Olam has acquired the tomato processing assets of SK Foods for US$39m, to be funded with internal accruals and borrowings. The acquisition is expected to expand its product range with cross-selling opportunities, generate cost savings through a consolidation of logistics and general functions, and offer an immediate entry into a large and profitable market. The acquisition price is also significantly lower than the replacement cost of US$130m. Our EPS estimates remain unchanged. Cash from its recent fundraising has put the company in a strong position to snap up further attractive assets at distress prices to gain market share and break into new markets. We believe this will support Olam's future growth. Our target price has been lifted to S$2.95, based on 22x CY10 P/E, its historical average, from S$2.05, based on 14x CY10 P/E. Upgrade to Outperform from Neutral.

We believe the formal award of the Saudi Aramco Total Refinery (SATORP) project in Jubail could come soon for Rotary and estimate Rotary's potential allocation at US$320m. With SATORP, Rotary's order book could reach S$900m by end-2009, supported by other small to mid-sized (S$50m-200m) contract wins from the region. Our earnings estimates have been raised by 6-30% for FY09-11, as we upgrade our order-win assumption for 2009 to S$950m from S$450m. Maintain Outperform with a higher target price of S$0.88 (from S$0.74) following our earnings upgrade, still based on 11 CY10 P/E (5-year average).

The recent rally has stretched valuations to an unappealing 1.5x 2009E BV (from 0.8x), close to the historical average of 1.6x P/BV. At this level, the market has factored in an economic recovery, in our opinion. As long as a strong global economic recovery remains opaque, it is unlikely for valuations to stretch beyond the historical average. We believe the market will be well supported at 2,000 FSSTI or 1.2x P/BV, representing one standard deviation below historical average.

We still hold the view that market correction is unlikely to be deep as we sense that there is still ample amount of cash awaiting to gain entry. We believe the current market consolidation could last one quarter before staging a comeback in the fourth quarter as clarity with regards to a global economic upturn emerges.

As risk appetite recedes, defensive names like SMRT, SingTel, StarHub, SingPost and SPH will start to outperform the market. We have BUYs on SMRT and SingTel but HOLD on StarHub.

We recommend investors accumulate stocks on price weakness. For that, we prefer the larger and higher-beta sectors like banks (UOB is our preferred pick), property (City Developments) and offshore and marine (SembCorp Marine). At this juncture, we have a Neutral stance on the banking and property sectors, but a Positive stance on the offshore and marine sector. For exposure to small-cap names, we recommend CSE Global and Ezra Holdings.

We raise our FSSTI target to 2,600 from 2,500 previously. The increase came about as we roll over our base year to 2010 (from 2009) and after ascribing a 1.6x P/BV multiple (previously 1.5x). The higher P/BV multiple is warranted as we believe the recent round of highly-dilutive rights issues is drawing to an end. We maintain our OVERWEIGHT stance on Singapore. However, our regional strategist, Clive McDonnell, has an UNDERWEIGHT rating on Singapore from a regional perspective, as high-beta North Asian markets are his preferred choice. Clive is of the view that on a relative basis, the Singapore market will continue to underperform compared to the North Asian markets.

Resilient 1Q09 results as expected. All the three telcos - MobileOne (M1), SingTel and StarHub - reported a pretty resilient set of results recently. M1's 1Q09 earnings were slightly ahead of our forecast but that was mainly due to an one-off tax credit; EBITDA margin also improved due to slight easing in competition. SingTel's 4Q09 earnings were much better than expected, aided by a strong domestic market performance. StarHub's 1Q09 earnings were within expectations, but the boost came from lower taxes; its mobile business recorded a mild decline.

Review of operations. On the mobile front, we note that the recession has impacted consumer spending in the March quarter; this has led to a decline in mobile post-paid ARPUs. And in line with the weaker demand, most of the telcos have further scaled back their acquisition costs; the exception being SingTel, which clocked in at S$290 / customer, up QoQ but down YoY. And in terms of market dynamics, we see that M1 has continued to lose post-paid market share, which does not come as a surprise, given its lack of bundling abilities. On the broadband front, the net additions for both SingTel and StarHub have slowed, partly due to the economic slowdown and also the saturation in the market, which has now hit 109.5% (up from 99.9% in 4Q08). And while StarHub managed to add more customers, we note that its ARPU has been declining, whereas SingTel's ARPU hasmanaged to remain quite stable.

Stable outlook for 2009. Going forward, all the three telcos expect their Singapore operations to remain stable or show slight growth, with EBITDA margins remaining relatively steady; this as they strive to reduce costs to keep pace with the expected softening in operating revenue. But due to their strong cashflow-generative businesses, the telcos have largely kept their dividend payout guidance; M1 to pay at least 80% of underlying net profit; SingTel to pay 45-60% of underlying earnings; StarHub to pay S$0.18/share, or S$0.045/share per quarter.

Maintain Overweight. Although there has been a steady switch into high-beta stocks on hopes of a rapid recovery in both the economy and corporate earnings, we are not entirely convinced. And until we see more concrete signs of a rapid recovery, we would still advocate holding on to these defensive counters for their attractive dividend yields and as a means of diversification. Maintain Overweight.

Dairy Farm (DFI) is a leading pan-Asian retailer that has 123 years of operating history. From a modest beginning of supplying fresh milk, the group has transformed itself into one of Asia’s largest retailers of daily necessities. DFI operates 4649 outlets and employs over 75,000 people. The stable of brands in its portfolio include Welcome, Cold Storage, the Giant hypermarkets, Shop N’ Save, 7-Eleven, IKEA and the Guardian stores, which are closely knitted with the heart of consumers.

DFI strives to offer consumers value-for-money through efficient, low-cost distribution of high-quality fresh foods and consumer/durable goods. While its convenience stores, IKEA and Maxim are more vulnerable to the economic downturn, DFI’s niche positioning in consumer staple products explains its recession-proof earnings (7-year earnings CAGR of 38%).

DFI has a defensible, asset light and cash generative business model, which enables it to expand rapidly while maintaining a low net gearing of 1%. Its stores now occupy prime locations across Asia. Welcome, along with its Park ’N Shop competitor enjoy a duopoly in the Hong Kong supermarket business with an estimated combined market share of near 70%. Mannings is consistently ranked as the most trusted pharmacy brand.

DFI’s success stems from its approach as a “modern retailer” in markets largely dominated by “traditional” retail outlets such as street hawkers and wet markets. Over time, growth potential will come from the switch in consumer preferences towards modern retail store format that offers competitive pricing realized through scale economies, broader product offerings and hygiene. DFI targets to add at least 400 new stores every year. Falling rentals will be an added earnings catalyst in the near-term.

DFI’s premium valuations reflect its growing profitability and solid retail presence. In addition to paying regular dividends since 2002 (~60% payout), DFI has paid out 3 special dividends, boosting the average annual DPS to US$0.21 over the past 4 years. DFI’s asset light model in mass-market retailing across the fast-growing Asia has achieved superior a ROE of ~100%. Key risks are rising competition and unemployment.

CityDev reported 1Q09 net profit of S$83.1m (-49.6% YoY), or EPS of 9.1 S cents, in line with our estimates. We are downgrading CityDev to Underperform from Neutral. CityDev has rallied close to 75% from March lows, without a significant change in fundamentals.
Contribution from the residential segment was lower due to the absence of profit recognition from projects completed within 2008. Hotel operations remained under pressure. M&C reported 1Q09 results of £6.9m (S$15.3m), down 51% YoY. RevPAR was down 18.2%, with April registering a 22.9% fall YoY. We expect hotel earnings to remain weak for the year, with RevPAR likely to fall 25–30%.

Although profit from investment properties was up 47% YoY as a result of positive rent reversions, office occupancy fell 3ppt QoQ to 91%, as demand continued to weaken. In 1Q09, prime office rents fell 20% QoQ, and we do not anticipate a bottom until 2011, as weak demand is compounded by significant supply over the next few years.

The group’s launch schedule reflects our view that the recent recovery in sales volumes is not broad-based but limited to the mass-market segment. CityDev is fast-tracking the mass-market project at the former Hong Leong Garden condo for launch by 4Q09, whilst continuing to delay the launch of The Quayside Isle on Sentosa island. Although construction at The Quayside Isle is progressing on expected completion in 2011, CityDev will launch it possibly only when completed or near completion, with a view of better returns.
Our current RNAV of S$9.50 assumes that overall residential prices fall 15% and office rents correct by 30% this year. Given weak asset markets and the magnitude of declines already experienced by these two sectors in 1Q09 (-14% and -20%, respectively), our RNAV has further downside risks.

No change to our earnings estimates or target price of S$5.70, which is based on a 40% discount to RNAV of S$9.50. 12-month price target: S$5.70 based on a RNAV methodology. Catalyst: Weak sector fundamentals to persist for another six months.

CityDev is trading at an 11% discount to RNAV, which is already at parity to the long-term historical average. We think its recent share-price strength reflects the market chase for high-beta stocks. Fundamentals remain weak. Downgrade to Underperform from Neutral.

Apr-09 passenger -18%yoy, cargo -22%yoy — Passenger traffic fell by 18%yoy in April, a slight improvement from March (-22%), possibly due to “Easter effect”, while cargo traffic slumped to worst fall (-22%yoy) since downturn began in Sep-08. Post FY09 results, mgmt highlighted “drop in demand for air travel is leveling out”, but added signs of recovery are not visible yet. Stock likely to underperform until fundamentals improves. Maintain Sell/Low Risk (3L), Target S$8.50.

Passenger — The number of passenger carried fell 18.2% to 1.29m from 1.58m a year ago, while passenger traffic measured in RPKs fell 17.7%yoy, against capacity reduction of 12.9%yoy. Consequently, PLF fell by 4.2ppt to 72.2%. By region, all regions except for East Asia saw declining PLFs, with Europe falling 9.8ppt and Americas by 4.7ppt.

Cargo — Cargo lifted fell 19%yoy while cargo traffic measured in FTKs registered a decline of 21.6%yoy, the worst yoy fall since the downturn started in Sept-08. With capacity reduced by 16.5%yoy, cargo load factor declined by 3.7ppt to 58%; All regions except for Aus/NZ experienced lower cargo load factors. (East Asia -4.2ppt, Americas -3.8ppt, Europe -5.1ppt).

FY10 capacity reduction — For the period Apr-09 to Mar-10, SIA has planned to reduce capacity by 11%, with cutbacks made progressively across the network. The passenger fleet will fall to 99 from 103 over FY10, with 12 new arrivals (5 A380s, 7 A330s), 2 disposals (B747) and 13 “surplus aircraft (9 B777, 4 B747) which are being actively marketed.

