Warrants Highlight

OCBC - Divestment Done, Acquisition(s) Next? (MER)

Earlier this week, OCBC Group completed the divestment of its stakes in Asia Pacific
Breweries and Fraser & Neave as announced on July 18. Macquarie Equities Research (MER) adjusted its earnings model and valuation accordingly, but made no change to the dividend payout assumption.

A done deal. MER admits to having hoped for potential further upside from the divestment given MER’s reading that the deal was contingent on the divestment stocks remaining listed at the time of sale. That hope proved to be in vain as the shares were crossed on Tuesday. Total immediate gains for OCBC should be S$1,153m including its share of Great Eastern’s S$418m.

MER doesn’t expect a big dividend payout from OCBC following the divestment. OCBC’s statement to the SGX says “The proceeds arising from the divestment are intended to be applied for re-investment into OCBC Bank’s core financial assets and/or other purposes as the Directors may consider appropriate”. MER thus maintains a normal 3.5% dividend forecast for 2012.

Back on the M&A warpath. MER estimates a total 136bp increase in OCBC’s Tier 1 capital ratio to 16.1%. MER believes that the group is most likely to utilise the excess funds in inorganic expansion. Possible acquisitions include life insurance assets in Hong Kong and Indonesia, finance companies in Indonesia, or even further Asia-based asset management businesses.

Earnings and target price revision
No change to underlying profit forecasts, but MER raised 2012E reported net profit by S$1.3bn to reflect the S$1,153m divestment gains announced 18 July plus another S$135m to reflect OCBC’s share of MER’s estimated year-end gains at Great Eastern which are not reflected in the 18 July announcement.

The gains work out to 38 cents per share of OCBC Group, and MER revised target price higher by that amount.

Price Catalyst
A slowdown in earnings momentum in 2H12 from a very strong 1H12 could put a cap on valuations. M&A could be in the cards, with OCBC a possible acquirer of insurance, asset management, or finance businesses.

Action and recommendation
Neutral maintained, with a target price of $9.40. MER’s view is that investors hoping for a one-off dividend payout from OCBC as a result of the divestment may be disappointed as OCBC is likely to preserve the capital for acquisitions.

* Excerpts from MER report dated 14 Aug

Singapore Market Wrap

STI - flat for the day

Yesterday, the STI started strong in the morning, adding approximately 1% day-on-day (dod) by noon. However in the afternoon, the index erased gains and closed at 3062.89, flat for the day.

Premier Wen Jiabao said that slower inflation has given China more room to adjust monetary policy and investors' sentiments turned positive. However, a report that showed foreign direct investment (FDI) fell 8.7% year on year overshadowed Premier Wen's comments. The Bloomberg survey had only expected FDI to fall 2.5%. The HSI breached the 20,000 level and closed at 19962.95, down 0.5% dod.

In Singapore, private home sales increased 42% in July as compared to June. An article in the Straits Times highlighted that "reasonably priced new launches in popular areas like Tampines and Punggol, where there is pent-up demand, helped lift overall sales".

STI 3100MBeCW121031 (Q1AW) exercise level 3,100.*
STI 2950MBePW121031 (Q0ZW) exercise level 2,950.*

HSI19800MBeCW120927 (Q1DW) exercise level 19,800.*
HSI20400MBePW120927 (Q1SW) exercise level 20,400.*

Singtel's response to Moody's
On Wednesday, Moody's revised Optus' rating to negative from stable. The credit rating agency expects "a trend of elevated leverage over the next 2-3 years as Optus considers additional acquisitions", as mentioned by Ian Lewis, Vice President of Moody's. As such, he expects that the financial leverage ratios will be raised to a level that is inconsistent of a Aa3 rating.

However, Moody's did mention that Optus' parent, Singtel "would highly likely to have both the ability and willingness to step in and support Optus, in a distress situation" and that "rating outlook could revert to stable with improved profitability or strengthened financial profile".

Yesterday, Singtel responded by posting an announcement on SGX stating that "Optus remains financially-disciplined in its approach to investments and is committed to maintaining an investment-grade credit rating".

Investors reacted on Moody's downgrade and Singtel closed at $3.29, down 1.5% dod.

Call warrant SingTelMBeCW130301 (PB6W) exercise price $3.30.*

DBS bid for Alliance taking "longer than usual"
Since early April, DBS has won approval to start talks to buy a 14.2% stake in Alliance Financial Group (AFG), Malaysia's seventh-biggest lender by market value. DBS CEO Piyush Gupta told reporters that he is "keen on the Malaysian market".

However, their bid seems to have hit a road block as reported by The Straits Times. The national newspaper stated that Bank Negara, Malaysia's central bank, is taking longer than usual to give the go ahead. Currently, foreign institutional ownership of domestic banks in Malaysia is capped at 30% and there is talk that Langkah Bahagia may be interested to sell its holding in Vertical Theme to DBS. This would raise the potential effective stake in AFG to 29%. This is possibly the reason why it is hard to get past Bank Negara.

DBS closed at $14.66, up 0.3% dod.

Call warrant DBS MB eCW121101 (QZ1W) exercise price $15.00.*
Call warrant DBS MB eCW121102 (Q0NW) exercise price $14.00.*
Put warrant DBS MB ePW121101 (Q4UW) exercise price $15.00.*

Overnight Market Wrap

Global economy improving

With the US building permits increasing more than expected as well as the speculation that Spain would get a bailout, the US market rallied. The S&P closed at 1415.51, up 0.7% day on day (dod).

Last night building permits rose 6.8% month on month, far beating estimates of only a 1.2% increase. With this, an S&P gauge of 11 homebuilders added 4.4% on optimism that the industry is picking up. Jobless claims announced yesterday remained relatively unchanged from the past week, indicating that the job market is stabilizing in the US.

Looking at the Europe crisis, Chancellor Angela Merkel said that "The ECB is completely in line with what we've said all along" and that policy makers in the euro region "feel committed to do everything we can to maintain the common currency". With that, the Euro Stoxx 50 advance 1.1% dod.

Overnight Markets

Indices	Last	Change
STI	3062.89	0.0%
HSI	19962.90	-0.5%
DJIA	13250.10	0.7%
S&P 500	1415.51	0.7%
Nasdaq	3062.39	1.0%
China A50	7321.37	-0.3%

Corporate News

Corporate Announcements

Results announcements:
Tue 28 Aug: Olam 4Q12

Ex-dividend dates:
Wed 21 Aug: STX OSV ($0.13)
Wed 22 Aug: Wilmar ($0.02)
Thu 30 Aug: Sakari ($0.02), UOB ($0.20)
Wed 26 Sep: SGX ($0.15)