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Investors’ Corner
Investors' Corner | 07 April 2008
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PRICE – $0.73
TARGET – $1.38

Allco REIT has successfully refinanced its $550m debt due in July 2008. With the market’s misplaced view of refinancing risk and expectations of a “fire sale” of its Australian assets expunged, we see Allco REIT pursuing an orderly review of its portfolio while the market re-focuses on the REIT’s inherent value. While office supply will remain tight over 2008F, we expect office rents to peak in 1H09F, before seeing cyclical declines of 15.2% in 2010F and 18% in 2011F, given increased new office supply. Strong rental reversions are likely to underpin REIT cashflows. That said, rising concerns over the ability to refinance debt has seen REITs trade below book value. In such an environment, investors need to focus on underlying asset values, with REITs with well-located assets to benefit from rising expectations of M&A activity. Maintain STRONG BUY.
– Nomura (24 Mar)

PRICE – $3.27
TARGET – $4.20

On the back of potential headwinds – rising steel prices and labor costs, we are moving away from our previously assumed blue-sky scenario and pricing in more realistic assumptions. According to management, its steel input cost has increased by 20% Y/Y in FY07. While management has budgeted 20% increase in steel input prices for all its contracts secured since Oct-07, it remains exposed to any further increase in steel plate prices beyond the budgeted level and margins could be impacted on further price increases. YTD, medium steel plates prices have already increased 19% which signifies that COSCO is likely to suffer from margin pressure for its outstanding orders as it has yet to procure its steel supply for projects slated for FY09 delivery and beyond. We are reducing our SOTP price target to $4.20 factoring in more conservative net margin estimates of 10% for newbuilding, 21% for ship repair, 16% for conversion and 19% for offshore projects secured from FY07. Maintain OVERWEIGHT.
– JPMorgan (24 Mar)

PRICE – $6.25
TARGET – $5.20

Creative completes its move towards an asset-light business model with the announcement of the sale-and-lease back of its Singapore headquarters for $250m. Creative expects to book a gain of about $200m on the back of this transaction, which will likely be completed in June. This would further reduce Creative’s asset intensity. In the past two years, it has sold off manufacturing plants as well as reduced the level of inventories held as it made changes to its distributor network in the US and engaged further in outsourcing work. Operating conditions remain difficult. Its press release alluded to revenue of only US$150m for 3Q08, down 42% QoQ, 25% below forecast. While the company is on track towards establishing an enterprise business line with its new video conferencing device, the required time and investments needed suggest that meaningful contribution is still some time away. The highly competitive personal digital entertainment and MP3 products segment still made up 56% of the revenue base last quarter. Downgrade to UNDERPERFORM.
– Macquarie Research (24 Mar)

PRICE – $3.61
TARGET – $3.95

Following Evraz’s offer made in Feb 08 to purchase up to 51% of Delong, Evraz and Best Decade (Delong’s majority shareholder) have further agreed to a lock-up deal, which will become effective upon the final closing date of the offer i.e. 18 Aug 08. What is significant about the additional agreement is that both are attempting to demonstrate to the Chinese authorities as well as the investment community that the business will be ongoing and would be for the long term. In the best case, the Chinese authorities could view this favourably and allow the transaction to go through. While we think this lock-up agreement is positive for the deal, the Chinese government remains committed to consolidation within the domestic steel industry. That may become an entry barrier for companies like Evraz. We maintain that the outlook for steel producers like Delong remains challenging. We also continue to recommend that investors take the offer from Evraz at $3.95, if and when a mandatory cash offer is made on or before 18 Aug 08. Maintain UNDERPERFORM.
– CIMB (24 Mar)

PRICE – $0.20
TARGET – $0.365

R H Energy (RHE) is now trading at its all-time low of $0.20. There appears to be strong support at this level, and we believe that downside risk is limited at current price levels. While recent market turbulence has sent equities into a downward spiral, the price of crude oil has almost doubled from a year ago to reach US$110 per barrel. Besides implying strong demand for its services, we believe that soaring oil prices could tighten the urgency for oil producers to expedite their exploration activities in order for them to benefit from the high prices. RHE has been gearing up on acquisitions and getting itself equipped to capture a wider spectrum of the supply chain. As such, we expect RHE’s net profit margin to increase to 11.7% in FY08, as compared to the 9.5% it recorded in FY07. However, we have eased our fair value estimate to $0.365 (from $0.485), as we now value the stock at 12x FY08 PER instead of 16x to account for generally lower risk appetite among investors. Maintain BUY.
– OCBC Investment (24 Mar)

