DBS Equity Research: Wired Daily 9 Jan 2015

kiasutrader

Publish date: Fri, 09 Jan 2015, 02:58 PM

Singapore Property conference highlights - Moderate growth from industrial REITs; delays in office completions could sustain upturn in office rents with recovery in hospitality expected

We recently hosted 10 S-REITs, developers and property fund managers in our Pulse of Asia (POA) conference. Consistent with our expectations, the outlook for Singapore real estate sectors (office, retail, industrial and hospitality) is seeing further headwinds. Key highlights are: 1) Weaker industrial rents. Industrial landlords (AREITand Cache Logistics) highlighted the more challenging outlook for the industry sector due to excess supply over the next few years; 2) Stable retail outlook. Retail REIT's portfolio should remain resilient; and 3) Brighter prospects for office and hospitality. The office sector offers the brightest near-term outlook on the back of limited new supply in 2015. Frasers Commercial Trusthighlighted the prospects of a sustained recovery, should there be delays in office completions and if the economy is on a stronger footing in 12-24 months' time. Meanwhile, CDL Hospitality Trustremains hopeful for a better Singapore hospitality market this year, on the back of a recovery in tourist arrivals and firmer corporate demand.

Ezra Holdings announced that its Subsea Services division, EMAS AMC, has secured a subsea construction contract with Apache Energy in Australia valued in excess of A$130m. Separately, Ezra reports US$321m revenue for FY1Q2015 and maintains operational profitability. Profit after tax increased to US$60.6m, from US$8.7m in 1Q14, largely due to one-off gains from consolidation of EMAS Offshore. The Group maintains a healthy backlog of US$2.5bn with majority of contracts to be executed over the next 12 to 18 months.

China Aviation Oil expects to report weaker financial performance for the Group for 4Q 2014 and FY 2014 as compared to the previous year, mainly attributable to the highly volatile global oil market and difficult oil trading environment. Nevertheless, the Group continues to be profitable.

Raffles Education Corporation's Oriental University City is aiming to raise HK$118.8m in gross proceeds through its listing on the Hong Kong Stock Exchange's Growth Enterprise Market (GEM). Raffles Education's spin-off listing will see an initial placing of 45m shares at an indicative price range of HK$2.60 to HK$2.68 apiece. Net proceeds of about HK$77.8m are expected. Oriental University City intends to use the net proceeds for constructing new dormitories on its campus site.

Oriental Group has entered into a S$5.5m in aggregate principal amount convertible loan notes subscription agreements with a group of eight Singapore investors. The 3-years unsecured convertible loan notes will bear an interest at the rate of 8% per annum, convertible at the option of the subscribers at a conversion price range from S$0.13 to S$0.16 per new share. The initial conversion price of S$0.13 per share has been set at a 58% premium over the last volume weighted average price. The proceeds from the issuance of convertible loan notes will be used to fund the expansion of Oriental's business outside China, especially to support its Singapore existing steel trading operations and future business expansion.

The construction sector is expected to secure contracts worth S$29 bn to S$36 bn this year, the Building and

Construction Authority (BCA) estimates. Public sector projects will be key demand drivers for the sector, as private sector projects take a back seat amid wariness among developers. The sector marked a new record of S$37.7 bn contracts last year - which was at the upper-tail of BCA's forecast - on the back of more institutional and civil engineering construction contracts. BCA is projecting the sector will achieve S$27 bn to S$36 bn of contracts per year for 2016 and 2017, and S$26 bn to S$37 bn per year for 2018 and 2019. Public sector projects are expected to account for 60% (S$18 bn-S$21 bn) of all construction contracts, up from 52% last year.

The construction sector remains challenging. We maintain neutral on the sector. Taking guidance from BCA's forecast, projects are not expected to ramp up intensely. Lower margins continue to lurk as construction companies have to contend with higher manpower costs vis-a-vis lower tender prices amid keen competition. While productivity improvement is key, we believe that companies will have to invest time and financial resources to achieve this. Without significant productivity improvement and more intense construction demand this year, 2015 is unlikely to be exciting. We therefore believe that the sector will continue to chug along in 2015.

HDB resale prices fell 0.4% to a 41-month low in December compared to November. Resale volume also fell 4.1% to 1,295 units transacted in the traditionally slow last month of the year. This was according to the latest SRX Property flash figures released. Year-on-year, December's resale prices fell a more pronounced 6.1%, while volumes actually rose 28%. The higher year-on-year volume could be due to a sharp increase in supply of private and executive condo units, which saw upgraders sell their HDB apartments before moving to their new homes. December's price drop was driven by four- and five-room flats, whose resale prices slipped 0.7% and 0.3% respectively. The resale prices for three-room flats stayed level, while those for executive flats rose 1.8%. Prices in non-mature HDB estates also fell 0.9%, compared to a 0.2% increase for mature HDB estates.

US markets rallied further on optimism that central banks will support growth even as the US economy recovers. There was also optimism ahead of tonight's December job numbers. Investors were reassured that Federal Reserve minutes signalled no change in interest-rate policy and optimism over employment growth. Most central bank officials agreed their new policy guidance means they are unlikely to raise interest rates before late April and several expressed concern inflation could remain too low. Energy and technology shares gained. Yahoo! Inc. after an activist investor sent a new letter urging CEO Marissa Mayer to unlock value by monetizing assets.

Source: DBS

CDL HTrust (J85)Ezra (5DN)China Aviation (G92)Raffles Edu (NR7)

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