We are reducing 2009 forecast by 19% as we understand Peugeot sales have been affected by political tensions between China and France over Tibet since last year. In fact, China recently banned sales of Renault cars in apparent retaliation against Paris granting honorary citizenship to the Dalai Lama. Armstrong supplies a high value part, the door shield system, to Dongfeng Peugeot-Citroen Auto (DPCA) in China.

Still, we expect Armstrong’s China auto business to be the only segment to show growth this year while overall auto sales decline will be less than expected. China auto sales have exceeded forecasts in Jan-May, +21% yoy to 4.96m units. Also, Armstrong has been approved by a major customer in China for a large car seat-related part. Investment will not be substantial but the payoff could be significant as the part is higher in value than the door shield systems, its highest value part to-date.

Also, Armstrong is on track for 2Q09 to be far stronger than 1Q09 ($0.7m net profit, -83% yoy), as it has been experiencing a pickup in orders from all businesses since March, most notably its automotive plants in China and Thailand, while HDD has exceeded previously revised down expectations. There should also be a partial writeback of provision for forex loss as the US$ has fallen from the peak of 1.55 in 1Q09.

On the bright side, we also do not expect Armstrong to be affected by GM’s recent bankruptcy filing in the US, as direct customer Shanghai GM only accounts for less than 0.5% of total sales. In fact, it is likely that there would be no impact at all as GM is doing well in China and has astrong 50% partner in SAIC (Shanghai Automotive Industry Corp). However, if VW is affected, then there would be an impact as VW accounts for 10% of auto sales.

Despite the latest development over Peugeot, the market already expects 2009 to be a weak year hence there should be no adverse reaction in the share price. However, we downgrade our recommendation to Hold with a lower target price of $0.20 (still based on 12x P/E), due to lack of other positive catalysts.

CapitaLand astutely moved to clear existing inventory, notably the sell-off of the 186-unit Wharf Residence in early May. While the market and buyers appear to be convinced of a rebound in asset prices, CapitaLand’s pre-emptive decision to cut prices and clear inventory some eight to nine months after the first launch — and at a time when the company is flush with S$5.5bn in cash — suggests to us that the developer is mindful of the inventory overhang in the Singapore market and the risk of future presale discounting to clear this inventory. To recap, CapitaLand released a total of 100 units on 15 May, selling 85 units on that day. Over the following weekend, management sold a further 24 units, bringing total sales to 134 unitshaving sold 25 units at the original launch in 2008. According to the company, the “average price achieved was S$1,300-1,600 psf”, inclusive of the interest rate absorption scheme (IRAS). The agent we spoke with, however, suggested that prices over the weekend were S$1,100-1,300/psf, as most buyers opted for the deferred payment scheme and the smaller two-bedroom units.

As a consequence of the S$1.84bn rights issue in 1Q09, gross debt fell by S$2.3bn y-y to S$10.0bn, resulting in the group’s net debt-toequity falling to 0.32x at end-1Q09, from 0.59x at end-1Q08. The group currently has a cash balance of S$5.5bn. While CapitaLand has de-levered its balance sheet, the group has not booked any revaluation deficits to date, as “it is the practice of the group to revalue its investment properties half yearly”. Expectations of revaluation deficits, however, are now being realised with CapitaCommerical Trust (CCT) revaluing its portfolio down 10.1% to S$6,029.6mn (equivalent to S$681.0mn) in May prior to announcement of its rights issue. On our numbers, CapitaLand will book, on this announcement alone, an attributable revaluation deficit of S$230.5mn (comprising CapitaLand's attributable stake of CCT revaluation deficit (S$214mn) plus CapitaLand's attributable stake in Raffles City (via CapitaMall Trust), which was revalued down by S$141mn, equivalent to 5.2% of the assets total value).


We agree with CapitaLand management’s prognosis at its 1Q09 results announcement that “downside risks to capital values” remain and see the potential for further asset write-downs over the cycle. In the context of CapitaLand we see such risks as focused on the office/retail sector, rather than in the residential market and its exposure to en bloc developments. The following Exhibit highlights potential asset write-downs of its major associates CCT and CapitaMall Trust, and the implications for CapitaLand, with the group potentially booking an attributable revaluation deficit of about S$1.3bn.

Break-even analysis of CapitaLand’s major residential projects acquired enbloc highlights the potential for modest write-downs for “foreseeable losses” on its development properties, notably Farrer Court (break-even ~S$1,300/psf) and Char Yong Gardens (break-even S$2,700/psf), suggesting a potential write-down of S$125mn — modest in the context of the revaluation deficits that could potentially be booked from the office sector.

Our earnings adjustments are primarily driven by a more positive assessment of the China residential market and adjustments to the timing of residential launches. In addition to the adjustments to our earnings expectations, we rolled forward our intrinsic sum-of-the-parts (SOTP) NAV to FY10F to derive a value of S$3.33/share. Notwithstanding the market’s recent appetite for risk, we maintain our view that asset prices are likely to bottom in 2010F, suggesting further downside risks to earnings. In that context, we adopted mid-cycle discounts to NAV to derive our FY10F price target of S$2.72/share.

Expands into Libya. Hyflux Ltd has just announced a new MOA (Memorandum of Agreement) with the General Desalination Company (GDC) - the commercial arm of the Ministry of Utilities in Libya to for a number of JV companies to develop two seawater desalination plants. The first would be a plant with a minimum design capacity of 500k m3/day in east of Tripoli - possibly the largest membrane-based plant in the world; the second will have a minimum design capacity of 400k m3/day in Benghazi. We understand that the MOA was a result of nearly nine months of talks between Hyflux and GDC and Hyflux was selected due to its technological edge as well as value proposition.

No immediate financial impact. Although Hyflux has provided a brief outline of the likely JV - which is pretty similar to the one adopted for its projects in Algeria, other details (including the project value) are still sketchy at this stage. As it may take several months before the actual agreement is signed, we do not expect the Libyan projects to have any immediate financial impact. But we estimate that the project value of the two projects should easily exceed S$1b (to as much as S$1.5b) and would bump up Hyflux's order book for the next three years.

Awards US$28m contract for Magtaa. Earlier, Hyflux awarded a contract worth US$28m to ABB for it to supply electrical equipment for its Magtaa project in Algeria - currently the world's largest membrane-based reverse-osmosis seawater desalination plant. According to reports, ABB will set up a 220kV outdoor substation to provide power to the facility and it will also supply power transformers, medium-voltage drives and medium and low-voltage switchgear. Separately, Hyflux has also signed a MOU with ABB to collaborate on energy efficiency technologies and solutions.

Raising fair value to S$2.52. We believe that the latest geographical expansion into Libya is an important milestone for Hyflux and would further serve to showcase its technologies to the rest of the world, and should result in more project wins. Meanwhile, we are keeping our FY09 and FY10 estimates unchanged until we get better clarity on the two projects. Nevertheless, due to the positive development and the recent re-rating of the equity market, we raise our valuation from 18x FY09F EPS to 20x blended FY09/10 EPS and our fair value from S$$2.11 to S$2.52. Maintain BUY.

Line maintenance was the biggest contributor to operating profit- Management provided segmental breakdown on 3 key business units. Of the 3 units, Line maintenance accounted 68% of operating profit. Linemaintenance is handled out of Singapore, Australia ( 6 cities), Phillipines ( 3 major international airports and 17 domestic airports) and will soon involve one out of Los Angeles. Line maintenance, is generally performed away from hangars and this has now evolved to include segmental "C" checks for newer narrow bodied aircraft. While previously some of these C checks would involve aircraft being grounded for 5 days, it is now possible to space out such checks for select aircraft over a longer period, involving shorter duration checks. This has led to the division recording an operating profit growth of 80% on a margin of 20%.

Fleet management is another growth area, but margins are lacklustre- Fleet management is one stop comprehensive maintenance program that is based on fleet utilisation( typically in number of hours). Airlines, which outsource MRO work pay a fixed dollar based per hour utilised. This favours airlines, which would be able to budget MRO costs to utilisation. For SIAEC, this has been a growing segement and something which is targetting aggressively. However, margins can be quite unpredictable and in FY09, operating profit from this segment fell 60% on margins of 3.6%.

Outlook remains challenging- Management has guided that outlook remains weak and will deteriorate further. They have also indicated that their 23 jv and associate businesses are also beginning to see impacted by airlines grounding aircraft. Underscoring the seriousness of this, management has cut final dividend payout by 31% to 11cents. The company has indicated that capex is likely to remain steady. As such, we interpret the lowered dividend payout as an indication of the maximum potential decline in operating cash flow for FY10. Note, that final dividend payout will impact FY10's cash flow. A positive catalyst for the stock would improved traffic trends from parent SIA, which could potentially lead to SIA removing part of 17 aircraft from storage. We have downgraded our rating on the stock from a Buy to Hold. Target/Fair price remains unchanged at S$2.45.

Lowering 2009 net profit by 9.6%. The International Air Transport Association's (IATA) latest assessment of US$9b losses for global airlines has negative implications for ST Engineering’s (STE) aerospace unit ST Aerospace (ST Aero), which derives 80% of its revenue from Asia and North America. Consequently, we do not expect margins to improve in 2H09. We have cut our 2009 and 2010 earnings estimates for STE by 9.7% and 8.0% respectively. We are also mindful that any further weakness in the US dollar will have a negative impact on ST Aero in 2H09, given that maintenance, repair and overhaul (MRO) billings are in US dollars.

Market has not factored in impact of lower IATA guidance on MROs. Contrary to positive expectations in the marketplace, neither ST Aero nor SIA Engineering has reported an improvement in maintenance operations. The market is simply projecting a recovery in airlines and extrapolating that to MROs. A recovery will only take place if traffic picks up and if airlines utilise grounded aircraft. That has yet to materialise for Asian or US carriers. IATA’s dire expectations for the airline industry do not bolster confidence.

Electronics segment and possibly military sales to buffer impact of smaller aerospace contributions. The electronics segment is expected to mark milestone contributions from Land Transport Authority’s (LTA) Circle Line and Taiwan's Mass Rapid Transit (MRT) projects in 2009. Contributions from this division and regular defence-related work are expected to partially offset the decline in the aerospace division.

Lower target price to S$2.04 and maintain SELL. Our forecast is the second lowest among consensus forecasts after the downward adjustment. We lower our fair price to S$2.04 from S$2.14. Our fair price is derived from the lower end of STE’s historical PE band and approximates the sum-of-the-parts valuation of S$2.09.

Opportunistic cash call. Starhill Global is proposing a $337.3m rights issue on a 1-for-1 basis at $0.35 each. Proceeds are earmarked to repay loans and for asset enhancement activities and new acquisitions. Assuming the manager repays $236m of debt, gearing could drop to 20.7%, amongst the lowest in the Sreit sector. Overhang is minimized as YTL Corp has committed to subscribe for up to 75% of the rights issue.

