Brokers Digest: Foreign Equities

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OVERSEA-Chinese Banking Corp Ltd
Target price: S$10.55 NEUTRAL
RHB RESEARCH (Sept 3): With the voluntary general offer (VGO) for Hong Kong’s Wing Hang Bank (WHB) completed in late July and the 440 million new OCBC shares from the one-for-eight rights issue targeted for issuance on Sept 26, we have adjusted our earnings model.

Based on our projections, a five-month contribution from 97.5%-owned WHB in FY14 would lift OCBC’s net profit by 4% to S$3.357 billion while a full 12-month impact would boost FY15 earnings by 8% to S$3.712 million. However, the 11% increase in issued capital following the rights issue would dilute EPS by 5% to S$0.94 in FY15 with a 3% cut to S$0.90 in FY14.

The rights issue would also lower ROE to 11.6% from 12.3% in FY15 with a modest 20 basis point cut to 12.2% in FY14. Recall that management does not expect the acquisition to be EPS and ROE-accretive until FY17.

Our target price is adjusted downwards from S$10.75 after factoring in lower ROE and higher weighted average cost of capital of 9.7% from 9.3%. We maintain our “neutral” rating. While we view the EPS dilution as manageable and ROE is within management’s target of 11% to 12%, we believe concerns over its weakened capital position would weigh on share price performance.

Samsung Heavy Industries Co Ltd
Target price: KRW36,000 BUY

NOMURA RESEARCH (Sept 1): SHI will absorb Samsung Engineering (SSE) to enhance its offshore plant capabilities. The two companies aim to grow combined sales by 80% until 2020 whileSHI identifies two key areas of merger synergies: sharing of plant design capabilities and strengthening of EPC management.

However, we see limited value-creation opportunities for SHI from this merger, given (1) the extent of compatibility in the design process for onshore and offshore is uncertain, and (2) SSE’s projects in the pipeline (in particular, projects like UAE Carbon Black and the Saudi Yanbu refinery project) may post further losses, (3) SSE’s order momentum is likely to remain weak due to competition, and (4) SHI’s post-merger balance sheet may deteriorate due to SSE’s high gearing.

We used to be positive on SHI’s earnings turnaround story post the huge 1Q14 provisioning, but the merger with SSE is likely to lower earnings visibility.

Based on FY15 consensus estimates and our pro forma financials, the merger seems EPS accretive as the consolidated entity’s EPS rises 6% post the issue of new shares. Nevertheless, there is potential downside risk to SSE’s consensus FY14 to FY15 EPS, given two problematic projects — Carbon Black and Yanbu — while the post-merger impact on EPS remains to be seen.We plan to revisit our earnings estimates and target price after pro forma financials become available.

Philex Mining Corp
Target price: PHP15.98 BUY
MAYBANK KIM ENG RESEARCH (Sept 3): Changes in minerology, among others, led to milling costs going up even as recovery rates declined in the Padcal mine, thus negatively affecting revenue and costs. 1HFY14 net income to common shareholders’ funds of PHP627 million fell 42% y-o-y, much lower than we expected.

The pre-feasibility study results of the Silangan mine indicate a viable project with payback in less than five years since cash-operating costs are low at US$2/lb for copper and US$800/oz for gold. In the first five years of a 30-year mine life, costs have been even lower at US$1.50/lb and US$500/oz, respectively, since grades are higher. However, throughput for the mine was paced at 15,000 tons per day, lower than the 30,000 we assumed in our model. PNC still has to submit the bank feasibility study, which will be the basis of mining operations to be undertaken.

Management has undertaken cost-cutting measures and productivity enhancements in the Padcal mine. But until we see concrete results, we are downgrading earnings in 2014 to PHP2.3 billion (-29%) and valuation to PHP3.67 a share (-18%).

Using the sum-of-parts method, we value the company at PHP15.98 a share — the combined value of the Padcal and Silangan mines. With this as a target price, the potential upside is 40%, thus our recommendation remains a “buy”.

Amata Corp pcl
Target price: THB19.20 BUY
UOB KAYHIAN RESEARCH (Sept 3): Amata’s 3QFY14 net profit could plunge 90.1% y-o-y to THB61.7 million since the bulk of land transfers of 400 to 500 rai (one rai = 0.395 acre) has been shifted from 3Q14 to 4Q14 due to a delay in the drafting of title deeds. About 75% of these land transfers are at Amata Nakorn industrial estate.

But we maintain a “buy” on compelling valuations, better outlook for land sales as well as potential upside from the unlocking of its investments, that is selling its 49%-owned Amata Summit Ready Built to a REIT at end-2014 and the listing of Amata Vietnam in Thailand in 2H15.

After the military junta restored stability and appointed a new Board of Investment of Thailand, the company is now seeing more customers enquiring about land sales. Amata has a few potential customers from China and Japan who intend to buy plots of 500 to 1,000 rai. We forecast Amata’s land sales at 1,020 rai in 2014 and 1,420 rai in 2015.

We cut our earnings forecasts for 2014 and 2015 by 12.9% and 17.1% respectively to factor in changes in our key assumptions for land transfers, land sales, gross margin and selling, and general and administrative expenses. Risks to our forecasts include a global economic downturn and renewed political instability, which will hurt foreign direct investment in Thailand.

This story first appeared in The Edge weekly edition of Sept 08-14, 2014.