Brokers Digest: Foreign Equities

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UNITED Engineers Ltd
Target price: S$2.85 HOLD
CIMB RESEARCH (Aug 26): United Engineers’ 67.6%-owned WBL Corp Ltd will sell its automotive division to StarChase Motorsports Pte Ltd for S$455 million.

We stated previously that the sale of non-core assets will be a re-rating catalyst for United Engineers.

We deem this news as positive for several reasons. Firstly, this will reduce its net gearing to 39% by end-FY14 after factoring in the sale of MFS Technology Ltd and the upcoming sale of orchardgateway. Secondly, the reduction of non-core assets allows the company to refocus on its core property portfolio. Lastly, we believe this increases United Engineers’ appeal as a potential takeover target for Charoen [Sirivadhanabhakdi, Thailand’s richest man), as the synergy between the automotive segment and his Singapore assets is limited. Given its property-dominated portfolio, we believe a lower discount to RNAV is possible.

At 23% discount to RNAV and 1 times the adjusted NTA, we believe the positive impact of the sale has already been priced in. The next re-rating or de-rating catalyst will depend on whether a takeover will take place. A takeover at 5% to 15% discount to RNAV could value United Engineers at S$3.02 to S$3.38 per share, implying a 10% to 23% upside. The downside, should there be no takeover, could be 10% if United Engineers trades back to 30% discount to RNAV.

SPT Energy Group Inc
Target price: HK$5.60 BUY
UOB KAY HIAN (Aug 27): SPT Energy reported 1H14 net profit of RMB81.4 million (down 16.6% y-o-y), which is in line with our expectation. The decline was mainly due to losses from currency depreciation in Kazakhstan earlier this year and higher option cost recognised.

Revenue from the reservoir segment rose 19.1% y-o-y to RMB309.5 million. The domestic market saw a sharp 92.9% y-o-y jump. SPT Energy’s long experience and strong presence in the domestic reservoir segment enabled its growth to stabilise amid a weak domestic market this year.

The company had orders worth about RMB2 billion as at end-June, with about 50% from overseas. Given the current status of the projects, management believes 90% of the jobs can be completed this year. We think our estimate of an over 20% top-line growth can be largely secured.

SPT Energy’s share price has retreated over 15% in the past two months due to market concern of a significant y-o-y drop in 1H14 earnings. We think the company’s performance in 1H14 exceeded market expectation. In addition, we believe the industry environment will improve in 2H14 with the recent open bid in Changqing and more fracturing demand in Sichuan. So far, SPT Energy is the strongest performer among oil field service peers and we believe investors will start to regain confidence in the stock.

China Petroleum & Chemical Corp
Target price: HK$8 NEUTRAL
JP MORGAN (Aug 25): China Petroleum & Chemical Corp’s (Sinopec) update reinforced management’s understanding of the current state of the oil industry with the company exerting further capital discipline, and is likely to be taken positively by the market.

Retail reform seems on track for 4Q14 completion with the use of proceeds being focused on upstream re-investment and optimising capital structure, although there seems limited new consideration for reforming other segments.

Sinopec sees overcapacity in refining in China and will focus on organic growth, but that does not mean cutting capital expenditure (capex) across all segments. It sees spending growth in the upstream segment, especially in shale. Management said 2H14 capex will be similar to 1H14, which implies RMB80 billion to RMB100 billion for the year, well below the original guidance of RMB162 million.

With Sinopec guiding better profitability in 2H14, we sense this is likely to come from feedstock and product optimisation as the company expects the chemical market and prices to stabilise.

Drilling costs have averaged RMB82 million per well for shale, and at some wells, Sinopec has been able to reduce this cost to RMB60 million per well this year. If Sinopec lowers capex for all wells, it could unlock more shale opportunities. It sees RMB50 million cost per well to be possible in the medium term.

Raffles Medical Group Ltd
Target price: S$3.93 HOLD
MAYBANK KIM ENG (Aug 25): Raffles Medical could face rising competition from new private and public hospitals in the next few years as well as competition from neighbouring countries for medical tourists. So far, it has done a good job in raising service quality. As its prices approach those of the top providers in the industry, room for further price hikes is limited. Maintain “hold” with discounted cash-flow-based target price slightly down to S$3.93 from S$3.94. We trim FY14E-16E EPS by 0.2% to 2% due to a slight delay in new rental income.

Official data shows rapid rollout of new private and public hospital beds between 2014 and 2020, after the completion of the 220-bed Farrer Park Hospital this year and five new public hospitals. A slew of private medical suites will also be completed in the next few years. Public hospitals could increasingly become a threat, as higher government healthcare subsidies and the rising cost of living prompt more Singaporeans to turn to public healthcare services.

Management has assured investors that it has room to raise prices, given the 20% gap between Raffles Hospital’s charges and leading private hospitals’ fees. However, with its improving service quality, that price gap has narrowed to less than 10%, according to the latest data from the Ministry of Health.

