17887_010911 sunny side up
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SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONSCo. Reg No: 198700034E
MICA (P) : 090/11/2009
SUNNY SIDE UP Start your day the Kim Eng way
1 September 2011
What’s cookingSingapore Office Sector - Elevated Downside Risks.
The recent market sell-down could be a harbinger of
things to come. There are visible signs of a global
economic slowdown and Singapore looks like it could
be heading into another recession. With ample new
office supply and looming secondary supply, we are of the view that office rents have peaked, with mounting
downside risks. We advise investors to switch out of
the office sector and switch to developers with
diversified exposures. We are downgrading SingLand
to SELL (TP: $4.89) and CityDev to HOLD (TP: $11.05),
but maintain BUY on Keppel Land and CapitaLand
with target prices of $4.05 and $3.56 respectively.
wilsonliew@kimeng.com
Hot stockAmtek Engineering (AMTK SP, $0.665, NOT RATED) –
This could be an opportunity to buy Amtek cheaply, if
signals from major shareholder Standard Chartered
Private Equity are to be believed. The fund bought 9m
shares in Jun 2011 at close to a dollar. With the stock
now trading at a 30% discount to SCPE’s purchases
and nearly half the IPO price, Amtek’s single digit
valuations and 8% yield do look tasty!
gyap@kimeng.com
Overnight market snapshotsDow Jones 11,613.53 53.6
Nasdaq 2,579.46 3.4
FTSE 100 5,394.53 125.9
CAC 40 3,256.76 97.0
DAX Index 5,784.85 140.9
Top news in bite-sized piecesOVERNIGHT…
US stocks closed higher on Wednesday, as the
US reported growth in factory orders that
exceeded projections, while a private report
showed that American business activity topped
forecasts. The Dow ended up 53.58 points,pushing the index into the black for the year.
LOCAL…
Government to ensure steady supply of office
space. Singapore Deputy Prime Minister Tharman
Shanmugaratnam said the government will make
sure prime office space, and commercial space in
general stays competitive. He noted that Grade A
office rents are still about 45% cheaper than the
equivalent in Hong Kong and 25% cheaper thanthat in Tokyo. “And we have to keep it that way,”
he said.
Platinum privileges…Meet the CFO – China Animal Healthcare
(1 September 2011): China Animal Healthcare is a
manufacturer of three out the four compulsory
vaccines under the requirements of the Ministry
of Agriculture of China. We expect its vaccine
business to grow from strength to strength. HearCFO Edwin Goh talk about the prospects for the
company and its goal to explore new growth
opportunities. 1-2pm. 39F Boardroom, Suntec
Tower 2. Please register for the session through
your trading representative.
Kim Eng Research Portal: This is part of our
efforts to better engage YOU, our valued client.
Everything is just a click away. Get actionable
trading ideas each day. It’s even iPhone friendly.Free public access for now, so mark down this site
and share the joy with your friends!
www.kimengresearch.com.sg
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MORE TO DIGEST
Wilmar International (WIL SP) – Fails in Proserpine bid in Australia
Previous day closing price: $5.30
Recommendation – HOLD (maintained)
Target price – $5.31 (maintained)
Wilmar’s Australian sugar subsidiary, Sucrogen, has been unable to secure the necessary level of
support from Proserpine’s members to enable it to purchase its assets. Wilmar needed 75% of
PCSMA members who voted needed to vote in favour of Sucrogen’s offer. Wilmar came close,
with 70% of the vote secured. In June, Sucrogen entered into an agreement to buy the business
assets for A$115m. The vote failed despite Proserpine’s board recommendation and regulator
approval secured. Sucrogen alluded that there were other interested parties that may have
disrupted the transaction.
The purchase of Proserpine would have increased Sucrogen’s milling capacity by about 2m tonnesto a total of 17m tonnes, and increase raw sugar production by about 10 per cent, to 2.2m tonnes.
