Semicon Sector, Olam and SAR (18 Aug 2010), Market Pulse

By Carey Wong


Wed, 18 Aug 2010, 08:32:55 SGT

Market Pulse: Semicon Sector, Olam and SAR (18 Aug 2010)

FOCUS

Semiconductor Industry: Upbeat outlook continues to hold

Summary: Micro-Mechanics (MMH) and Avi-Tech Electronics are due to release their 4QFY11 (Apr-Jun quarter) results in the coming week. We expect both companies to post a healthy YoY recovery in revenue over the quarter, driven by continued strong demand from a broad range of end markets. We note that market research firm iSuppli has again raised its 2010 global semiconductor revenue forecast last week, where it now expects the market to grow by 35.1% as opposed to 30.9% projected in May. In Singapore, outlook for the semiconductor industry also appears to be equally buoyant, in our view. As highlighted by the Economic Development Board (EDB), the electronics sector experienced a swift and sharp rebound on the back of an Asia-led global demand recovery. With such strong performances from both manufacturing and service segments of the sector, EDB is optimistic that it will continue to see strong growth in 2010 and beyond. We view this positively, as semiconductor companies such as MMH and Avi-Tech are likely to benefit from the market uptrend. We reiterate our OVERWEIGHT view on the semiconductor industry. (Kevin Tan)

Olam International: Invests US$43.5m in cocoa processing facility

Summary: Olam International (Olam) has announced its plans to invest US$43.5m to set up a new cocoa processing facility as well as a primary processing and warehousing facility in Cote d’Iviore. The investment, which is small relative to its recent acquisitions (for instance, its recent Gilroy acquisition cost US$250m), will be funded internally. This is a sensible investment, in our view, as it allows Olam to capture additional value from midstream processing activities where margins are higher. Management envisions synergies with its existing beans business and believes that this investment will elevate its positioning as an integrated supply chain manager of traceable cocoa beans and cocoa products (namely cocoa liquor, butter and cake). The investment will not have immediate financial impact as the plant is expected to be commissioned only by 1Q12, and be value accretive from FY14, where Olam forecasts annual revenues of US$175m coupled with an EBITDA margin of 10-12%. Our projections and S$3.61 fair value estimate remain intact pending the release of Olam’s FY10 results on 26 Aug. Maintain BUY. (Lee Wen Ching)

Straits Asia Resources: Improving outlook

Summary: Straits Asia Resources (SAR) hosted its 2Q10 earnings call last evening. As a recap, the group posted a 9.1% YoY improvement in revenue to US$191.5m thanks to higher sales volumes. Gross profit, however slumped 42.5% YoY to US$46.5m due to lower thermal coal prices, while core net profit declined 35.1% YoY to US$23.2m. While YoY performance was uninspiring, the group’s sequential performance was encouraging with revenue growing 24.8%, gross profit improving 54.2%, and net profit doubling QoQ. SAR’s sequential recovery bolsters confidence over its 2H10 outlook, which we expect will improve on higher sales volumes and further cost reductions. While SAR’s outlook is improving for 2H10 and beyond, lingering risks including wet weather as well as potential delays in obtaining the Sebuku permits remain. We have trimmed our FY10 earnings estimate by 22% to US$79.8m, but raise our DCF-derived fair value estimate to S$2.08 (from S$1.85) on higher ASP assumptions from FY11 onwards. Maintain HOLD. An interim dividend of 1.83 US cents has been declared. (Lee Wen Ching)

For more information on the above, visit www.ocbcresearch.com for the detailed report.

NEWS HEADLINES

- Singapore experienced a decline in export performance in July, with the key NODX index down a seasonally adjusted 3.9% MoM.

- Link Crest, Pine Agritech’s major shareholder, has garnered 41.0% control of the company and has launched a mandatory general offer at S$0.20/share to take the company private.

- CapitaLand sold S$350m worth of 10-year, Singapore-dollar bonds more cheaply than expected, in a debt issue that was heavily oversubscribed.

- Khazanah is evaluating the listing status of Parkway Holdings after acquiring a 95% stake.

- Novo Group expects to report a lower profit for 1Q11 due to the economic recovery slowdown.

- FM Holdings, which has been forced to delist by SGX, is in preliminary talks with its two controlling shareholders on an exit option, but no firm offer has been made.

- C2O Holdings has been given the clearance for the proposed acquisition of Swissco International, which is expected to end trading of its shares on 25 Aug.

- Singapore refining margins have started increasing again, probably due to refiners here benefiting from product shortages caused by the regional hiccups, rather than a market uptrend.