monday.
Instead, the selling pressure quickly resumed even before investors could digest the news of the Fannie and Freddie bailouts.
This shows the true extent and depth of the US financial crisis and refutes the popular notion that current developments are following the course of a normal crisis.
At the last count, Bear Stearns is gone, Fannie and Freddie are being nationalised, Merrill Lynch is being sold to BoA, Lehman Brothers is filing for bankruptcy and AIG is seeking for Fed help. The question now is: Who's next?
Amid the worsening sentiment, the STI has failed to hold the support level at 2,554, which represents the 50 per cent Fibonacci retracement level of the 2003-2007 bull rally.
Technically, this does not bode well for the STI and implies that bears are still maintaining their vice- like grip on the local market. So where is the market headed and where are the next support levels on the STI?
The first line of defence is positioned at 2,427 or the 61.8 per cent retracement of the 2003-2007 rally. Coincidentally, this is also the major triple top resistance, which had held during the 1990s.
There could be some support for the STI here and traders should look to unwind some of their short positions at this level.
Based on the Elliot Wave Theory, we believe the STI is currently on Wave-C of its downtrend.
If the decline from 3,906 to 2,745 represents Wave- A and the length of Wave-C usually equates that of Wave-A, then the STI is likely to have a minimum long-term objective of 2,106.
Our empirical study of the four major bear markets in Singapore since 1984 shows the STI declined by between 43 per cent and 64 per cent. If the STI were to fall to 2,106, this would imply a drop of 46 per cent from its peak of 3,906 in October 2007.
-Research Report by KEN TAI CHEE MING,
technical analyst
KELive Research (16 Sept)
technical analyst
KELive Research (16 Sept)
SOME observers thought the silver lining was in the sky following the 120-point rally on the Straits Times Index (STI) last Monday.
Instead, the selling pressure quickly resumed even before investors could digest the news of the Fannie and Freddie bailouts.
This shows the true extent and depth of the US financial crisis and refutes the popular notion that current developments are following the course of a normal crisis.
At the last count, Bear Stearns is gone, Fannie and Freddie are being nationalised, Merrill Lynch is being sold to BoA, Lehman Brothers is filing for bankruptcy and AIG is seeking for Fed help. The question now is: Who's next?
Amid the worsening sentiment, the STI has failed to hold the support level at 2,554, which represents the 50 per cent Fibonacci retracement level of the 2003-2007 bull rally.
Technically, this does not bode well for the STI and implies that bears are still maintaining their vice- like grip on the local market. So where is the market headed and where are the next support levels on the STI?
The first line of defence is positioned at 2,427 or the 61.8 per cent retracement of the 2003-2007 rally. Coincidentally, this is also the major triple top resistance, which had held during the 1990s.
There could be some support for the STI here and traders should look to unwind some of their short positions at this level.
Based on the Elliot Wave Theory, we believe the STI is currently on Wave-C of its downtrend.
If the decline from 3,906 to 2,745 represents Wave- A and the length of Wave-C usually equates that of Wave-A, then the STI is likely to have a minimum long-term objective of 2,106.
Our empirical study of the four major bear markets in Singapore since 1984 shows the STI declined by between 43 per cent and 64 per cent. If the STI were to fall to 2,106, this would imply a drop of 46 per cent from its peak of 3,906 in October 2007.
-Research Report by KEN TAI CHEE MING,
technical analyst
KELive Research (16 Sept)
Wednesday, September 3, 2008
Commodities Sector Research Report
by OCBC Investment Research (3 Sep)
OUTPERFORMING the broad market: Commodities performed well in Q2 2008. Corporate earnings for Q2 2008 were relatively mixed. Compared with last year, fewer companies reported earnings growth, and in general, many succumbed to inflationary cost pressures and saw margins being compressed as a result.
Amid an increasingly challenging operating environment, the commodities sector continued to perform and even surpassed expectations. For instance, Noble Group Holdings impressed with a 191 per cent y-o-y surge in H1 2008 net profit, Olam International posted a 54 per cent growth in FY2008 earnings, while Straits Asia Resources (SAR) dazzled with H1 2008 earnings soaring 263 per cent y-o-y. We believe that the commodities sector will continue to outperform the broad market in H2 2008.
Mid-long term growth intact: Despite recent swings in commodity prices, the medium- to long-term growth profile for commodities remains intact. 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 price for 2009 delivery by 47 per cent to US$104 per tonne (versus US$70.5 per tonne in 2009).
Global demand for energy has been estimated to grow by more than half over the next 25 years, according to the International Energy Agency, and this will continue to put upward pressure on energy prices.
Hurricane Gustav to boost oil prices? Adding to the tight demand-supply landscape, oil prices could spike should Hurricane Gustav result in production disruptions in the US. According to news reports, at least nine refineries, with together account for 12.5 per cent of US refining capacity, have been closed in anticipation of the hurricane.
Depending on the extent of damage, supply shortages could drive oil prices up, with spill-over effects flowing to coal and energy prices.
Top picks - Noble and Straits Asia Resources: Under our coverage of commodity-linked stocks, we continue to favour Noble and SAR. Catalysts for the stocks include:
- for Noble, the upcoming listing of its subsidiary, Donaldson Coal, on the Australian Stock Exchange in Q4 2008, which will enhance its cash position; and
- for SAR, the acquisition of coal interests in Madagascar and Brunei, which will increase its reserves substantially and let it evolve into a global coal player.