Value enhancing plans in the works. We believe investors should look beyond the near term DPU dilution into the longer term positives of accretion coming from enhancing Wisma Atria over the next 2-3 years, as well as potential new acquisitions in Singapore and overseas, given current market conditions and leveraging on its sponsor YTL¨s network across the region. Potential new contributions from these exercises would likely alleviate downside pressure from office rents in view of the challenging office leasing market and competitive retail environment over the next few years.

Maintain Buy. Our revised pre-rights target price of $0.84 ($0.59 rights adjusted) has taken into account potential earnings boost from enhancing Wisma Atria and interest savings from loan reduction. The rights price of $0.35 ie at 0.44x P/adjusted bk NAV, offers a compelling entry level for investors seeking exposure to prime landmark assets in Singapore. We view potential downside risk, including execution of new purchases, as low given the vast experience of the reit management and strong sponsor support.

Quick Comment: NOL’s Period 5 operational data (both volumes and freight rates) remain similar to Period 3 and Period 4 data, implying little change in underlying challenging market conditions. NOL continues to have approximately 20% of its fleet laid up.Until container traffic growth is sufficient to absorb the substantial excess capacity, we think investors looking for signs of sustainable freight rate recovery to breakeven levels are being too optimistic.

NOL and other shipping companies are proposing Asia-Europe rate hikes of US$100-300/TEU in July. We think that a portion of this rate hike may stick, as current rates are below cash breakeven levels (~US$400-500/TEU for the industry), but will be offset by declining Transpacific rates (post conclusion of delayed annual contracts in July), leading to continual deterioration in overall average freight rates.

What’s New: In Period 5 (May 2 to May 29, 09), NOL reported a 21% YoY volume decline due to deteriorating global trade demand and capacity cuts in an effort to reduce operating costs. The Period 5 volume deterioration of 21% was similar to 22% volume deterioration for Periods 3 and 4 and an insignificant 1% MoM improvement for Period 5 vs. Period 4.

Period 5 average freight rates declined 23% YoY, to US$2,326/FEU, reflecting the rapid deterioration in freight rates and lower bunker fuel surcharge. Period 5 average freight rate deterioration of 23% was comparable to Periods 3-4 rate deterioration of 20-21%, and on a sequential basis, Period 5 rates were unchanged from Period 4 rates. The sharp volume and freight rate deterioration resulted in a revenue contraction of 39% for Period 5.

We adjust our net loss forecast from US$481m to US$280m for 2009 and US$263m to US$236m for 2010 to reflect better order momentum in 2Q09. We raise our TP to SGD0.7 from SGD0.18 to factor in shares consolidation and lower net loss. However, our TP implies 70% downside potential, and we are concerned about the company’s profitability due to slower ramp-up of advanced technology and unfavorable margin trend in the long term. We maintain Sell.

While the company raised its sales and margin guidance for 2Q09, the guided net loss remains substantial. Mid-point loss per ADS should reach US$0.62. We expect sales to grow 10% QoQ in 3Q09 driven by communication and PC customers. However, we expect net loss per ADS of US$0.50 in 3Q09. This is attributable to overly aggressive pricing strategies and slow improvement pace in the yield rate for advanced nodes.

We see evidence of deteriorating cost structure. While the utilization rate rose during 2006-08, margins continued to trend down. We expect this downtrend to continue as the company’s cost structure may worsen with the ramp-up of 45/40nm capacity. We believe a limited customer base and disappointing progress in 45/40nm node will lead to continued net losses in 2010-11.

Our target price is based on 0.4x average 2009-10E PB, which is in line with the historical trough, and reflects that its average 2009-11E ROE of -15% is far below the cost of equity of 7.5%. We disagree with the Street’s argument that the company could be a beneficiary of an economic recovery. Indeed, its uncompetitive balance sheet and poor P&L may trigger more financing risks and hence lead to a stock de-rating. Upside risks: better execution in advanced technologies and stronger demand.

According to the recent Visa poll, Singaporeans are ranked top online spenders in the Asian- Pacific region in 2008, followed by spenders in Hong Kong and India. Online shopping in these regions saw the largest qoq increase in 4Q08, growing by at least 30%. Demand was particularly high for online tickets, online travel agents and travel accommodation. The trend to shop online looks sustainable with 81% of the respondents stating interests to shop online in the next 12 months.

Indeed, AST is a direct beneficiary to the rising demand in online spending, given its niche positioning in the online travel segment. In fact, AST has been able to record improvement in profitability and room nights in 1H09 (Sep 08 – March 09) despite the gloom in the weak travel industry, thanks to the unstoppable switch to its online travel platform.

Not resting on laurels, the group continues to enhance the appeal and scalability of its fully integrated online book engine. In time to come, AST will be the world’s first to launch flights with multiple stopovers from one departure point. AST has a good head start in doing so due to its long established physical presence across 8 countries globally.

AST has recently expanded into the video content space through acquiring the remaining 49.9% stake in Star-Travel.com. Star-travel has an inventory of over 7,000 hours of travel programmes and destinations footages which will enable AST to produce mini destination videos for its hotel partners. With the sizable exclusive hotel contracts on hand, we estimate AST could readily add $20m through video production. In addition, its collaborations with renowned high-traffic websites (such as YaHoo and Jobstreat.com) are cost efficient means to boost bookings.

AST is well positioned to be a key beneficiary of global recovery. Besides, its market capitalization is still below the replacement cost of its fully integrated, real time online booking engine. Its valuations are even more attractive after price correction, trading at 50% discount to peers. Reiterate Buy!

FY09 performance. SIA Engineering Company (SIAEC) recently reported a 3.5% rise in FY09 revenue to S$1.05b. Better performances from Line Maintenance and Fleet Management helped offset its main Airframe and Component Overhaul business. However, Fleet Management revenue consisted of a one-off for a cabin modification job for a Middle Eastern customer.

Rates could come under pressure. While SIAEC positions itself as a premier MRO centre, it is still likely to face pressure to drop its rates. Even if it manages to sustain its rates, additional "value added services" are likely to be offered to secure contacts and these use more manpower. The group iterates that it will continue to control costs, improve productivity and redeploy manpower to new centres (e.g. Bahrain).

Stay cautious. Historically, the group has garnered >50% of its revenue from its Airframe and Component Modification business. However, the downturn is likely to result in shrinkage in business volume for this segment as more airlines cut back on flights or ground some planes. Its business from SIA will also take a hit from the aggressive capacity cut backs. Line Maintenance will also suffer with lower number of flights passing through Changi Airport. The hope for growth lies in Fleet Management, where bottomline pressured airlines seek to cut costs by sub-contracting out aircraft maintenance to a third party.

Associates/JVs were strong contributors. This segment's PBT grew 9.6% YoY to S$173m and accounted for 58% of group's FY09 PBT. The better performance was largely due to the Engine related businesses which is seeing the payoff of past investments in repairing new generation engines. However, we believe that fewer flights will crimp contributions for the next 1 - 2 years.

Good company but pricey stock. We are initiating coverage on SIAEC with a HOLD rating and a fair value estimate of S$2.95. We have used a DDM and P/E blend to factor in typical investor expectation of good yields along with an attention to earnings that also drive its share price. The stock is currently trading significantly above SARS level valuations and we are mindful that today's economy is in a more limpid and prolonged economic downturn than 2003-2004. This will lead to sustained depression of air travel and thus MRO activity. However, we are hopeful that its previous investments that went into maintaining newer generation aircraft parts and airframes will allow it some earnings buffer. We are advocating entry at about S$2.60.

Starhill, formerly known as Macquarie Prime Reit until YTL acquired control, yesterday announced a 1-for-1 rights issue at 35 cents to raise $326.1 mln.

The subscription price represents:

- 29.3% discount to the theoretical ex-rights price based on Friday’s 64 cents close. The discount is slightly higher than 28.7% for CapitaMall (CMT), and 28.5% for CapitaCommercial (CCT).

- 56.4% discount to pro-forma NAV of 80.2 cents. Given that at least 90% of the net proceeds will go towards debt repayment, gearing will drop to 20.7% from 31.1% as reported for Q1 ended Mar ’09, and 33.4% after adjusting for the drop in valuation for the assets of the reit.

Coupled with the waning “magic” surrounding companies announcing rights issues (especially after the flood of rights / placements in recent weeks), we expect StarHill’s price to weaken in the short term.

We do not have a rating for StarHill, as our preferences have been for reits supported by CapitaLand, Keppel Land, City Developments.

What is also worth noting is that most of the larger reits have raised new capital from existing unit-holders, which have reduced their gearing.

NOL’s May operating numbers are encouraging, with flat rates and a pick-up in volumes MoM. This is in line with our expectation that more positive news flow will support the sector. That said, we think it is too early to conclude that blended rates have bottomed, given the lower CCFI rate in June, and weaker Transpacific contract rates have yet to be reflected. We think the outcome of July rate hike in Asia/Europe will be a key indicator to whether carriers’ pricing power is returning.

While the sector is still making losses, the sequential rate and demand improvement from very depressed levels are the key positive catalysts to share prices. With aggressive capacity cuts and a potential demand recovery, the new industry balance will allow rates to drift higher towards their break-even levels, in our view.

OOIL is a beneficiary of both shipping and Chinese property market’s recoveries, and remains our top pick. We also like NOL given its strong balance sheet to weather the current downturn post the rights issue. NOL is also leveraged to any US demand recovery given its higher exposure.

US$0.7bn estimated contract. On 16 June 09, Saudi Aramco Total Refining and Petrochemical Company (SATORP) finalized the awarding plan for Engineering, Procurement and Construction (EPC) contracts that constitute the 13 different process packages of its Jubail JV refinery. The 400,000bbl/ day full-conversion refinery in Jubail, Saudi Arabia plans to be fully operational by the 2H13. While news flow has indicated that SATORP will only be sending out letters of intents to the awarded contractors this week, MEED.com, a middle eastern newswire has indicated that Rotary Engineering's (Rotary) 51% owned subsidiary (49% by Rafid Group), Petrol Steel, has won the refinery tank farm package. While official figures are not yet available, we estimate it to be worth US$700m.

JV is a double edged sword. Besides having a strong track record and a ready facility in Jubail, the collaboration with Saudi Arabia based Rafid Group undoubtedly gave Rotary a favourable edge in winning the package. However, this would mean that the positive financial impact would be diluted. Moving ahead, good execution on this project would position Rotary to win more projects in the Middle Eastern region.

