We believe the fraud issue at Oriental Century is isolated and the drop in REC’s market cap has more than reflected this. P&L impact is minimal at 2%. Worst-case potential write-off is $34.6m (1.5cents/share). Fundamentals of REC remains firm and valuation is attractive, being close to the 5.5x PER, a level not seen since its listing.

Cash misappropriation in Oriental Century. The CEO of Oriental Century (ORIC), 29.9% owned by Raffles Ed, has allegedly misappropriated cash. He is said to have also inflated sales and cash balances over the years and diverted unspecified sums to an interested party.

P&L impact on Raffles Ed minimal (2%). Raffles Ed (REC) has no management control and board seat. The profit impact is minimal at c.2% on our forecasts. The worst-case scenario is the impairment of this investment ($34.6m or 1.5cents/share) if ORIC ceases to be a going concern.

REC’s operations unaffected. Management maintained that its own operations are still robust. Except for ORIC, they have management control in their recently acquired entities (Oriental University City, Shanghai Zhongfa, Tianjin Boustead, Shaanxi Electronic Information Institute and Wanbo College).

Drop in market cap > potential write-off. REC’s market cap has eroded by over $200m arising from this, far exceeding the potential $34.6m write-off. We think it has more than compensated for the investment.

Maintain recommendation. There is no doubt that sentiment is affected by the recent spate of governance issues on S-shares. But, we believe the current situation is confined to ORIC and the market has priced that in. Management has, so far, delivered growth and valuation is at a significant discount to peers trading at an average pe of 22x. TP: S$0.78.

SPH, SGX and FTSE have announced results of the latest Straits Times Index review. ComfortDelgro and SMRT have been added and Keppel Land and Yanlord Land (moved to the mid-cap index) are removed.

● Overall, ComfortDelgro is the largest winner with a weighting increase of 2.3 p.p. SMRT is next with +1 p.p. Biggest losers are SingTel (-0.43 p.p.) and Yanlord Land (-0.35 p.p.). This followed by Keppel Land (-0.32 p.p.) and DBS (-0.26 p.p.).

● Separately, a reserve list with five names has been introduced. In the event of corporate actions or mergers, companies in the list will replace any STI names that might be removed. These are AREIT, STXP, Yangzijiang, SingPost and SingLand. YZJ was removed after the previous review.

● All changes from this review will take effect from 23 March (Monday). The next review is scheduled for 10 September 2009.

● We estimate that index representation of the revised STI would increase to 64% from the 63% currently. This is still much higher than MSCI.s 53% and FTSE.s 60%.

Post the change in shareholding of Starhill Global REIT (SGREIT) and its management early this year, we revise our estimates in light of the weaker economic outlook in 2009. Our DCF valuation and target price is now S$0.58 (from S$1.56 pre the strategic review) and we maintain our Outperform recommendation.

Given the significant increase in new Orchard Road supply of 1.2m sq ft within this year (660k sq ft from ION Orchard, 250k sq ft from Orchard Central, and 294k sq ft from 313 sq ft at Orchard), we expect prime retail rents to fall ~10−13% this year. We have assumed that SGREIT’s retail occupancy falls to 88−90% from 96−99% by 2010.

As the bulk of the revenue from Ngee Ann City is secured under the Toshin master lease, the focus will be on maintaining performance of Wisma Atria basement retailers. The potential uplift in basement traffic once ION Orchard opens by June 2009 could boost sales and may provide some support for renewal rents.

Gearing is one of the lowest in the sector at 31% and the company has healthy interest cover of 4.3x. The majority of borrowings of S$671m is to be refinanced only in September 2010. As its S$380m CMBS was collateralised against its Orchard Road assets, which were valued at S$1.8bn as of December 2008, we see little refinancing risk given the low 20% LTV. Management is looking to refinance this at the end of 2009/early 2010. The 2009 budget provided for 40% commercial property tax rebates, which SGREIT will pass through to tenants, though possibly not across the board. The group is considering rebating loyal tenants but details are still being deliberated at the board level.

FY09−11 DPU estimates were lowered by 22−30% on lower retail rents and occupancy, as well as higher interest rates upon refinancing.

12-month price target: S$0.58 based on a DCF methodology. Catalyst: Potential uplift in basement traffic once ION Orchard opens in June 2009. Better than expected renewal rents.

Maintain Outperform. The stock has no refinancing requirements this year, is trading at a 70% discount to NAV/unit of S$1.44 and offers an attractive 14.6% FY09 yield. In the retail space, our preference is for CapitaMall Trust (CT SP, S$1.07, OP, TP: S$1.45) as we believe suburban retail rents will be more resilient than prime in a downturn.