DBS Equity Research: Wired Daily 18 Aug 2014

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Publish date: Mon, 18 Aug 2014, 01:40 PM

STI - Earnings downward revision halt puts support around 3250 with 3400-3500 by year-end

Little to cheer for Corporates off National Day Rally speech, Lakeside transformation plan likely a long-term project

Midas, POSH and Tiong Seng results disappointed, earnings forecast and TP cut

The 2Q results season ended last week. The good news is that the earnings downward revision trend that lasted for more than a year showed a halt. EPS growth figures for the STI are current +8.4% for FY14F and +8.8% for FY15F. With that, we see the STI 1) underpinned around 13.7x (average) 12-mth forward PE currently around 3250 on the pullback 2) trend around the 14.1x (+0.25SD) 12-mth forward PE or 3400 by year-end with the potential to 3) head towards 14.48x (+0.5SD) or 3500 by year-end in the event that earnings revision trend turns positive in subsequent quarters.

The annual meeting at Jackson Hole from August 21-23 is an event to watch this week. The conference discusses the outlook for the US economy and monetary policy. FED Chair Janet Yellen and ECB President Mario Draghi are among the speakers.

Singapore Prime Minister's National Day rally speech gave good reasons for the citizens to cheer but little for businesses. CPF matters and schemes to help Singaporeans supplement their retirement income were addressed. For the CPF, the minimum sum will be increased to S$161k (current S$151k) next year but there will be 'no more major' increases after that. CPF members will soon have the option to make lump sum withdrawals from their accounts after they retire. To help the low income elderly Singaporeans, the Government will introduce a new scheme called Silver Support, which will pay a bonus each year, starting from age 65. Meanwhile, the Lease Buyback scheme, which was previously restricted to 3-room and smaller flats, will now be extended to 4-room units.

PM Lee also spoke about a new Jurong Lake Gardens as part of the Lakeside transformation plans. The development of Jurong Lake District is a long term positive for the Singapore construction sector and will add to the already robust construction pipeline in Singapore. But the government is likely to rollout the Lakeside plans at a measured pace give labour constrains. Key projects in the immediate term are the Project Jewel (S$1.47b, by 2018) and Changi Airport Terminal 4 (S$1b, by 2017). With more contracts available, the onus is on construction companies to add to their order book. But competition has been keen and construction companies are impacted. Low tender prices are not helping margins in a high labour, material and subcontracting cost environment.

Midas'2Q net profit declined 44% y-o-y to RMB8.3m, despite an 18% y-o-y increase in revenue to RMB336m. Interim net earnings doubled to RMB19.8m, but made up just 9.6% of our original full-year forecast. DPS of 0.25 Scts declared. Profitability over the next few quarters will likely remain subdued due to higher operating and interest costs. Factoring in lower margins and higher interest costs, our FY14 and FY15 estimates are cut by 60% and 39% respectively. We expect sequential earnings improvement but the recovery will be more gradual than previously anticipated. Current order book for the core business is c. RMB750m and for associate NPRT - RMB10bn. Our valuation multiple for Midas is lowered from 1.2x P/B to 1x P/B to derive a lower TP of S$0.51 (previous $0.64).

PACC Offshore Services Holdings (POSH) reported 2Q14 net profit of US$11.9m, down 57% y-o-y. Core chartering profit of US$9.7m was also down 56% aafter stripping out gains on vessel disposal and other one-off items. The earnings below expectations as two out of four segments were operating below par. We cut our FY14/15F net profit by 11% and 13% respectively to account for i) underperformance in 1H14, ii) likelihood of 1-2 month delays in deployment of the two SSAVs, iii) more conservative margin assumptions on SSAV contracts, iv) possible absence of significant mobilisation income on second SSAV if charter is not in Brazil and v) weaker performance at T&I and HSER segments in the near term. Our TP is likewise lowered to S$1.15 (previous $1.32), still pegged to 10x FY15F PE.

Tiong Seng's 2Q14 core earnings came in at only S$77,000 (-96% y-o-y) mainly on lower margins in construction segment while revenue grew 18%.Gross margins declined to 4.7% (-7ppt from 2Q13) attributed to higher direct labour, materials, and subcontracting costs and higher revenue mix of lower margin HDB projects. We expect low margin environment to persist in the construction sector. We lower our construction gross margin assumption from 7.5% to 5%/4.9% for FY14F/FY15F. FY14F/FY15F earnings are reduced by 17-22%. Maintain HOLD with TP of $0.19 (previous $0.2) based on blended 1x book value and 6x FY15F earnings.

US stocks ended off session lows to end mixed as increased violence in Ukraine sent oil price higher and triggered a rally in energy producers. Ukrainian government troops had attacked an armed convoy that had crossed the border from Russian territory. Meanwhile, economic data showed industrial production advanced 0.4% in July, while the New York Fed Empire Manufacturing gauge fell more than estimated and consumer confidence unexpectedly declined to its lowest level of the year. Applied Materials Inc. shares rallied after forecasting sales that may top analysts' estimates as it steals orders from rivals and demand rises for machines that make displays.

Source: DBS

Midas (5EN)

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