Anticipating more in the pipeline. Although the SATORP project was a key catalyst for Rotary, we believe that the group was and will still be pursuing projects in Singapore and the region to fully utilise its 7000+ global workforce staff. Management indicated that there were still some substantial projects (>S$100m) that are up for tender in the region during the last results briefing. We have catered for project wins of about S$175m and S$185m in FY09F and FY10F, respectively.

Upgrade to BUY. Although Rotary has yet to receive official confirmation of the contact, the likelihood of winning is high. We have factored the US$700m project to span 4 years from 2010 to 2013. We have assumed gross margin for EPC to start to edge upwards to reach a peak of 22% in 2011 when the project will most likely be running at maximum efficiency. However, the longer time span will have a less accentuated effect on the earnings impact as the Singapore based S$535m Universal Terminal that only spanned about 2 years. While we have rolled our valuation forward to FY10F, we have maintained our peg at 8x. If the terms of contract are better than our expectations, the stock could be positively re-rated (note: Rotary traded up to 18x in 2007). Upgrade to BUY with fair value of S$0.81 (prev. S$0.51).

The decrease in revenue was mainly due to the reduction in the engineering, procurement and construction ("EPC") segment from $42.9m in FY08 to $32.1m in FY09. However, the decrease was offset by the increase in the treatment business from $8.3m in FY08 to $10.8m in FY09.

The operating income for treatment business was $5.0m, surpassing that of EPC segment which recorded a mere $1.4m profit.

The other operating expenses decreased 19.5% to $6.1m in FY09 as one-off various fees incurred to obtain the financing for the two TOT projects in Liaoyang and Xintai.

Finance cost pertained mainly to the bank loans interest expenses for the two TOT projects in Liaoyang and Xintai. The reduction was consistent with the decline in the borrowing rate.

No dividend was declared for FY09, as compared to 0.3 Sg cts in FY08.

The business risk for EPC segment is very high as we can see from the high variance of segmental sales over the years. The revenue for EPC is less predictable and is highly dependent on the company's ability to secure new contracts in the increasingly competitive industry. Nevertheless, the volatility in EPC segment is well buffered by its stable and improving treatment business. We like its treatment business for several reasons: (1) steady cash flow, (2) increasing treatment capacity, and (3) high return-on-invested capital.

Although the FY09 results were below our expectation, we are still upbeat about the company's prospect. Therefore, there is no major revision on our estimates for FY10 and FY11.

The share price was battered badly as a key substantial shareholder ? China Growth Opportunities Ltd - is unloading its stake and we are unsure when it will end. On top of that, in near term, the share price might be overhung as Oei Hong Leong, holding more than 15% stack in the company, was reported in the press that he lost $1 billion due to trades in forex and US Treasury bonds. Nevertheless, we view all these serve as a good entry for investors.

We continue to apply 0.7x FY10 NTA per share, we derive a target price of S$0.15, representing 76% upside potential. Maintain BUY.

Softer FY09 earnings as guided. Valuetronics Holdings Limited (VHL) reported softer FY09 earnings amid a challenging March quarter, consistent with its profit guidance a month ago. Revenue fell 22.3% YoY (-35.7% QoQ) to HK$159.3m in 4QFY09, while bottom-line swung into the red with HK$2.7m loss from HK$19.7m profit in 4QFY08 (3QFY09: HK$12.5m profit), due mainly to an allowance for doubtful debts of HK$8.7m and goodwill impairment of HK$4m arising from the recent acquisition of a Medical Equipment (ME) manufacturer in March 2009. For FY09, the group's performance was also affected by higher operating costs, forex loss of HK$3.7m, and a one-off charge of HK$10.0m asset impairment due to flash floods in June 2008. As a result, despite an 8.6% growth in FY09 revenue to HK$960.0m, earnings declined 41.4% to HK$53.1m. Excluding this one-off loss and the goodwill impairment provision, profit before tax would have dropped by 26.6% to HK$73.6m. Nevertheless, VHL maintained its 30% dividend payout by proposing a final cash dividend of HK4.5 cents (~7% dividend yield).

Outlook remains challenging; positioning for new business opportunities. Based on regular updates from customers, VHL is expecting FY10 to remain challenging and the sentiment among its customer to remain cautious. While the group has seen pick-up in orders in recent weeks, demand patterns stay highly uncertain as its customers aggressively keep their inventories lean. Furthermore, it has to contend with price pressures, deteriorating credit conditions and significant fluctuations in currency exchange rates. As such, VHL said it will continue to strengthen its working capital and cost containment efforts, while carrying on its business development strategies to capture new business opportunities. The acquisition of the ME manufacturer, as mentioned above, is one such example that has enabled the group to tactically gain immediate access to the medical market and new avenues in the ME sector.

Reiterate BUY. With healthy balance sheet (HK$153.5m cash with no borrowings), strong operating cash flows and excellent management, we believe VHL is well-positioned to take on business opportunities as these arise. However, as the global economy is unlikely to show any dramatic recovery in the near term, we have prudently reduced our FY10F forecasts by 15-27%. Applying 6x (4x previously) FY10F EPS alongside a re-rating in the sector, our fair value is now raised from S$0.15 to S$0.17 (36% upside potential). Maintain BUY on VHL.

Run-up has taken stock above valuations at this stage of the cycle: The stock has risen 54% in the past month, outperforming a rising market by 28% over that timeframe, and is now at a 28% discount to our updated S$11.17/share RNAV for the stock. We believe the stock has run up beyond its fair value at this stage of the cycle and therefore downgrade our rating from Overweight to Neutral. We would be buyers of the stock towards S$6.70/share, a level it was at not two weeks ago.
1Q09 results did not contain any surprises: 1Q09 PATMI was S$83.1 million, down 49.6% Y/Y on the back of lower development profits and hospitality contributions from subsidiary Millennium & Copthorne. Rental income rose 22.4% Y/Y on still-positive rental reversions at the group’s investment properties. Book value was S$6.11/share (post-implementation of FRS40 rules on investment properties under development) and gearing ended the quarter at 46.6%.

City Developments has historically traded as one of the most liquid Singapore property proxies: The stock has recently been affected by the market’s uncertainties over the 33% joint venture South Beach project and its associate financing. We consider the prospects of an equity fund-raising by the company as very low, with the group’s gearing comfortable and few by way of cash flow pressure points in the medium term. We do, however, reduce our FY09-11 earnings estimates by 9-11% to take into account lower margins.

Price target trimmed to S$7.20, a 36% discount to RNAV (one standard deviation below the mean discount since 1990). Key risks: our EPS estimates are substantially below consensus, and earnings estimate downgrades could prompt a reversal in the stock’s recent outperformance. Key upside risks to our rating and price target would come from a significant increase in the risk appetite for Singapore real estate assets or global hospitality properties.

Global IBC supply chain solutions provider. Goodpack Limited is principally engaged in the business of renting its multi-modal, returnable metal box system, known as Intermediate Bulk Container (IBC), used for the packaging, transporting and storage of cargoes. We believe Goodpack, as the world's largest provider of IBCs, has clear advantages over its peers.

Firstly, it allows the group to achieve economies of scale and greater trade- lane matching opportunities. Secondly, the sheer size of its IBCs and market coverage also present a high barrier to entry for its competitors. The same could not be said on its smaller-sized competitors, which could only compete on a smaller scale or risk wastages in time and resources incurred when carrying empty boxes.

Growing preference towards IBC packaging. Prices for packaging material have also been on the rise over the past years, thus leading manufacturers to source for cheaper packaging alternatives to reduce their high operating expenses. This has inadvertently spurred demand for its lower-cost IBCs, which is expected to provide 20-40% savings over the traditional packaging methods. With the recent implementation of International Phytosanitary Measure (ISPM 15) regulation by the International Plant Protection Convention (IPPC), Goodpack is also poised to ride on the ongoing growing preferences by customers to switch from wood to IBC packaging.

Ongoing measures taken to improve yield and efficiency. Despite the strong prospects, Goodpack is never lax in improving its yield and operational efficiency. Internally, it continues to take initiatives to reduce its logistic and handling expenses. Since the setting up of in-house automated cleaning depots in the US and Europe during the last fiscal year, the group has seen improvements in lowering the average cleaning cost per IBC unit.

Initiate coverage with BUY rating. We like Goodpack for its strong earnings margin, market leadership and sturdy growth profile. While the group's business is inevitably being affected by the poor macroeconomic conditions, we expect the group to resume its positive growth in profitability in FY10-12, where the global economy is widely expected to improve and customers begin to take up more leases of Goodpack's IBCs. As such, we are initiating coverage on Goodpack with a BUY rating and S$1.14 fair value, based on a Discounted Cash Flow (FCFE) model. Our fair value implies a 13.1x FY09F EPS and 11.6x FY10F EPS; though it may appear high, we note that it is still significantly lower than the average PER of 19.9x seen during the 2003-04 SARS crisis.

Holding on to equity stakes in SC Global and HPL. WP management intends to keep their investments in SC Global and HPL as passive equity investments and the possibility of a joint development remains low. However, management did mention are the open to an invitation from them. As their stake in SC Global and HPL has been written down to S$0.385 and S$0.93, it is likely to be written back going forward due to the strong share price performances.

Comfortable with holding back of launches. Management stated that it is comfortable with their current position, with S$888.0m cash on hand (net cash position of S$497.1m) as at 31 Mar 2009. As such, it has no qualms about holding back the launches of Orchard View, Ardmore 3, and the remaining 100 units of Scotts Square to such a time when the market is accepting of the price that Wheelock Properties (WP) is willing to sell at. They remain confident of a recovery in the luxury segment.

Foreign buying buoys housing market. Management highlighted that even though property prices seem high compared to some other cities in the region (e.g., Tokyo), the market is propped by foreign buying that is not seen in other cities. In case for Scotts Square (highest price paid S$5.9m or S$4,701psf in Sept 2007), the split between foreign and local buyers for Scotts Square is about 50/50, with nationalities of the overseas buyers being varied.

No DPS default risk. With regards to Scotts Square, management noted that collections have been good, with 96% of payments due collected fully. They also reiterated that all projects, save for a few Seaview units (all of which have been collected), were sold on the progressive payment scheme. Thus, the risk of deferred payment scheme defaults is virtually nonexistent for WP.

Wheelock Place to benefit from the opening of ION Orchard. Both the office and retail portions are 100% occupied in the Wheelock Place building. The current asking rentals are around S$8-10 for the office portion and about S$10-20 for the retail part. Management expects the Wheelock place building (valued at S$790m, with 60/40 split between office and retail) to see a meaningful increase in traffic upon the opening of both ION Orchard and the tunnel linking the two malls come July 2009. Total rental income this year is expected to be better than last year.

