DBS Equity Research: Wired Daily 11 August 2015

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Publish date: Tue, 11 Aug 2015, 03:30 PM

Thematic Report - Does consolidation make sense in the MRO, container shipping industry and offshore and marine space?

ASEAN Airlines -Positive on the growth of the ASEAN aviation market

In our Thematic Report - Sea of Change, we explore the possibility of consolidation in the maintenance, repair and overhaul (MRO) industry, container shipping industry and offshore and marine space. While the global airline maintenance, repair and overhaul (MRO) industry is in steady growth mode supported by the increase in aircraft fleets, structural challenges in airframe MRO has dented premier operator SIA Engineering (SIE)'s earnings in the recent past. ST Engineering (STE)'s aerospace arm has been more resilient as it focuses on older models and narrowbody aircraft, but it has not made efficient use of its balance sheet to pursue accretive inorganic growth opportunities. This sets the stage for STE and SIE to consider a merger funded by STE's balance sheet to better exploit complementary capabilities and create synergies in terms of cost savings to consolidate Singapore's position as an aviation hub. Following the steep share price decline, we upgraded SIE to HOLD with TP of S$3.70, as a potential M&A target play. STE remains a BUY with TP of S$3.80.

Container shipping industry also provides recipe for consolidation. We believe liners outside the top 3 should look to consolidate further to enhance their competitiveness through improved cost efficiencies, access to a broader global network and more financial flexibility. This creates potential M&A interest in Neptune Orient Lines (NOL).

Singapore shipyards are bracing for tough times ahead. However, there are roadblocks to a merger, as revenue synergies are not clear and there exists integration challenges. We prefer to HOLD Keppel Corp and SembCorp Marine given the challenging industry outlook and have upgraded Sembcorp Industries to BUY with TP of S$4.10 on attractive valuation. BUY Yangzijiang, (TP$1.62) as we expect it to emerge as a leader in the consolidation of Chinese shipbuilding industry. The stock offers an attractive dividend yield of 4%, we see potential re-rating from a possible dual listing in Hong Kong to fund M&A activities.

On the ASEAN aviation market, we continue to be positive on the growth of this market, particularly on the shorthaul segment, driven by the region's growing affluence and increasing propensity to fly. The ASEAN Open Skies agreement is close to full ratification and even some delay should not impede the boost that a liberalised environment would provide. Key roadblocks revolve around infrastructure constraints and ownership restrictions. Earnings for ASEAN carriers are projected to recover over these two years on lower fuel costs and steady carriage growth. While the strength of the US$ has and will continue to hit costs, the significantly lower fuel bill more than offsets this impact. For SGX-listed stocks, we have a BUY rating on both SIAand Tiger Airways.

3Q15 results for F&N within expectations. We have raised our FY15F forecasts to account for the gain from Myanmar Brewery Limited's (MBL) disposal. However, FY15F/ 16F/ 17F core profits are revised down by 6%/ 39%/ 43% to account for the loss of brewery profit stream, mitigated partially by higher interest income. Maintain HOLD, TP revised to S$2.45 (Prev S$2.74) with sale of MBL to be completed by end-August at US$560m. F&N is flushed with cash again, and the potential cash deployment to enhance shareholder value could provide support to share price.

2Q15 core profit for Noble Group was below expectations on losses at the Mining and Metals division. PwC gives clean bill of health for Noble's mark to market (MTM) accounting but this may not satisfy detractors. Lacks re-rating catalysts; weak cashflows and low ROE still feature. Maintain HOLD, TP lowered to S$0.57 (Prev S$0.95).

ARA Asset Management's 2Q5 results in line. ARA has launched ARA Harmony Fund III and ARA China Investment Partners has received an additional US$300m commitments. ADF1 is on track to completely divest ITS properties by end of 2015. Maintain BUY, TP S$1.87 (Prev S$1.85).