While this is a setback, we do not expect the deal to have a significant impact on Wilmar’s large
earnings base. Overall, the positive aspect is evident in the high level of competition to secure
such assets, and for soft commodities and agri-businesses in general. This bodes well for Wilmar’s
prospects. After a volatile ride, Wilmar’s share price has recovered to our target price of $5.31. We
maintain our Hold recommendation.rohan@kimeng.com
Year End Dec 31 2009 2010 2011F 2012F 2013F
Sales (US$ m) 23,885.1 30,377.5 36,539.9 38,528.7 40,100.4
Pre-tax (US$ m) 2,294.4 1,644.2 2,066.7 2,630.8 3,140.3
Net profit (US$ m) 1,882.0 1,324.0 1,658.1 2,122.5 2,560.6
EPS (US cts) 29.5 20.7 25.9 33.2 40.0
EPS growth (%) 22.9 (29.7) 25.1 28.0 20.6
PER (x) 14.9 21.1 16.9 13.2 10.9
EV/EBITDA (x) 13.3 19.4 16.1 12.3 10.2
Yield (%) 1.8 1.3 2.2 2.3 1.9
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WHAT’S COOKING Singapore Office Sector
Analyst: Wilson LIEW 65-64321454 wilsonliew@kimeng.com
The recent market sell-down could be a harbinger of things to come. There are visible signs of a
global economic slowdown and Singapore looks like it could be heading into another recession.
With ample new office supply and looming secondary supply, we are of the view that officerents have peaked, with mounting downside risks. We advise investors to switch out of the
office sector and switch to developers with diversified exposures.
Jittery markets a harbinger of things to come?
The Eurozone debt woes have continued to plague on, with some economists citing that the risks
that the bloc may eventually split have elevated. Things are not looking rosy in the U.S. either, as it
gets mired in its own debt crisis. As for Singapore, the government has also cut its 2011 GDP
forecast from 5-7% growth to 5-6%, led by a weakening manufacturing sector. Demand for office
space is closely tied with business sentiments and economic confidence. It can be shown that on a
historical basis, if the quarterly GDP YoY growth rates decline by more than 5 ppts over two
consecutive quarters, this heralds an impending office sector downturn. In 2Q11, Singapore’s GDP
grew by a mere 0.9% YoY compared to the 9.3% YoY growth for 1Q11, which may not bode well
for the office sector.
Buoyant office leasing activities are over
According to Jones Lang Lasalle, average prime office rents surged 31% to $10.15 psf in 2Q11 from
a recent trough of $7.75 psf in 1Q10. Much of the leasing activities came in a busy 12-month
period which saw bulk pre-commitments from major financial institutions and MNCs for space at
the new International Grade A developments such as MBFC and Ocean Financial Centre. Thestrong office demand came at a time when the Singapore economy rebounded strongly, coinciding
with a tight office market as the new developments were still under construction. However, with
most of the bulk leases already signed, momentum started to wane in 2Q11. We think that with
the looming economic headwinds, office rents have already peaked.
Older developments could lead the downturn
While Singapore is likely to remain a desired destination for international companies as occupation
costs remain at a significant discount to our closest competitor Hong Kong, prime Grade A rents
could see a correction of about 10% by end 2012 to $9.60 psf, and $12.15 psf for the International
Grade A category. Prime Grade B buildings may see greater downside pressure, considering
increased competition from alternative supply, such as business parks, secondary space, and
perhaps even the return of “shadow space”.
Downgrading office landlords, prefer diversified developers
We are downgrading Singapore Land to SELL (TP: $4.89), and would avoid other office-biased
landlords, such as OUE (unrated). At this juncture, we prefer developers with more business
diversification. We are maintaining our BUY calls on CapitaLand (TP: $3.56) and Keppel Land (TP:
$4.05) although on lower valuations due to their office exposures. We are downgrading City
Developments Limited to a HOLD on valuation grounds (TP: $11.05), due mainly to a lower M&Cshare price and a weaker Pound Sterling.
