OCBC'S STOCK COMMENT: Wilmar International

OCBC'S STOCK COMMENT: Wilmar International expands into the sugar business by acquiring a sugar refinery in Indonesia and a sugar trading company in Singapore. Asia Pac sugar consumption to see 6% growth over the next few years with demand outstripping supply. Still early days before meaningful contributions from its sugar business, we hold off adjusting our estimates. Our S$7.25 fair value and BUY rating maintained.

Banks and conglomerates - Nomura

Stocks for action Banks and conglomerates are reasonably valued and offer EPS growth along with high dividend yields. We include stocks that could rerate on stock-specific drivers over the next two quarters.
Stock Rating Price Price target

OCBC (OCBC SP) BUY 8.65 11.80

Fraser & Neave (FNN SP) BUY 5.59 6.55

Keppel Corp (KEP SP) BUY 8.76 11.00

ST Engineering (STE SP) BUY 3.19 3.90

SATS (SATS SP) BUY 2.77 3.40

Noble Group (NOBL SP) BUY 1.66 2.10

Keppel Land (KPLD SP) BUY 3.84 4.68

Biosensors (BIG SP) BUY 0.80 1.20

Venture Corp (VMS SP) BUY 8.85 11.50

Pricing as of 17 August, 2010; local currency

2H10 challenging for Singapore banks: DBS Vickers

Written by The Edge


Thursday, 19 August 2010 12:08

The second-half of the financial year will be a challenging one for Singapore banks with net interest margin still under pressure, loan growth moderating, says DBS Vickers, according to Dow Jones.

With provisions almost at all-time lows, non-interest income will be key factor determining earnings performance. Expects fee income to remain robust in 2H10 given strong capital markets.

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.

OCBC - Citi

Net interest income – Credit demand remains firm and broad-based, from both

consumer and business (corporates and SMEs), and across various sectors. Most
loans originated are on floating rates rather than fixed. NIM fell 7bps QoQ in 2Q10
due to various factors: Blending effects from consolidating Bank of Singapore
(BoS)’s loan portfolio (c.1-2bps), lower gapping opportunities, thinner loan spreads,
and generally lower interest rate environment. Mgmt noted some foreign banks
have been more aggressive in the corporate lending space. As such, spreads have
narrowed, but remain above pre-crisis 2007 levels. For the rest of the year, mgmt
expect loans spreads to stay fairly stable.

 Update on regional businesses- Malaysia: Accounted for 26% of OCBC’s 1H10 PBT.
OCBC is the largest foreign bank in Malaysia (by asset) focusing on the SME
segment, though housing loan momentum has also picked up in 1H10. Interest
margins helped by BNM rate hike (2Q10 +19bps QoQ). Recent pick-up in
expenses reflects tighter labor market, plus increased business volumes. Indonesia.
Bank OCBC NISP largely focused on the SME segment, but has been adding
exposure to consumer loans (c.30% of loan book). 2Q10 NIM dipped 21bps QoQ
partly on increased consumer loans (lower margin), and higher deposit costs due to
competition from some foreign banks.

 Bank of Singapore (BoS) - Bank has been active in recruitment, with headcount
rising to 220 (from c.200, including 50 from OCBC Private Bank). Mgmt estimates
incoming RMs will take 6-12 months to re-grow their AUMs. Non-interest income /
interest income split c.80:20, while higher cost-income ratio (relative to group) is
balanced against lower capital consumption. Acquisition has generated numerous
cross-selling opportunities (both-way) between the corporate/SME business and
BoS. Over time, BoS could become net US$ liquidity provider to group even clients’
asset largely denominated in US$.

 Great Eastern (GEH). Underlying business growth has been consistent, both in
Singapore and Malaysia. GEH has also been focusing on higher margins /
embedded value products (eg. investment-linked products). 2Q10 earnings
affected by poorer investment returns due to market volatility related to eurozone
concerns. In Indonesia, GEH’s footprint is still small, but firm has been working to
increase agency workforce. Inorganic growth not ruled out, but only if the
opportunity is right

Banks - CIMB

• DBS the best, UOB and OCBC within expectations. The banks’ 2Q came in

within expectations with common features being 1) accelerating loan growth; 2)
lower provisions; 3) widening capital buffers; but 4) stronger-than-expected margin
pressure. DBS stood out from the pack because it had an extremely strong trading
gains. OCBC missed our PPOP numbers as its costs spiked up unexpectedly.

• Revenue challenges await. Our impression from 2Q is that revenue challenges are
brewing. The lending business sees tentative credit demand as disintermediation is
a rising trend again. Tighter lending spreads and lower yields from investment
securities are weighing down on margins. Revenue growth opportunities lies in fees
but those opportunities could be somewhat blunted if capital markets remain edgy.

• Sector rated Overweight; top pick OCBC, least preferred DBS. The sector is
rated Overweight though as valuations have pulled back to almost -1sd from mean
P/BV and looks attractive relative to other cyclicals. Also, having gone through
Banking Crisis Round 1 two years ago and operating away from western markets
that still need to cope with de-leveraging, we believe that the Singapore banks will
hold up. Our top pick is OCBC (Outperform, TP S$10.08) as we expect it to be best
positioned to derive revenue growth. DBS (Underperform, TP $14.03) saw its 1H10
revenue growth supported by trading gains - that is inherently volatile - but, ROE still
lags behind peers even with the trading boost and goodwill write-off. It is our least
preferred. UOB (Outperform, TP $21.37) might be a near-term revenue growth
laggard, but the avoidance of low-margin loans could accelerate the regionalisation
strategy while the de-risking of its balance sheet is a positive.