We think the market's concerns on China stocks listed in Singapore (S-Chips) – the lack of industry leadership, lower perceived transparency, liquidity constraints and shorter operating history – are well known. If the current strong liquidity environment can be sustained, the S-Chips could play catch up to the China shares listed in Hong Kong. The S-Chips Index has rallied 23% in the past month, but it has still underperformed the HK small caps and China small caps by 29% and 36%, respectively, this year. Valuations of the S-Chips are also lower than for both the HK small caps and the Singapore market.

The Kingboard group's privatization of the Singapore listed Kingboard Copperfoil and Elec & Eltek highlighted a trend we see more in Hong Kong. There are over 30 companies with enough net cash to buy out the minorities (Figure 3). Kingboard's privatization attempts are mainly to streamline its corporate structure. The two holding companies, Kingboard Laminates (which is privatizing Kingboard Copperfoil) and Kingboard Chemicals (which is privatizing Elec & Eltek), could see earnings accretion as well as a one-timegain from negative goodwill. There may be less incentive for other S-Chips, particularly for those with a short listing history.

On the other hand, the current cycle offers S-Chips an opportunity to evaluate their decision to list in Singapore. Poor sell-side coverage, inconsistent investor interest, and low market multiples are negative to capital market access, and could be an obstacle to business growth in the long term. There are significant financing risks in a privatization and market timing risks in a Hong Kong re-listing. On the other hand, the potential re-rating could be rewarding to both the major shareholder and the minority investors.

China food and beverage distributor Want Want (0151.HK) traded on an average historical PER of 11.2X when it was listed in Singapore (Jan 1997 to Aug 2007). The company de-listed in Singapore in September 2007, and it re-listed in Hong Kong in March 2008. Its average PER in Hong Kong was 15.9x. We estimate that the major shareholder's stake in Want Want is currently worth US$3.37bn (51%, share price of HK$3.9 on 6 June), compared to US$1.6bn (54.19%, last traded price US$2.34) when it was listed in Singapore.

Jade Technologies Holdings has proposed a one-for-two rights issue of up to 566,591,364 new ordinary shares at an issue price of $0.01 each - a 75 per cent discount to the last transacted share price of $0.04. The net proceeds of $5.4 million will be used partly to fund the redemption of corporate bonds when they fall due as part of Jade's proposed acquisition of a 20 per cent stake in Daqing XinLong Chemical Company for 36 million yuan (S$7.7 million).

Downgrading sector to underweight. Our regional plantation team is downgrading the plantation sector from Neutral to Underweight. We believe a sharp reversal in palm oil price is imminent as palm oil is currently trading at a wide premium to crude oil and the risk of a downturn in prices will continue to increase as production moves out of its low season. Nevertheless, as average palm oil price YTD has exceeded our expectations, we are raising our FY09 average price assumption to RM1,900/tonne from RM1,650/tonne previously and maintaining our industry assumption of RM1,900/tonne for FY10.

Maintaining NEUTRAL for Indofood Agri and SELL for First Resources. In line with the rise in CPO price assumption, our FY09 and FY10 earnings for Indofood Agri Resources (IFAR) are IDR1.08t (+3.7% from previous estimates) and IDR1.29t (+3.3% previously) respectively. IFAR remains a NEUTRAL with a new fair value of S$1.17 (from S$0.95 previously), derived from 10x FY10 earnings. For First Resources (FR), our FY09 and FY10 earnings are IDR394b (+15.6% from previous estimates) and IDR468b (-12.3% previously) respectively. FR remains a SELL with a new fair value of S$0.42 (from S$0.21 previously), derived from 10x FY10 earnings.

STE has seen strong order inflows from its military business and we expect this strength to continue. Sensitive in nature, military orders by the Singapore Armed Forces are often not disclosed but the difference between FY08 and 1Q09 order books (considering 1Q09 recognized total) suggests new orders worth c. S$1.2bn were won in 1Q09, the bulk of which we think are liekly military related. Maintain Buy on what we see as attractive valuation.

STE manufactures products that are well regarded as indicated by the successful UK Bronco sales, continued orders for its 40mm ammunition, and the group previously being the front-runner for potential Indian howitzer order (now put on hold pending an investigation of a retired ordnance official by the Indian authorities). According to STE, its participation followed India’s processes.

Effective on or after 15 April 2009, for operators of aircraft converted by non-Boeing licensed converters, a fee of US$150-250k/year/plane will be charged by Boeing. ST Aerospace, being a Boeing licensed partner, will fall under a special category with lower fees paid by operators. This move is positive in our view as it effectively raises the price of PTF work done by non-licensed players and may lead to future potential business flowing to licensed parties such as ST Aero.

STE is sitting on a record order book of about S$11bn (as at 1Q09), providing healthy long-term visibility. The group is in a net cash position which places it strongly for any potential M&A activities. Our DDM-based target price of S$3.00 is based on a 7.4% cost of equity, (2.6% RFR and 4.8% ERP). Downside risks relate to project execution, greater-than-expected US$ depreciation, and worse-than-expected aircraft grounding (see p. 6 for details).

Upping CPO price forecasts. In this report card on the recent results season, we are raising our CPO price (cif) forecasts by 18% for 2009 and 8% for 2010 to US$710 per tonne for both years. The reasons for our upgrades are Argentina’s lower soybean crops, the slower decline in demand growth from key consumers and a slower-than-expected recovery in palm oil output. Our new local CPO price forecasts are RM2,280 for 2009 and RM2,250 for 2010.

CPO price to pull back in 3Q before recovering in 4Q. We remain positive about CPO price until end-2Q as the replenishment of stocks will require time, India’s import duties on edible oils remain at zero and there is concern over the delay in plantings in US. We expect CPO price to pull back in 3Q before recovering towards the end of the year.

Upgrading earnings forecasts and target prices. In view of our higher CPO price forecasts and recent changes in our rupiah assumptions, we are raising our FY09-10 earnings forecasts for all the planters in our coverage by up to 30%. This, along with higher target P/Es following our upgrade of regional stockmarkets, bumps up our target prices by 3-53%. We are raising Hap Seng Plantations and Sampoerna Agro to Neutral given their recent underperformance.

Upgrading Malaysian plantation sector to Neutral. We are raising our rating for the Malaysian plantation sector from Underweight to Neutral as its valuation premium over regional peers has narrowed following its recent underperformance, selected plantations stocks will benefit from an increase in their weightings in the new FBM30 indices on 6 July 2009, we are more bullish on the Malaysian stock market and foreign shareholding levels have fallen.

Staying NEUTRAL on regional plantation sector. Despite our CPO price upgrade, we remain NEUTRAL on the regional plantation sector as the share prices of most planters in our universe have done well YTD, reflecting the more upbeat CPO price outlook and expectations of a correction of CPO price in 3Q due to seasonally higher production and potential cutbacks in demand from major consuming countries if crop prospects improve. There is also no change to our Overweight rating on the Singapore plantation sector and Neutral call on the Indonesian plantation sector. For exposure to the regional plantation sector, we continue to recommend large-cap liquid planters. Our top picks in the region are Wilmar, Sime Darby, Indofood Agri and London Sumatra.

Upgrade to OVERWEIGHT, BUY CDL, KepLand and CapLand. We are upgrading our sector call on the Property sector to OVERWEIGHT, on the back of (1) physical prices leveling off, (2) a comfortable mid-prime price disparity paving the way for return of interest in prime properties, (3) mass market volumes to transition to mid-prime properties and (4) expected return of foreign buyers. On the ground, confidence is sky high, which is best documented by a shift from fleeting enquiry interests (buyers’ market) three months ago, to the present genuine and immense buying interests (sellers’ market). While property stocks have already soared 98.9% QoQ and 32.7% MoM, we believe upside potential remains for the blue chip developers under our coverage. Pegging 0 – 30% premium (which transpired during initial phases of property recovery cycles) to their new RNAVs, we derive BUY recommendations for City Developments (S$9.59 TP: S$12.18), Keppel Land (S$2.54 TP: S$3.15) and CapitaLand (S$3.85 TP: S$4.27).

Improved physical market dynamics. We reckon physical prices have already bottomed in 1Q09, assisted by developers’ aggressive downward price adjustment (10 – 30%) to move inventories. We believe current price disparity between mid-prime projects stands within 1Q05 – 3Q05 levels, which should drive sales and buying interest into prime projects for the next six - nine months. More importantly, we reckon this implies more upside potential than downside, thus erecting a good entry point for investors. We expect end-2009 vacancy rate to hit 6.7 – 6.9%, which is still under 20-year average and past crises’ levels. Supply in the pipeline for the next three years have plunged 41.5% YoY, ending any initial concerns over a supply glut.

Onshore palate to salivate offshore appetite. We believe the pick-up in domestic buying activity and current mid-prime price gap would trigger a return in foreigners’ buying appetite. Signs of foreigners’ purchasing interest have begun to emerge, based on caveats lodged from Apr – May 09, recent prime project launches and anecdotal evidences. We foresee an increased quantity of foreigners to enter the market within the next six – nine months.

CDL as top pick. We prefer developers with a reasonable exposure to the domestic residential market. With 34% of its RNAV (vs. CapLand’s 16% and KepLand’s 22%) exposed to Singapore’s residential sector, CDL is our top pick. We believe this accords it a slight edge over the strengthened balance sheets of KepLand and CapLand post-rights, notwithstanding their higher proclivity for NAV growth through opportune land acquisitions. Key risks include a slower-than-expected economic recovery, negative newsflow emanating from the US and failure of IR to take off.

The 2,400 level has proven to be a strong resistance level for the STI, having been breached intra-day but never at the close. The index came close to that level 2 Fridays ago, when it closed at 2,396.4. Since then, the STI has retraced 6.6% to close at 2,237.2 yesterday.

No surprises here given the 6.1% correction in the index over the past week. Most blue chip stocks were down with investors switching to defensive names like StarHub (+2.4% week-on-week [wow], $2.15) and ST Engineering (+4.2% wow, $2.49).

Property developers were sold down sharply Large cap property developers like CapitaLand (-8.6% wow, $3.50), City Dev (-10.2% wow, $8.50) and Keppel Land (-12.8% wow, $2.18) were hammered over the past week.

The 3 local banks fell more than the STI over the past week, with DBS (-7.3% wow, $11.50), UOB (-8.9% wow, $14.10) and OCBC (-8.8% wow, $6.65) closing in the red.

Commodity related stocks like Straits Asia (-12.0% wow, $1.68), Indofood Agri (-11.0% wow, $1.21), Golden Agri (-10.3% wow, $0.39) and Noble (-7.7% wow, $1.67) weakened in line with the 3.7% wow retracement in the Reuters / Jefferies CRB index. The index comprises both hard commodities like Gold and Crude Oil, as well as soft commodities like Soybeans and Wheat.