Hana Microelectronics pcl
Fair value: THB38 HOLD
KRUNGSRI SECURITIES (Aug 26): Hana plans to invest US$12 million to US$15 million to install new machinery at the Ayutthaya plant in 2H14.

Meanwhile, there is still room to increase the utilisation rate at the Lamphun 1 plant after it reached 90% in 2Q14. The 25,000 sq m Lamphun 2 facility, which will produce electronic components for non-automotive clients, will begin commercial run in November. This will raise the company’s total production capacity by another 25%.

To reflect the better-than-expected 2Q14 performance and a solid business outlook ahead, we revise upward our core profit forecast for this year by 34% to THB2.36 billion and by 41% to THB2.62 billion for 2015, as we raise our sale and gross margin assumptions and lower our expense/sale assumption to reflect efficient control over operating expenditure.

We raise our 2014 fair value by 33% to THB38, based on a prospective PER of 13 times. The stock currently provides limited upside of 5.6%, but a promising outlook, a robust balance sheet with a net cash position and an attractive dividend yield of 5% this year and in 2015. Fair value for 2015 is expected to rise to THB42, based on a target PER of 13 times 2014.

PT Bank Rakyat Indonesia (Persero) Tbk
Target price: IDR13,150 BUY
DANAREKSA (Aug 27): Loans grew at a softer rate of 17.3% y-o-y in June, backed by robust growth in micro loans at 18.2% y-o-y. The bank impressively added another 900,000 new micro borrowers y-o-y to 6.9 million borrowers in June.

Given the bank’s strong focus on the micro segment, we believe its proportion of the total loans portfolio will gradually increase from 30.4% as at December 2013 to 30.5% in December 2014, and then to 30.7% and 30.9% in December 2015F and 2016F respectively.

We remain upbeat about Bank Rakyat’s performance. Nonetheless, given the changes in the economic landscape, we adjust some of our key assumptions for 2015-16F. In particular, we cut our loans growth target for 2014-16F to 17.1% to 18.7% and our deposits growth estimate to 14.8% to 15.7%.

Our blended cost of funds estimate is adjusted to 3.7% and 3.6% for FY14F and FY15-16F respectively, as we expect the reference rate to stay unchanged until at least 2H15. Our target price of IDR13,150 implies 2.8 to 2.3 times 2015-16F price-to-book value.

Singapore Airlines Ltd
Target price: S$9.97 HOLD
OCBC INVESTMENT RESEARCH (Aug 25): The proposed airline of Tata-SIA will be called Vistara and is expected to improve Singapore Airlines’ coverage of the Indian aviation market. According to the Airports Authority of India, total passenger traffic registered a 5.8% y-o-y increase in May 2014 to 16.13 million. The process to obtain an air operator’s permit is still on track, with Vistara to launch commercial flights only in October 2014.

SIA will commence its first A380 flight from Singapore to Auckland in October 2014, and with five extra weekly flights using B777-300ERs, SIA will operate 12 flights weekly to Auckland. We believe the reciprocal code share relationship presents a potential for SIA to capture the market for passengers travelling between New Zealand and SIA’s global network, given that passenger arrivals from Southeast Asia to New Zealand grew 18% over the last 12 months.

However, we remain cautious about its impact in the nearer term as it is still too early to tell whether the increased capacity of an estimated 100,000 seats per year will find the right balance between passenger load and yield.

We believe the current pressure on yields due to competition and the long-term nature of these alliances will not provide any significant impact on its FY15 results. The regulations in India also remain a key concern.

CPMC Holdings Ltd
Target price: HK$7.13 BUY
RHB OSK RESEARCH (Aug 27): CPMC’s 1H14 revenue edged up 1% y-o-y to RMB2.8 billion, much lower than consensus’ and our FY14F expectation of +14% and +17% respectively. Recurring earnings increased slightly by 5% y-o-y, below consensus’ and our FY14F estimates of +11% and +26% respectively.

Despite the flat revenue growth, gross profit margin (GPM) rose 0.7 percentage point y-o-y to 18.5% in 1H14, mainly driven by higher-than-expected aluminium packaging GPM of 21.5% in 1H14. Two-piece cans continued to be the potential growth driver, with sales growing 23% y-o-y in 1H14. The average sales price (ASP) was RMB0.48 per can, a drop from RMB0.51 in FY13.

We expect the sales of two-piece cans to maintain the strong growth momentum in 2H14 with a GPM of 22%, as there will be seven two-piece-can lines in full operation by end-2014, along with the completion of the transformation to two-piece cans from three-piece by Jia Duo Bao in 1H14.

However, we pare down our FY14-FY16F earnings by 17% to 23% to reflect lower ASPs and slower sales growth. With the rising sales contribution of two-piece cans, we expect FY14-16F GPM to be stable at 18.5%, 18.7% and 18.9%.

Our target price is based on a FY15F target PER of 12 times, being the stock’s post-initial public offering one-year forward mean PER.

This story first appeared in The Edge weekly edition of Sept 01-07, 2014.