DBS Equity Research: Wired Daily 7 Oct 2014

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Publish date: Tue, 07 Oct 2014, 11:35 AM

STI underpinned at c.3200

Rex - Subsidiary Rexonic AG secures first ground-breaking contract of US$10m

US indices rallied on last Friday as better than expected September non-farm payrolls (actual 248k, consensus 215k) and a drop in the unemployment rate to 5.9% (consensus 6.1k) lifted optimism on the US economy. The rally paused yesterday ahead of their 3Q results season that starts this week with Alcoa. In Hong Kong, the momentum of the prodemocracy protests appears to have tapered down. The number of protestors fallen have dramatically and student leaders have agreed to hold talks with the government.

For the Singapore market, blue chips had rebounded on Friday ahead of US Friday rally. There should not be much follow through gains upon the US job numbers. Still, the current taper down of the HK protests should underpin markets. Thus STI pullback should be just modest. At 3250, STI is trading at 13.7x (ave) 12-mth forward PE. The current STI EPS growth forecast of 8.4% for FY14F and 8.8% for FY15 is very decent indeed.There is a good chance that last week's low of 3220 is already the short-term low, if not just modestly lower at c.3200.

Rex International Holdingannounced that its 66.7%-owned subsidiary, Rexonic AG has secured its first contract with a reputed National Oil Company (NOC) to provide its unique well stimulation technology to enhance production from selected wells. The contract is worth about US$10m over a period of 24 months and is expected to start in end 2014. This is an important milestone for Rexonic, which Rex invested in back in October 2013, and finally sees the commercialisation of the proprietary environment-friendly ultrasonic well stimulation technology. This well stimulation technology, once proved and demonstrated effectively during the first contract, should be able to expand its presence and place Rexonic on a solid footing to win more contracts in future and adds another recurring income stream. With the earlier acquisition of the Rex Technologies suite from founders, Rex should be able to generate about US$15-20m annual recurring revenues from FY15 onwards, and around US$5-10m in profits from the technologies licensing business model. Maintain BUY with target price of S$1.05. Look forward to more drilling plans and catalysts in 2015.

Vardhas secured a contract with repeat Norwegian customer Island Offshore for the construction of one offshore support vessel. The total value of the contract is close to NOK 300m. The vessel is scheduled for delivery from Vard Brevik in Norway in 1Q2016. This latest contract is the sixth vessel currently under construction for Island Offshore at VARD's yards. This is VARD's first contract win for the fourth quarter of 2014. YTD, Vard has secured newbuilding contracts for 15 vessels worth about NOK8.8bn. While management had indicated that order wins in 2H14 would be slower than the strong showing in 1H14 - when Vard had secured more than NOK8bn in orders - the pace in 2H14 has still been somewhat slower than expected, and there is still some way to go for Vard to meet our new order win expectations of NOK14bn in FY14. Orderbook, while still impressive, is also expected to decline below NOK20bn at end-3Q14 after touching multi-year highs of NOK22bn earlier this year.

Combined with lower oil prices and a slower momentum in order wins, Vard share price has been affected by negative sentiment and corrected by more than 20% over the last 2 months. While downside looks limited at this point, uncertainties regarding the extent of tax related provisions will likely result in a negative overhang on the stock in the near term. Our estimates, target price of S$1.34 and BUY recommendation for Vard are put under review, pending discussions with management.

STATSChipPAC has been served a writ of summons by ERS Electronic GMBH with the claim that STATSChipPAC has infringed its patents relating to debonder machines used in the wafer level package assembly process. The company has sought legal advice and is of the opinion that the claim is groundless and without merit and intends to take all necessary steps to vigorously defend the claim.

United Engineers is proposing to dispose its approximately 68.2% stake in UE E&C Ltd for S$230.2m in cash or S$1.25 per share to Universal EC Investments, an investment holding company and Southern Capital Group, a private equity firm. The UE E&C Group provides integrated M&E engineering services that include high and low-voltage electrical power distribution, air-conditioning and mechanical ventilation, and fire protection, alarm and sanitary systems. The proposed disposal is in line with the Company's ongoing strategic review and objective of streamlining activities and businesses across the Group. The net proceeds from the proposed disposal are intended to be used to repay external borrowings and as general working capital of the Group. Based on the Group's unaudited consolidated financial statements for 2Q FY2014, the Group would expect to realise an attributable net disposal gain of approximately S$59.2m and would expect to receive net proceeds of approximately S$228.7m.

With about five months left for it to apply for removal from the Singapore Exchange (SGX) watch-list, Youyue International has secured shareholders' approval for the packaging product manufacturer's foray into sustainable energy business. The group said that the approval would bring Harbin Prom-lite Energy Saving Technology, a specialist in energy conservation services and sustainable developments, into the fold. Youyue sees the new business as the key growth driver that may eventually replace the packaging business as the core activity.

The worst may be over for companies squeezed in recent years by the tightened policy on foreign workers. Prime Minister Lee Hsien Loong said he does not expect any further drastic measures to tighten foreign worker numbers. He said the latest manpower numbers indicated that foreign worker growth had eased to a more sustainable level.

The first package of bus services under the new Government Contracting Model (GCM) was put up for tender by the Land Transport Authority (LTA). Both local and foreign bus operators may bid for the right to operate the package, which comprises 26 routes, to be progressively implemented from the second half of 2016. The contract is for five years but with good performance, the operator will be granted a two-year extension.

In property news, resale volumes of private condominiums have fallen to levels last seen during the Global Financial Crisis. All transactions (new sales, resales and subsales) involving private condos have slumped 40.7% y-o-y in the second quarter to 4,118 - similar to the levels last seen during the 2008-2009 Global Financial Crisis. District 18, which comprises Tampines and Pasir Ris, in the east and District 27, which covers Yishun and Sembawang in the north appear to have held up well in resale volumes for the second quarter.

Source: DBS

Rex Intl (5WH)Green Build (Y06)

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