Singapore property stocks have had a strong run, and valuations factor in optimistic scenarios, including a 15-25% rise in residential prices, a bottom in Singapore office rents and falling cap rates. While the market’s chase for beta will keep property in flavour, we see upside becoming limited, especially until the office or residential rent outlook improves. The office sector is now key for valuation upside, and the outlook there has yet to improve. We remain negative on City Developments and CCT.

Good run in stocks, on improved residential take-up. The Singapore property stock index has risen 73% since March, led by higher home sales. The market has swung from anticipating large defaults by home owners to expecting significant rises in home prices. We remain of the view that Singapore home prices have seen the bottom, and that 2009 primary transaction volume will come to 8,000-9,000 units. This demand can, intermittently, drive home prices up, but a sustained price escalation needs to be supported by a rising rent environment that has yet to manifest.

What are the stocks factoring in? Based on our analysis, we believe current share prices are now factoring a 15-25% recovery in Singapore residential prices. Furthermore, the expectation appears to be that Singapore office rents will cease to fall from current levels (down 45% peak-to-trough) and that Grade A commercial cap rates will drop 100bps to 4.5% (mid-cycle levels). These expectations seem optimistic, more so those related to a recovery in the office rent market.

Bullish scenario provides limited upside. Even in the tremendously bullish scenario of Singapore/China residential prices reaching historical peak levels and hotel business valuations recovering to mid-cycle levels, the upside for City Developments’ (CIT SP - S$10.00 - U-PF) stock is less than 20% and for CapitaLand (CAPL SP - S$3.93 - BUY) is 25%. We believe the probability of this bullish scenario panning out is rather distant, and upside is becoming restricted in our view.

Office outlook becoming key. Improvement in the office market’s outlook will now be the key driver of any further valuation upside for Singapore stocks. Our recent checks on the office market suggest that office rents are still moving down and that tenants are not committing to new space. Furthermore, the arrival of new physical office space supply in 2H09 will lead to more discounting on office rents. We would avoid office-centric stocks such as City Developments and CCT (CCT SP - S$1.00 - U-PF).

1Q09 performance in line. CSE posted S$8.1m net profit (-33% y-o-y, flat q-o-q) and S$95m revenue (-10% y-o-y, -17% q-o-q) for 1Q09, which were within our expectation. But operating cash flow of S$0.9m was lower than we expected. Going forward, management believes that CSE can generate c.S$12m operating cash every quarter as more payment milestones are reached in 2Q/3Q 2009. A reduction in work-in-progress and increase in receivables also show that more projects are approaching payment milestones.

FY09F earnings raised by 7% on higher order win assumption. CSE's outstanding order book stood at S$342.8m, up 27% q-o-q, as it benefited from the UK healthcare contract win. It secured S$161m worth of new orders in 1Q09. Non-healthcare wins were worth S$102m while the UK healthcare win was worth S$58m. Management expects to secure another S$100m-150m of orders in 2Q09. Given its healthy order wins, we raised FY09F order win assumption to S$400m (from S$370m). This raised FY09F earnings by 7%.

Term loans to ensure more flexible cash management. Management is confident of converting the bulk of its short-term debt to a 3-year term loan in 2Q09. Our revised target price of S$0.66 is pegged to 7.5x FY09F PER, which is the average valuation of mid-tier oil & gas peers.

Unattractive takeover bid by parent company. E&E’s parent company, Kingboard Chemical (148 HK, HK$19.18, NR), recently made a takeover bid for E&E at US$1.20 per share, valuing the latter at only 0.6x historical P/BV. We consider this price unattractive, and would advise shareholders to reject the offer.

Business has stabilised after a weak 1Q09. Business appears to have stabilised since March, with average utilisation improving beyond 70% in the first two monthsof 2Q09 from 60% in 1Q09. Backlog orders have improved to about four weeks from less than three weeks as at end-Dec 08 as OEMs start to replenish their inventories. The improved market conditions coincide with an uptick in the US PCB book-to-bill ratio.

Potential beneficiary of greater demand for HDI boards. The introduction of consumer ultra-low-voltage notebooks should help to drive the demand for HDI boards, which could be positive for E&E. E&E’s Kaiping HDI plant is expected to ramp up gradually in 2H09.

Forecasts and target price unchanged; maintain Outperform. We have kept our FY09-11 profit estimates unchanged. We retain our target price of US$1.89, at 1x P/BV, which we deem reasonable given its leading market position in China, strong free cash flow business, and consistent dividend record.

An emerging mining player ? Abterra is an emerging supply chain manager of resources and minerals in the Asia Pacific region dealing specifically in coking coke and metallurgical coke and iron ore. The Group trades coking coal, coke and iron ore in Australia, India, Indonesia and China. Abterra has and is looking to acquire upstream assets such as coking coal mines, iron ore mines and coke plants to differentiate itself by having control over the inputs in its core trading business.

Shanxi Taixing Jiaozhong ? Coal reserves increased to 61.4m MT ? Abterra has recently acquired a 49% stake in a coking coal mine company, Shanxi Taixing Jiaozhong in May 09. The initial total reserve of 10.23 million MT was increased to 61.4 million MT in May 2009, as confirmed by Shanxi Province Coal & Coke Geological 144 Exploration Institute. In addition, the management intends to increase the annual production capacity by 6 folds to 900,000 MT.

Acquisition of 22.8% stake in iron ore company ? Abterra is expected to acquire a 22.8% stake in an iron ore mining company, Zuoquan Xinrui, by 4Q09. The acquisition target, ranked 3rd largest in Shanxi, has an annual production capacity of about 1,500,000 MT with an iron ore reserve estimated to by 27.9 miilion MT.

Increasing production capacity to 5 million MT per annum in the next 2~3 years ? We understand that Abterra intends to increase its annual production capacity to 5 miilion MT per annum within the next 2~3.

A recent acquisition by Noble Group Limited who made an AUD 447.7 million takeover offer for Gloucester Coal Ltd, giving it access to Gloucester's 38 million tons of coal reserves. Currently, we do not have a rating for Aberra.

In our view, we are near the bottom of the aviation cycle. However, the scale and pace of recovery remain uncertain and we are concerned that SIA’s recovery may be muted by company-specific challenges. Therefore, we have downgraded our rating to Neutral and reiterate our preference for Cathay Pacific (Buy, Key Call).

SIA’s FY09 results were weaker than we expected (Adj. EPS of $0.74 versus UBSe of $0.96) although this was partly due to the early termination of hedging contracts. That said, the strike price on residual fuel hedging positions is also higher than we expected (25% hedged @ c$US125/bbl) and this has contributed to a downgrade in our estimates (FY10 $S1.01 → $0.60; FY11 $1.18 → $0.94). This assumes FY10 revenue falls 20% and the jet fuel price remains c$US60/bbl.

SIA has an impressive track record of delivering a premium product while sustaining a low cost base. However, SIA’s decision to configure its Boeing 777- 300ER fleet with just 278 seats (Emirates has at least 29% more seats on this aircraft type) may prove to be a strategic mistake in the context of the difficult economic environment. We aren’t convinced that SIA can generate the yield premium required on these aircraft to ensure ongoing industry-leading margins.

The cuts to our earnings forecasts have led us to downgrade our UBS VCAM- based price target from $14.00 to $13.00. This implies a FY10 price/book of 1.1x.

Founded as a two-clinic practice in 1976, Raffles Medical Group (RMG) now operates the largest local network of 65 General Practice clinics. Its flagship, Raffles Hospital, was established in 2001. Its impressive performance was reflected by the fact that it broke even within two years. In fact, the Group has been a model of consistency since its listing in 1997, registering double-digit profit growth almost every year.

We believe a congruence of factors such as an aging population, coupled with the influx of foreign immigrants, has benefited the private healthcare sector. Moreover, this year, the government introduced means testing in public hospitals, with the aims of increasing its efficiency in allocating subsidies and potentially shifting demand towards the private sector.

The employee remuneration model is a key criterion for healthcare providers. We believe RMG’s Group Practice Model, in which all its medical professionals are employees of the Group, is a more scaleable model and gives it a higher operating leverage than peers. We expect its staff cost as a percentage of revenue to continue declining.

Licensed for 380 beds, Raffles Hospital is capable of ramping up its capacity from its current 200 operational beds. This is in contrast to a potentially tight private sector supply, with new beds only by 2013. With a strong financial position, this is an opportune time for RMG to expand overseas, where it has previously been more conservative than its peers.

Even with just organic growth, we expect net profit to increase 14% CAGR over the FY09-FY11 period. Its strong cash position could prompt M&A activities as well as an increased dividend payout. Our Free Cash Flow to Equity (FCFE) target price implies 20x FY09 estimated earnings. Since 2002, RMG has traded at a P/E trough of 13x and a peak of 29x.

Sale of M&J Technologies withdrawn. MAP Technology (MAP) announced that it is no longer proceeding with the sale of its subsidiary M&J Technologies (engaged in the design and manufacture of External HDDs) to Fujilink Technology due to funding issues pertaining to the latter. Additionally, it was also revealed that MAP has US$11m worth of trade debts owed by Fujilink which MAP “will vigorously pursue and recover”.

Newsflow is negative. As mentioned previously, we were of the opinion that MAP’s move to divest of M&J for US$32m was a good one as the latter commands generally low gross margins (which we estimate to be at 5%) as compared to MAP’s other business segments. Now that the US$19.6m exceptional gain is no longer forthcoming and coupled with the fact that MAP could see a reduction in its working capital as US$11m worth of accounts receivables may not be recovered, we therefore are expecting MAP to decrease its dividend payout ratio for the current year as compared to 2008.

We have altered our earnings forecast accordingly to reflect the potential contributions of M&J in FY09 and FY10 while stripping out the US$19.6m exceptional gain. Dividends have also been adjusted downwards – note that other downside risks to MAP’s share price still exist in the form of the unresolved issue over Jurong Tech which has 73.1m shares of MAP.

Valuation & Recommendation. Currently trading at 12.6x FY09F P/E and assuming MAP trades down to the industry average of 10.5x, we alter our target price to S$0.16 (from S$0.22 previously) and maintain our SELL recommendation.

New regulations from Boeing requiring the payment of an annual fee to Boeing for providing OEM technical support to aircraft owners (who use non-Boeing or non-Boeing certified MRO parties to convert their passenger-to-freighter aircraft) could have widespread implications for the cargo PTF conversion industry and its players.

According to a recent Flight International report, the new bill from Boeing will raise the technical support cost (which has historically been free) to US$150,000 and US$250,000 for a wide-bodied aircraft, with operators of aircraft converted by non-Boeing aircraft converters (the first category) paying the full fee for every aircraft in their fleet.