PRICE – $2.32
TARGET – $3.60

We expect the Baltic Dry Index to thrust convincingly upward in 2H. Dry bulk shipping should contribute more than 90% of its 2008 earnings, with the rest from tankers and car carriers. Our target is based on sum-of-the-parts valuation, fusing the market value of its existing fleet and newbuildings, with a 4x P/E valuation for its chartered-in earnings, and the
current market value of its holding in Korea Express. Dry freight rates are expected to be more volatile in 2008 due to a smaller shortage of capacity. We are unable to track movements in STXPO’s chartered-in capacity closely, resulting in some forecast risk. Also, the company’s plans to start a ship finance business represent a departure from its core shipping business. We expect the BDI to average 8,000 points in 2008 on continued strong demand and moderate supply growth. Freight rates have strengthened from their recent lows after Vale’s iron ore price settlement, but 2H momentum should be even stronger. Initiate with OUTPERFORM.
– CIMB (24 Mar)

PRICE – $2.11
TARGET – $2.31

Our meeting with Wing Tai reaffirmed our view that the residential property sector would be weighed down in the near term by financial and economic uncertainties arising from sub-prime concerns. It also affirmed our view that the high-end segment has been quieter compared to other segments. Wing Tai has landbank with about 1.1m sq ft of attributable GFA. Of this, the high-end segment accounts for around 60%. Going forward, under its growth strategy, Wing Tai aims to diversify its business regionally into countries such as Hong Kong, Malaysia and China in the next 1-2 years. But the bulk of its property development business (50-60%) will remain in Singapore. We lowered FY08F and FY09F revenue to $369m and $803m, respectively. We also widened our fair discount to RNAV to 25% from 10% in view of the execution risks facing Wing Tai in its overseas expansion initiatives, greater uncertainty ahead for the ASPs of its new projects and Wing Tai’s tendency as a mid-cap stock to trade below its big-cap sector peers in a bearish market. Downgrade to HOLD.
– DBS Vickers (24 Mar)

PRICE – $0.07
TARGET – $0.08

Jishan could potentially face slowing export demand and the strengthening Rmb, which may lead to reduced export revenues and margins compression in the domestic market. China’s textile and garments exports in February declined 32.9% from January due to lower global demand. Jishan’s export sales accounted for 43.1% of FY07 revenue, and any slowdown in export demand could affect its export revenues. With the strengthening of the Rmb against the US$, this may also reduce Jishan’s export competitiveness, thereby reducing export revenues. Moreover, a slowdown in exports may lead to an increase in supply to the domestic market, resulting in a reduction in average selling prices, thereby compressing margins. In view of the above challenging operating environment, we are reiterating our HOLD rating and fair value of $0.08.
– OCBC Investment (25 Mar)

Creative Technology  2.860 -0.05 -1.72%   
Business: [FY18 Turnover] Audio, speakers & headphones (94.3%), personal digital entertainment (3.1%), other products (2.6%).

Insight: Feb-19, 1H19 net sales decreased by 20% due to the... Read More
COSCO Shipping Int'l (S)  0.290 -- --   
Business: Engaged in shipping and other logistics services. [FY18 Turnover] Logistics (69.7%), property management (11.9%), Shipping (9.5%), ship repair and marine related activities (8.9%).

Insight: Mar-19, FY18 revenue jumped 340% to $163.7m and gr... Read More
Wing Tai Hldgs  2.040 -0.02 -0.97%   
Business: Singapore-based property developer and lifestyle company. [FY18 Turnover] Development properties (51.5%), retail (36.5%), investment properties (9.6%), others (2.4%).

Insight: Feb-19, 1H19 revenue rose 7.1% to $193.9m largely ... Read More

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