Credit woes hit rig builders. Keppel Corp has received indications fromSeadrill, Scorpion Offshore, and Lewek Shipping, that their respectivecontracts signed in mid-2008 are now put under review for mutuallyacceptable arrangements (please see page 2 for contract details). These arestrong hints that the global credit crunch has extended its grasp tooffshore rig building sector.

Changes to payment structure or delivery dates are more likely. We see there-scheduling of payment structure or vessel delivery dates as more likelyscenarios, as they address the cash flow issues faced by clients. Thehindrances to order cancellations are the loss of deposits and milestonepayments, and the longer-term opportunity cost of missing out on imbalancesin oil demand/supply in the next 2-4 years. Rig builders are unlikely tore-negotiate the contract prices, as most of the critical equipment costshave been locked in.

Higher delivery delay possibility for contracts at early stage ofbuildiing, due to lower cash collection. We see the orders for deliveryfrom 2H 2010 for jackup rigs and 1H 2011 for semi-submersible rigs athigher probability of being delayed, with an estimated <30% of cash flowper contract collected by end 2008. These represent 43% of SembCorpMarine's (SMM) combined value for secured contracts, and 34% for KeppelCorp (KEP).

Keppel Corp has a more diversified order book and less levered clients. KEPhas a more diversified customer base, with 44% of total secured orders ofS$17.5b for delivery after end 2008 exposed to its top 3 customers likeEnsco, Skeie Group, and Petrobras. This is less than SMM's 55% exposure toLarsen, Seadrill, and Atwood for its total secured orders of S$11.9b. Wealso estimate that KEP has 23-30% of secured orders exposed to the morelevered clients, vs. at least 45% for SMM.

News flow to worsen before it gets better. The rig builders are expected tobe increasingly vulnerable to order delivery delay concerns. We now assume12% of KEP's order book to be exposed to delivery delay, and a higher 15%for SMM, as captured in our lowered earnings forecasts. SMM is downgradedto HOLD with fair value at S$1.90, using 8x FY09 PE for offshoreconstruction business. KEP is downgraded to FULLY VALUED, with fair valueof S$3.58 due to similar reasons.

Proposed acquisitions announced. Indofood Agri (IFAR) recently announced a few proposedacquisitions by its 90%-owned subsidiary, PT Salim Ivomas Pratama (SIMP) and its listedsubsidiary, PT Perusahaan Perkebunan London Sumatra Indonesia Tbk (Lonsum).

No significant impact on earnings in the near term. They serve to enhance IFAR’s integratedagribusiness model and improve its operating efficiency through (i) the integration of its seedbreeding operations and development of plantation land, (ii) securing additional land bank for futureexpansion and (iii) operation of its own bulking station at a strategic location. The proposedacquisitions are targeted to be completed between Dec 08 and Apr 09

Total approximate consideration for the purchases is IDR131.7b (about S$15.8m, which includesSIMP’s obligation to settle outstanding loans estimated to be IDR43.5b in one of the acquisitions)and US$16.4m (about S$25.1m). Between SIMP & Lonsum, they would be obtaining 161,300 haof land (of which 11,800 ha is planted and 6,275 ha (53%) is mature), an oil palm seed breedingfacility that produces 6m seeds per year and a bulking facility located at the port of Dumai in theprovince of Riau, with a total storage capacity of approximately 7,500 tonnes of CPO. IFAR’smanagement indicated that the intention is to fund the purchases via internal funding. We do notsee this as an issue for Lonsum, which has IDR851b of cash as at 30 Sep 08 for its IDR48bproposed acquisition.

Maintain buy, fair value of S$1.12. Current CPO futures’ prices (Dec delivery) is RM1,650/tonne,against our CPO price assumption of RM1,500/tonne. We are maintaining our fair value of S$1.12and buy call for IFAR, with the stock trading at 2.7x our forward earnings.

Two hits & a miss. In the quarter ending 30 Sep 08, all three telcos saw earnings come off. Thetwo smaller telcos – StarHub and M1 - came in within our expectations while SingTel disappointeddespite us lowering our earnings a week before the results. Overall, M1 was the hardest hit as thebulk of its earnings are derived from the highly competitive mobile segment.

Margins on the path to recovery? Full MNP was implemented on 13 Jun 08. Competition wasintense for the year preceding that, resulting in a heavy hit to the EBITDA margins. Our discussionwith all three telcos seems to suggest that they will be tapering off their aggressive marketingcampaigns, which is good news for the industry.

Financials still healthy. The financials of the three are sound, despite StarHub having a somewhateye-popping gearing of 7.6x. If not for its capital reduction exercise, the net gearing would havebeen only 0.7x. The cash it generates is also more than sufficient to repay its debts, as gleanedfrom its Net Debt/EBITDA of 1.2x and interest coverage of 23x. It is the same story for M1, whichhas a gearing of 128% and a manageable Net Debt/EBITA of 0.8x. Interest coverage stands at40.6x.

Dividends still attractive. The telco industry’s yield of 8.6% compares favourably against themarket’s average of 5.9%. Given healthy cash flows, the companies should have the capacity tocontinue with rich payouts, particularly M1 and StarHub. The telco industry in Singapore is also fairlyresilient and is not as sentiment driven, so the impact from the current downturn should not be aspronounced. SingTel, the only listed operator with foreign exposure, has been hit by challengesfrom its Australian subsidiary Optus as well as its regional associates. Maintain OVERWEIGHT onthe sector, with BUYs on domestic telcos M1 and StarHub.