In the second category, operators of aircraft converted by Boeing-licensed supplemental type certificate (STC) holders will fall under another special category and will only need to pay US$200,000 per major aircraft type per year, or US$50,000 for each aircraft for fleets of three or fewer aircraft. In the third category, operators of aircraft converted under Boeing’s own Boeing Commercial Freighter (BCF) programme will continue to receive free support. The fees thus do not apply to the Boeing Converted Freighter (BCF) programme, under which 767-300s and 747-400s are converted by Boeing partners SASCO, a Singapore- based subsidiary of ST Aero, and TAECO in Xiamen, China, respectively, using Boeing STCs.

Besides the B767-300s BCF conversion, where the group has converted two aircraft and has another 17 in the pipeline; ST Aerospace also secured a US$470mn (S$700mn), seven-year programme in 2007 to convert eighty-seven B757-200 passenger aircraft to freighters for Federal Express, under a Boeing licensed STC. The group has a long-standing MD-11 PTF conversion, which is at its tail-end with another eight aircraft, which is also a Boeing BCF conversion.

ST Electronics recently announced the award of a S$100mn contract to provide the Advanced Combat Man System (ACMS) to the Singapore Armed Forces (SAF). ST Electronics expects to commence immediately with the supply contract, which is expected to be completed by 2012F.

The ACMS is a 3G Networked Warrior system equipped with advanced C4I (Command, Control, Communications, Computers and Intelligence) and network capabilities. It is jointly developed by the Defence Science and Technology Agency, the Singapore Armed Forces (SAF) and ST Electronics with the support of ST Kinetics- in the area of weapon sub-systems. The introduction of the ACMS is a part of SAF’s 3rd Generation Transformation to progressively provide tactical units with network capabilities, and we expect more SAF contracts as the armed forces upgrade systems and processes.

STE’s confirmed orderbook as at 1Q09 stood at S$11bn, of which more than S$2.88bn will be delivered over the next three quarters. As at 1Q09, commercial sales made up 64% of group revenue, while the rest was from defence-related businesses. We expect the group to continue to build up its orderbook, given that defence spending is relatively more resilient. On the commercial aircraft MRO front, concerns remain that a fall in demand among commercial airlines may continue to impact heavy maintenance and PTF conversion work in the short term.

We have trimmed our FY09-10F earnings by an average of 1.2-2.3% and are now assuming FY09-10F aerospace EBIT margins of 12.0% from 12.5% previously, with aerospace sales growth unchanged at 2%. This would still mean that ST Aerospace would have to perform substantially better in 2H09F, which is in-line with STE management guidance.

Following the earnings adjustment, our DCF-based price target is S$2.72 (S$2.73 previously, method unchanged, based on 8% WACC and 1% terminal growth). With the recent sharp price decline of over 8% over the past five months, STE is a relative underperformer. FY10F/11F P/Es now stand at 14.4x and 13.3x, respectively, with the stock now trading at the lower end of trough levels, given its historical P/E trading range of 12-22x. We do expect the group will maintain a healthy dividend payout ratio, given that it still generates robust cash. Our forecasts show ROE staying at a commendable 27% in FY10F and FY11F, with dividend yield at a relatively attractive level of 6.5%. We note possible continued downside risk to our price target from a worse-than-expected downturn in the global aircraft maintenance, repair and overhaul business, which accounts for 36% of group EBIT (1Q09).

As at end-March 2009, STE’s cash holdings and funds under management stood at S$1.38bn, with S$1.34bn being advance payments from customers. Operating cashflow for 1Q09 totalled S$351mn, with capex at S$54mn and investments at S$4.5mn for 1Q09.

Investment Conclusion: We are raising our price targets significantly. Our revised cost of equity is a key driver. But we also see an improved outlook in O&M based on recent industry discussions, and are raising our medium-term order assumptions. On a 12-month view, we still think that compelling upside can only be justified by assuming record order intakes in perpetuity as of 2011, which we see as challenging. In this context, our preferred names are SCI, followed by Keppel.

PBR tender #1 is a positive catalyst for Singapore: We think the PBR deepwater rig tender, expected in 3Q09 could comprise around seven vessels, with a high number of semisubs. This would favor the Singapore yards who lead this category and have a strong Brazilian presence – a key consideration. The consensus view is that PBR’s tenders will be split 50/50 between semisubs and drillships (which the Korean yards specialize in).

Keppel is preferred O&M play: It is best positioned for the coming PBR tenders, we think. We also see the stock as cheap vs. SMM with a better risk/reward, driven by Brazil work. The sale of SPC has addressed balance sheet concerns. We raise Keppel to Equal-weight.

Buy SCI for cheap exposure to SMM: We see SMM stock as expensive, but also as well positioned for upcoming PBR tenders. We think SCI stock offers a cheap implied entry price of S$1.95 into SMM (versus a current price of S$2.85). We raise SCI to Overweight.

Even COSCO could surprise: We are Underweight on COSCO. But the recent financing tie up between PBR and China Construction Bank could see some already tendered vessels without confirmed yard slots end up in China, where COSCO is the premiere O&M yard.

SingTel's 100%-owned Australian unit Optus has won a contract to provide managed network services worth A$186.5m over the next four years from the Australian Taxation Office. The contract is said to be Optus' largest contract win to date in the federal government sector, which was awarded via a competitive tender. However, the financial impact of this contract is not expected to be material to the SingTel group, which posted operating revenue of S$14.9b for FY09 ended 31 Mar. Nevertheless, we remain upbeat about SingTel's prospects, both in Singapore (NBN), Australia (possible sale of network assets), as well as on its regional associates. We will be keeping a close watch on the proposed MTN-Bharti merger and will adjust our forecasts accordingly when we get more information. For now, we maintain our BUY rating and our S$3.18 fair value.

FY09 earnings in red as global downturn hits. Willas-Array Electronics (WAE) recently posted FY09 loss amid a difficult business environment. On top of a significant 24.3% YoY (-33.6% HoH) decline in 2HFY09 sales to HK$937.8m, WAE's performance was further exacerbated by write-offs on its intangible assets (HK$8.8m) and goodwill (HK$6.7m) relating to its 60%-owned ValenceTech Limited acquisition in Sep 2006. This had subsequently dragged the group into 2HFY09 loss of HK$34.1m. For FY09, we note that WAE was also impacted by higher provisions of bad debt, forex losses, and margin erosion due to a deliberate move by management to clear excess inventory at lower prices. As such, while its FY09 revenue of HK$2.4b (-7.8%) was ahead of our sales projection of HK$2.1b, group's PATMI of HK$19.7m was closer to our estimate of HK$18.0m loss. Now in the red, WAE has skipped its dividend payout for FY09. However, this decision is highly anticipated, as cash preservation and liquidity is critical in the current operating landscape.

Continue to sharpen its operating efficiency. With the financial crisis and uncertainties revolving around the H1N1 influenza, WAE cautions that difficult times remain although it has seen some signs of a mild recovery - not sure if it was just due to inventory replenishment or a real recovery in demand. On brighter note, management is confident of weathering the downturn, given its strong financial discipline and seasoned management team. Having successfully implemented several measures, including trimming its inventory level and operating costs, minimizing its bad debts exposure, and maintaining a healthy cash position (HK$303.7m cash balance, +54.8% from a year ago), WAE said it will continue to sharpen its operating efficiency, and look out for opportunities in the PRC to extend its market presence.

Retain HOLD. While we are generally more optimistic in view of the recent improvements in WAE's customer orders and its debt ratio (net gearing fell to 0.31x from 0.63x in FY08), we note that there is still great uncertainty about the sustainability of demand, and that the group had breached one of the debt covenants after incurring loss for FY09 (to repay maximum HK$80m debt in worst case). To account for the still uncertain outlook, we pare our FY10F earnings by 32% but now use 0.4x FY10F BV (0.25x previously), in line with sector re-rating, to yield a S$0.09 fair value. We maintain our HOLD rating on WAE.

After a strong rally from March lows (+90%), we are taking a step back to review our banking stock calls. At 1.4x 2009E P/BV, banks are priced at historical averages. We think share prices have priced in an earnings recovery scenario and potential reversal of paper losses from investment books. We downgrade DBS and UOB to HOLD; we maintain our HOLD rating on OCBC. Our fair value multiples are left unchanged and are based on mid-cycle P/BV valuation. However our target prices have been raised slightly after rolling over our base year to 2010.

Unlike the powerful rally seen in the aftermath of the Asian Financial Crisis (which rose to 2.7x from 0.4x P/BV in 15 months) we think further re-rating will be gradual. This time, the world economy is fraught with long-standing imbalances and a weaker financial system. As a result, it could take the same recovery route as the one that followed the SARS outbreak: 3.5 years to deliver a convincing breakout (from mid-cycle levels) after three years of solid annual economic growth averaging 8%!

Assuming bank stocks were to re-rate to one standard deviation (SD) above their historical averages, the price upside is a modest 10% for UOB and OCBC, but a larger 16% for DBS. Valuation has only breached this level twice since 1995. Our analysis suggests that the market has already factored in assumptions that reflect reasonably strong GDP growth of 5% pa in 2010-11 compared with our forecast of 2.3% in 2010 and 3.6% in 2011.

Barring another round of global shocks, a retest of previous lows is remote, in our view. Being one of the most open economies in the world, Singapore’s fortunes will remain hostage to external factors. As such, the global economic outlook will continue to dictate the performance of Singapore banks. Trading at mid-cycle valuation, banks do not look attractive and the initial re-rating may have run its course, in our view. We would await a pullback to regain entry. UOB remains our top sector pick for its more exciting ROE profile.

SembCorp Industries (SCI) announced an 8.5% YoY rise (up 32.6% QoQ) in 1Q FY09 net profit on a 15.1% YoY drop in revenue (down 20.3% QoQ) after the market closed on 12 May 2009.
The quarterly results were slightly below our expectations, but in line with the Bloomberg-consensus estimates. The key surprise was the Utilities division, which recorded weaker-than-expected revenue due to lower high-sulphur fueloil (HSFO) prices, a weaker UK pound, less offsite power sales, and the expiration of favourable pricing contracts in the UK.

We have revised down our FY09, FY10 and FY11 net-earnings forecasts by 7.7%, 8.1%, and 9.1%, respectively, due to the weaker-than-expected utility profit. Our FY09-11 earnings forecasts are still slightly higher than respective Bloomberg-consensus forecasts.

We maintain our six-month target price of S$2.08 based on a sum-of-parts valuation.

SCI’s share price has risen by 20.7% over the past nine trading days (compared with a 20.4% rise for the FSSTI and a 16.3% increase in the price of Brent crude oil). We fully expect the company’s share price to trade in line with the crude-oil price and the FSSTI. However, we recommend that investors look elsewhere to participate in the rally, as we see this company as being at risk of a significant year-on-year earnings decline for FY11 due to a lack of new rig-building orders through SembMarine (SMM SP, S$2.78, 4).