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HOT STOCK Amtek Engineering
Analyst: Gregory YAP 65-64321450 gyap@kimeng.com
Up-to-date in 60 secondsSold down! Amtek is now trading at a sharp
discount to its IPO price in Dec 2010 followingthe market selldown and share sales by Capital
Group and Temasek Holdings. Today, Amtek is
trading at just 7x historical EPS and 2x book
compared to 27x historical EPS and 4x book at
the time of the IPO. Further, it has declared a
S$0.055 per share dividend (55% of FYJun11
earnings), which would yield an attractive 8%.
Our viewEarnings below consensus... Amtek posted a
109% jump in FY11 earnings to US$45.2m (FY10
earnings included US$13m in exceptional
charges for the closure of overseas factories,
among others). Excluding the exceptionals, we
estimate core earnings were 20% below
consensus. Gross margin was also weaker due to
the stronger US$ and higher raw material costs.
…but strong cashflow. However, it generated
positive free cashflow of US$30m during the
year that saw net gearing reduce from 0.9x in
FY10 to just 0.1x. It also ringfenced 55% of earnings for dividends, inline with its 50% policy.
With only US$20-25m in capex expected
annually, future dividends should be secure.
Net purchases from major shareholders.
Capital Group sold 7.6m shares in Aug, which
may have contributed to the share price malaise.
However, we note that Capital has been selling
across the board in recent months, most notably
in stocks such as CapitaMalls Asia and SingPost.
In contrast, long-time shareholder StanChartboosted its stake by 9m shares in June 2011.
That may be the better signal to follow.
Shareholders signalling: Is anyone listening?Capital Group Sold (m) Before (%) After (%)
26-Aug 7.1 7.0% 5.7%
12-Aug 0.5 7.1% 7.0%
Total 7.6
StanChart Pvt Equity Bought (m) Before (%) After (%)
29-Jun 2.2 29.5% 29.9%
27-Jun 0.6 29.4% 29.5%
24-Jun 3.7 28.7% 29.4%
23-Jun 0.2 28.7% 28.7%
22-Jun 1.0 28.5% 28.7%
21-Jun 0.9 28.4% 28.5%
17-Jun 0.5 28.3% 28.4%
Total 9.0
Source: Company
BackgroundProvider of comprehensive end-to-end EMS
solutions that includes product design, metal
stamping, plastic and rubber moulding, product
assembly and other finishing services.
Key ratios…Price-to-earnings: 6.7x Price-to-NTA: 1.9x
Net gearing: 0.1x Return on equity: 32%
Dividend per share / yield: S$0.055 / 8.3%Source: Bloomberg, based on historical data
Everything else…Share price (S$) S$0.665
Issued shares (m) 543.2
Market cap (S$ m) 361.2
Free float (%) 34.1%
Recent fundraising
activities
Dec 2010: IPO at $1.30,
200m vendor shares
Financial YE 30 June
Major shareholders Metcomp Holdings (30.3%)
StanChart Private Equity (29.9%)
Capital Grp (5.7%), Mgt (5.3%)
YTD change -46%
52 week px range S$1.37-0.58Source: Company
Summary Financials
YE June 30 2009 2010 2011 4Q10 4Q11
Sales (US$'m) 624.6 638.0 681.6 164.7 175.8
Pre-tax (US$'m) (0.5) 38.4 59.7 4.9 13.2
Net profit (US$'m) (12.4) 21.7 45.2 0.6 9.6
EPS (US cts) (2.3) 4.0 8.3 0.1 1.8
EPS growth (%) n/a n/a 108.6 n/a 1516
PER (x) n/a 13.9 6.7 n/a n/a
EV/EBITDA (x) 12.5 5.8 3.5 n/a n/aYield (%) - - 8.3% n/a n/a
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3
APPENDIX I: TERMS FOR PROVISION OF REPORT, DISCLOSURES
AND
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4
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