-Research Report by OCBC Investment Research (3 Sep)
OUTPERFORMING the broad market: Commodities performed well in Q2 2008. Corporate earnings for Q2 2008 were relatively mixed. Compared with last year, fewer companies reported earnings growth, and in general, many succumbed to inflationary cost pressures and saw margins being compressed as a result.
Amid an increasingly challenging operating environment, the commodities sector continued to perform and even surpassed expectations. For instance, Noble Group Holdings impressed with a 191 per cent y-o-y surge in H1 2008 net profit, Olam International posted a 54 per cent growth in FY2008 earnings, while Straits Asia Resources (SAR) dazzled with H1 2008 earnings soaring 263 per cent y-o-y. We believe that the commodities sector will continue to outperform the broad market in H2 2008.
Mid-long term growth intact: Despite recent swings in commodity prices, the medium- to long-term growth profile for commodities remains intact. 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 price for 2009 delivery by 47 per cent to US$104 per tonne (versus US$70.5 per tonne in 2009).
Global demand for energy has been estimated to grow by more than half over the next 25 years, according to the International Energy Agency, and this will continue to put upward pressure on energy prices.
Hurricane Gustav to boost oil prices? Adding to the tight demand-supply landscape, oil prices could spike should Hurricane Gustav result in production disruptions in the US. According to news reports, at least nine refineries, with together account for 12.5 per cent of US refining capacity, have been closed in anticipation of the hurricane.
Depending on the extent of damage, supply shortages could drive oil prices up, with spill-over effects flowing to coal and energy prices.
Top picks - Noble and Straits Asia Resources: Under our coverage of commodity-linked stocks, we continue to favour Noble and SAR. Catalysts for the stocks include:
- for Noble, the upcoming listing of its subsidiary, Donaldson Coal, on the Australian Stock Exchange in Q4 2008, which will enhance its cash position; and
- for SAR, the acquisition of coal interests in Madagascar and Brunei, which will increase its reserves substantially and let it evolve into a global coal player.
-Research Report by OCBC Investment Research (3 Sep)
Tuesday, August 26, 2008
Olam Research Report
by CIMB-GK (26 Aug)
We see increasing execution risks as the company expands into new and adjacent products, and new countries. Investing in upstream and downstream assets would also entail higher risks than operating an asset-light pure supply chain business.
The company needs capital to fund greater trade volumes, and acquistions and investments. The current yield of 13.7% for its debt implies a higher required rate of return on acquisitions/investments, and reduces its investment options available.
Management had delivered a 34% net profit compound annual growth rate (CAGR) in the past five years. We are cutting our FY2009-10 revenue estimates by 3% to 4%, and EPS estimates by 7% to 8% to account for increased volatility in commodity markets, which could lead to slimmer premiums and/or volumes.
Target price lowered to 16x CY2009 PER, at the low end of its historical trading band, from 27x CY09 PER.
-Research Report by CIMB-GK (26 Aug)
We see increasing execution risks as the company expands into new and adjacent products, and new countries. Investing in upstream and downstream assets would also entail higher risks than operating an asset-light pure supply chain business.
The company needs capital to fund greater trade volumes, and acquistions and investments. The current yield of 13.7% for its debt implies a higher required rate of return on acquisitions/investments, and reduces its investment options available.
Management had delivered a 34% net profit compound annual growth rate (CAGR) in the past five years. We are cutting our FY2009-10 revenue estimates by 3% to 4%, and EPS estimates by 7% to 8% to account for increased volatility in commodity markets, which could lead to slimmer premiums and/or volumes.
Target price lowered to 16x CY2009 PER, at the low end of its historical trading band, from 27x CY09 PER.
-Research Report by CIMB-GK (26 Aug)
Monday, August 25, 2008
China HongX Research Report
by DBS Vickers Securities (25 Aug)
All of China Hongxing's peers such as Li Ning, Anta and Dongxiang have seen significant valuation de-rating over the last six months, along with the declining Shanghai market.
China Hongxing itself has not been spared, and has seen its share price drop by over 40% in the last three months, despite delivering good results.
We believe current valuations for China Hongxing are at an attractive level for investors to accumulate for a leading China domestic sports. At less than 10x FY2008 and just over 7x FY2009 PER, China Hongxing is trading at less than half that of Li Ning, currently at about 25x FY2008 and 19x FY2009 earnings.
Maintaining our 20% discount to HK-listed peers, which are currently trading at an average of 13.5x FY2009 earnings, we adjust our target to 11x FY2009 PER for China Hongxing.
-Research Report by DBS Vickers Securities (25 Aug)
All of China Hongxing's peers such as Li Ning, Anta and Dongxiang have seen significant valuation de-rating over the last six months, along with the declining Shanghai market.
China Hongxing itself has not been spared, and has seen its share price drop by over 40% in the last three months, despite delivering good results.
We believe current valuations for China Hongxing are at an attractive level for investors to accumulate for a leading China domestic sports. At less than 10x FY2008 and just over 7x FY2009 PER, China Hongxing is trading at less than half that of Li Ning, currently at about 25x FY2008 and 19x FY2009 earnings.
Maintaining our 20% discount to HK-listed peers, which are currently trading at an average of 13.5x FY2009 earnings, we adjust our target to 11x FY2009 PER for China Hongxing.
-Research Report by DBS Vickers Securities (25 Aug)
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