Secures largest-ever project order win. Midas Holdings announced that its Aluminium Alloy Division, Jilin Midas Aluminium Industries, has secured two contracts that are worth Rmb603m collectively. These contracts will be for the supply of aluminium alloy extrusion profiles for a total of 100 train sets for the inter-city high-speed train CRH3-380 project in China.

We reiterate that Midas’ ability to clinch these contacts further proves its market leadership position in the PRC rail transportation sector. Additionally, the PRC government’s Rmb4 trillion stimulus package – which has a strong focus on rail infrastructural development – is generating many opportunities in the railway infrastructure market.

Valuations. These two contracts are expected to be earnings-accretive for 2H09 to 2011. We maintain our BUY recommendation with target price of S$0.855 under review.

1Q09 results in line with expectations ? Ezion reported revenue growth of 211.1% to S$14.6m in 1Q09, mainly due to increase in revenue from offshore logistics support services. In line with increased business activities, the Group's operating expenses increased 177.9% to S$1.7m, resulting in 181.5% net profit growth to S$3.3m in 1Q09.

Gorgon project A$350m contract wins ? Just the beginning ? The contract win of A$350m excites us in three ways - (1) Ezion, being the lead manager of the Consortium, reinforces Ezion's capabilities in the offshore support industry. (2) The contract win of A$350m is just a fraction of the estimated capital expenditure for Gorgon gas field, projected to be around A$50 billion. (3) Given that the Consortium is involved in the early stages of the Gorgon Project, we believe the Consortium is well positioned to capture a substantial portion of the total capital expenditure going forward. The in-depth knowledge expected to be acquired by the Consortium from the early stage involvement is likely to create a high barrier of entry for the Consortium's competitors for subsequent contract biddings.

Earnings forecast revised ? We lower our earnings estimates for FY09F by 15% to S$18.7m, after including contribution from share of profits from Gorgon project as well as pushing back delivery of the first two units of multi-purpose self-propelled jack-up rigs to 4Q09 and 1Q10 (previously assumed 3Q09 delivery).

Maintain BUY with target price revised to S$0.94 ? We change our valuation metric from discounted cash flow to price-to-earning based as we expect the group's activities and growth prospects to be earnings driven. We raise our 12-month target price to S$0.94, based on 10x FY10F EPS, justified by its strong earnings outlook, further underpinned by robust industry dynamics. With an upside potential of 62%, we maintain our BUY recommendation on Ezion.

Upward revision in 2Q09 guidance. Chartered Semiconductor had on Friday revised its revenue guidance upwards on the back of an incremental improvement in business, mainly from its mature technologies. 2Q09 revenue is now expected to come in at around US$338-348m (previous guidance: US$321-333m), while its net loss is likely to narrow to US$45-53m (previous guidance: US$54-64m). Utilization rate expectation, likewise, is raised to 59-63% from 55-61% as guided previously. This set of revised projections mean that 2Q09 revenue may grow at a faster 38.6-42.7% QoQ (31.6-36.5% QoQ previously) and that the net loss position is likely to improve significantly from US$98.8m seen in 1Q09.

Rebound in global semiconductor sales likely in 2010. In just the last three weeks, we also note that at least two industry watchers had raisedtheir 2009 global semiconductor sales forecasts amid better-than-expected1Q09 IC sales and views that the market had probably bottomed. Gartner,for example, now expects the 2009 industry revenue to fall to 22.4%, slightly better than its 24.1% decline projected in February. This was joined by estimates from World Semiconductor Trade Statistics (WSTS) and Semiconductor Industry Association (SIA), which were projected to hit a similar 21.3-21.6% decline. The most optimistic forecasts, in the range of 13-17% decline, came from VLSI Research and IC Insights. We think that these developments, though widely anticipated, are positive signs for apossible earlier-than-expected breakeven in Chartered's profitability and may herald a sooner-than-expected recovery in the semiconductor industry.Indeed, both WSTS and SIA, project that global sales are likely to rebound in 2010, with growth of approximately 6.5-7.3%.

Maintain SELL. We are now raising our FY09 revenue forecast by 9.6% to reflect the improvement in Chartered's 2Q09 business and a possible better outlook. In line with the strong re-rating in the semiconductor industry, we are also applying a 0.6x FY09F NTA to our fair value from 0.4x previously. While our fair value is raised from S$0.80 to S$1.40 (adjusted for share consolidation), we believe the sharp rally in its share price could have caused it to run ahead of its fundamentals. Noting that an increasingly high unemployment rate worldwide may hamper consumer spending and in turn the global semiconductor demand, we think that it is an opportune time for investors to lock in profit now than to bear any possible downside risks. As such, we maintain our SELL rating on Chartered.

CitySpring’s FY09 revenue of S$398.7m was within expectations. The trust will distribute 1.75 cts per unit for 4Q09, representing a yoy growth of 9.4% and no change from 3Q09. Total DPU of 7 cts declared for FY09 was in line with the manager’s guidance. The target DPU for FY10F remains to be 7 cts, implying an attractive forward trading yield of 12.6%.

4Q09 revenue was up 1.5% yoy to S$97.3m and cash earnings increased 7.3% yoy to $21.8m. The better than expected full year cash earnings of $60.9m were mainly attributable to the higher average gross margin at CityGas due to the tariff changes during the year. Lower revenue and cash earnings are expected in 1QFY10 after the tariff reduction in Feb-09.

The current slowdown in the Singapore economy is expected to impact CityGas negatively in FY10F, but the effect should be muted due to its large and diversified customer base and even exposure to the residential and commercial segments. SingSpring and Basslink, with long-term availability-based contracts with state-owned entities, will continue to deliver stable revenues.

The trust wrote off S$10.8m in intangibles in 4Q09 due to the termination of the telecoms agreement with the Tasmanian government in Apr-09. This paved the way for the commercialization of Basslink’s fibre optic cables, which was over-due. A number of customers have signed up and the network is expected to be operational by the middle of this year.

CitySpring is committed to deliver a DPU of 7 cts for FY10F. Cash accumulated so far is sufficient to cover a quarterly DPU of 1.75 cts in the next 12 months. Our target price has been raised from $0.84 to reflect the normalization of the equity risk premium. DPU for 4Q09 is payable on 26th June. Maintain Buy.

FJB recorded a net loss of $1.8m in 3Q09 and was hardly profitable for 9M09. Earnings missed our expectations yet again largely due to the unrealised non-cash foreign exchange loss of $1.7m, and weak operating profits from all segments. Excluding the exceptional items, the group recorded a slight net profit of $0.1m, -97% yoy.

Despite efforts in cost cutting evident in the reduction of staff cost by 9% and a decline in advertising and promotional costs by 72%, it was insufficient to offset weaker revenue and margins. Revenue fell by 19% qoq across all business segments. Despite increased outlets, weaker revenue was recorded in Southeast Asia (-21%), China (-40%) and Indonesia (-9%). Gross margins declined 2pts amid stiff competition.

The group expects the outlook for the region to remain challenging in the global recession. Albeit signs of stability of consumer sentiment, we expect consumer spending to remain weak amid the recession and weak job market. This will thereby affect FJB’s profitability in particularly its new outlets which will face difficulties achieving operational breakeven.

Cash generated from operations has surged to $10.6m from $1.7m in 3Q08. Strengthening cash flows from operations reflect stability in the group’s underlying business. Net gearing remains stable at 0.22x. FJB looks on track to emerge this crisis as a stronger retail player given its stronger balance sheet and enlarged retail network.

We have slashed our FY09 earnings estimates to $1m to reflect the weak 3Q09 and its huge translation losses. However, we have increased our target price to $0.20 pegged to a higher FY09 PBV of 0.85x (previously 0.7x). FJB earnings are likely to remain under pressure until we see a sustained economic recovery. Maintain HOLD.

THE managers of MacarthurCook Industrial Reit (MI-Reit) - MacarthurCook Investment Managers (Asia) Ltd - announced yesterday the fulfilment of conditions needed for the extension of MI-Reit's $202.3 million debt facility. The extension had been subject to documentation and satisfaction of certain conditions precedent, which the investment managers stated were 'within the control of MI-Reit'. Under the terms of the second extension, an event of default under the extension includes a failure by MI-Reit to settle the acquisition of a property in the International Business Park.

The facility will now come due on Dec 31 and is MI-Reit's second extension in a bid to negotiate longer-term refinancing of its debt with lenders National Australia Bank and Commonwealth Bank of Australia. At the end of March, MI-Reit was granted its first extension - a 60-day one for its $220.8 million debt facility that would have matured in April.

Slipped into the red. Koda's 3Q09 earnings came in below expectations. The group slipped into the red with a net loss of US$1.0m during the quarter vs. a net profit of US$0.5m a year ago and US$0.3m in 2Q09. Losses in 3Q09 alone wiped out its 1H09 earnings and dragged the group's 9M09 bottom line into a net US$0.2m loss. 3Q09 revenue fell 33.3% YoY to US$6.5m on weak consumer demand. Sales in UK and Europe plunged as consumers reined in on spending and property markets remained subdued. On a brighter note, sales from America and Canada have somewhat stabilized and inventory re-stocking has helped to fuel demand.

Contraction in profit margins. Profit margins deteriorated at all levels in 3Q09. Gross profit margin slipped 3.6ppt YoY to 26.4% as consumers shunned premium products for more economical alternatives. EBIT swung into a US$1.0m loss from a US$0.7 profit a year ago as operating expenses continued growing despite lower turnover. In particular, administrative expenses grew 14.0% to US$1.5m as the group incurred additional costs in relation to the setting up of its Vietnam plant. According to management, most of these are fixed costs and will persist in the coming quarters.

Balance sheet and cash flow remain healthy. Weak earnings aside, Koda has maintained a healthy balance sheet with net cash position. Operating cash inflow improved to US$0.8m from US$0.2m a year ago on lower working capital investments. Free cash flow turned into a positive US$0.2m inflow from a US$1.2m outflow as the group scaled back on its capital expenditure budget. The group's conservative credit policy has helped it to avoid major write-downs, and this should help it to tide through the credit crisis relatively unscathed.

Maintain HOLD. We have lowered our sales and earnings estimates to take into account Koda's weaker-than-expected 3Q09. Nevertheless, we expect 4Q09 results to improve on inventory replenishment. While we project a modest US$0.3m profit for the year, we note that the group's profitability hinges on its customers' timely acceptance of shipments. Any order delays will hurt the group's revenue and could threaten to throw earnings into the red once again. We rollover our valuation to FY10F NTA and keep our peg at 0.5x, deriving an unchanged fair value estimate of S$0.145. We maintain our HOLD rating on the stock.