Ascendas Hospitality Trust's 1Q16 DPU of 1.28 Scts (+3.2% y-o-y) below expectations. Robust Australian core portfolio performance was offset by weaker AUD. Going forward, absence of cross-currency swap costs and payout of Pullman Cairns disposal gains are expected to drive DPU growth. Maintain BUY, TP lowered to S$0.74 (Prev S$0.76).

2Q15 DPU of 1.16 Scts (-6.5% y-o-y) for Far East Hospitality Trust below expectations. Contribution from serviced residences was weaker than expected. We expect seasonal uplift in 2H but outlook remains challenging. Maintain HOLD, TP lowered to S$0.71 (Prev S$0.78).

Frasers Centrepoint Ltd reported a strong set of 3Q15 results. FCL continues to offer strong earnings visibility through almost c.S$3.5bn in locked-in sales, which it is expected to recognise in the coming years. FCL is targeting to derive 60% of its income base from recurring revenues. It also has existing capital recycling platforms in its listed REITs. Maintain BUY, TP S$2.36.

Global logistics Properties (GLP) announced the sale of 5 wholly owned logistics properties to GLP J-REIT for JPY 38.1bn or US$306m equivalent. The sale price is in line with the properties latest valuations as of 30th Jun 2015. The properties comprise 203,000 sqm (2.2 sq ft) and are mainly located in Greater Tokyo, with one property located in Greater Fukuoka. This transaction is in line with the group's capital recycling strategy in Japan. Looking ahead, GLP has a further 20 properties worth US$1.8bn that is wholly owned by GLP that can be injected into the J-REIT over time.

China Everbright Water has signed a supplementary concession agreement with Ji'nan Municipal Government, Shandong Province for the expansion of Ji'nan Waste Water Treatment Project (Plant 1). The total investment for the expansion project is approximately RMB112m, with an increase in daily waste water treatment capacity of 50,000m³.

Kim Heng Offshore & Marine expects to report a net loss in 2Q15, as compared to a net profit in the corresponding period in 2014. This was mainly attributable to a decrease in revenue due to the low demand for maintenance of rigs and related goods and services because of the fall in global oil prices.

SIA Engineering has reduced its stake in Safran Electronics Asia (SEA) to 40% from 49% to its joint venture partner, Sagem, for US$3.56m cash. Sagem purchased the sale shares as SEA is strategic to its aftermarket services in the region.

Singapore economy grew by 1.8% y-o-y in the second quarter, slower than the 2.8% growth in the previous quarter. On a quarter-on-quarter basis, the economy contracted by 4.0%, a reversal from the 4.1% growth in the preceding quarter. The manufacturing sector contracted by 4.9% y-o-y, extending the 2.4% decline in the previous quarter. The sector was primarily weighed down by declines in the output of the biomedical manufacturing and transport engineering clusters.

Non-oil domestic exports (NODX) growth forecast for the year has been narrowed to 1.0 to 2.0% y-o-y, while total trade is tipped to fall by a bigger minus 10.5 to minus 9.5%. Making the downward adjustments in its latest projections in Singapore's trade performance, trade promotion agency International Enterprise Singapore said that global economic growth has been weaker than expected in the first half of the year. Downward pressures in oil prices is also likely to continue to depress oil trade further in nominal terms.

U.S. stocks rose on M&A news and commodities-related shares rallied. Warren Buffett's Berkshire Hathaway Inc. had agreed to buy Precision Castparts Corp. Sentiment was also boosted by the rally in Chinese equities earlier in the day amid speculation the government will accelerate mergers of state-owned enterprises to bolster economic growth. Energy stocks rebounded, underpinned by a similar rebound in oil price as China's crude imports surged to a record on a monthly basis.

Source: DBS

SIA Engineering (S59)ST Engineering (S63)Keppel Corp (BN4)Sembcorp Marine (S51)YZJ Shipbldg SGD (BS6)SIA (C6L)F & N (F99)Far East HTrust (Q5T)Frasers Property (TQ5)China Everbright (U9E)Kim Heng (5G2)

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