Friday, December 10, 2010

OCBC: Starhill Global REIT Establishing its track record with acquisitions

Starhill Global REIT
Maintain BUY
Previous Rating: BUY
Current Price: S$0.62
Fair Value: S$0.66

Establishing its track record with acquisitions
Acquisitions paying off. Starhill Global REIT made a number of acquisitions this year - the David Jones Building in Perth, Australia on 20 Jan and Starhill Gallery & Lot 10 in Kuala Lumpur Malaysia on 28 Jun. These acquisitions helped boost its recent 3Q10 results, with reported revenue of S$45.2m, up38.7% YoY and 21.6% QoQ. Net property income of S$35.8m was also up 37.0% YoY and 23.9% QoQ. This also boosted its distributable income to unitholders to S$19.4m, up 5.8% YoY but down 7.6% QoQ.

Good portfolio performance. Starhill's portfolio now includes 13 prime properties across five countries valued at approximately S$2.6 billion. The geographic breakdown of the portfolio by asset value is as follows: Singapore 66.3%, Malaysia 17.2%, Japan 7.4%, Australia 6.0%, and China 3.1%. Starhill's Singapore portfolio, comprising of its interests in Wisma Atria and Ngee Ann City, contributed 60.8% of total revenue, or S$27.5 million in 3Q10. The Singapore portfolio's committed occupancy also improved from 95.8% in 30 Jun to 96.1% in 30 Sep. With an aggregate leverage of 31%, we believe that the manager is in a favorable position to embark on further growth initiatives for the trust.

Further growth plans for 2011. We recently caught up with the manager to find out about the trust's plan for 2011. We understand that its initial plans for asset enhancement works at Wisma Atria, which would add another 40k sq ft of retail space in 2011, is likely to be put on hold for the time being. Instead, Starhill Global is actively scouting for investment opportunities, both within and beyond the shores of Singapore. Australia, Japan, Malaysia are also other countries that may be of interest to Starhill Global. Starhill remains committed to acquiring assets in high-income prime districts with good location and prominent frontage.

Valuations still compelling. Starhill offers an estimated FY10F and FY11F yields of 6.3% and 6.6%, and trades at a significant 31.4% discount to book value. Stepping into 2011, we think there are still investment opportunities among the smaller but still credible REITs. These are S-REITs that have high-quality assets, strong sponsors and sound financials but are trading at significant discount to their NAVs. Starhill Global REIT certainly ticks all these boxes, in our opinion. With a strong sponsor (YTL) and potential further acquisitions, we maintain our BUY rating with an unchanged fair value estimate of S$0.66. This translates to an estimated total return of 12.7%.

OCBC: Frasers Commercial Trust Trading at an unwarranted discount to book

Frasers Commercial Trust
Maintain BUY
Previous Rating: BUY
Current Price: S$0.165
Fair Value: S$0.18

Trading at an unwarranted discount to book
High quality assets, strong sponsor. Frasers Commercial Trust (FCOT) owns 10 properties across three countries with retail and office components. FCOT derives some 52% of its gross revenue from Singapore, which comprises China Square Central, 55 Market Street and Alexandra Technopark. These assets are either high-quality commercial property located near the heart of the financial district or high-tech business space development at the fringe area of the central-region of Singapore. FCOT also owned four commercial properties in Tokyo & Osaka. Other asset includes Central Park (Perth) which is a premium grade office tower and the tallest building in Perth. Located on St Georges Terrace, Central Park is a pre-eminent business address, in the heart of the CBD and shopping precinct. Its sponsor is Frasers Centrepoint Limited (FCL), subsidiary of F&N, giving FCOT rights of first refusal to a possibly rich pipeline of sponsor-owned assets for future acquisition. In the near to middle term, StarHub Centre, Alexandra Point and Valley Point are possibly slated asset injection targets for FCOT, if they prove yield-accretive to unitholders.

Stable income. FCOT also enjoys a number of blue-chip long-tenure leases (such as Commonwealth of Australia, BHP Billiton Petroleum etc.) and master leases that provide longterm income stability to the REIT along with potential for rental upside. Approximately 65% of FCOT's revenue is derived from such leases. 25% of its gross rental income also has built-in annual rent step-ups. We also see scope to grow income through asset enhancement initiatives and acquisitions.

Trading at an unwarranted discount to book. But FCOT is trading at a 57% discount-to-book compared to the broader Office REITs which are trading at 30% discount-to-book. We believe that one reason could be a legacy issue; this being FCOT was formerly known as Allco Commercial REIT before it was bought over by FCL in 2008. However, given the current high quality assets, strong sponsor and stable income, we feel that the high discount is unwarranted. Instead, we apply a more reasonable 40% discount to our RNAV to derive a fair value of S$0.18. This translates to an estimated total return of 14.7% (Price Upside: 8.6%; Distribution Yield: 6.1%). Maintain BUY rating.

Unit consolidation underway. Meanwhile, FCOT is looking to consolidate five existing units into one, which it opined will improve market perception and attractiveness of its units. It has already gotten in-principle-approval from SGX-ST for the proposal and is now awaiting unitholders' approval.

OCBC: Lippo-Mapletree Indonesia Retail Still on the recovery cycle

Lippo-Mapletree Indonesia Retail
Maintain BUY
Previous Rating: BUY
Current Price: S$0.53
Fair Value: S$0.59

Still on the recovery cycle

Recovery cycle likely to continue. LMIR Trust (LMIR) was able to ride on the recovery cycle stepping into FY10. It has already reported a total 9M FY10 gross revenue of IDR 641.2b. This was 12.8% ahead of its full year gross revenues in FY09 (IDR 568.7b). This should not be surprising given Indonesia's recent announcement of its confidence in achieving a full-year 2010 GDP growth of 6%. The government has also projected for Indonesia's economic growth to improve further to 6.3% in 2011, suggesting that recovery cycle is likely to continue. On the occupancy front, LMIR's retail malls have also edged up 70 basis points from 97.1% at 30 Jun to 98.1% at 30 Sep; this also compares well against Jakarta's average occupancy rate of 84.5%.

Backed by quality assets. And we remain confident that LMIR performance will improve when the economy picks up, backed by its quality assets. LMIR's portfolio comprises of eight highquality retail malls and seven retail spaces located within other malls. Strategically located within large urban middle-class population catchment areas such as in Greater Jakarta, Bandung and Medan, LMIR Trust's properties are everyday malls favoured by middle income to upper-middle incomedomestic consumers in Indonesia. Top tenants include wellknown international and domestic retailers and brand names, such as Matahari Department Store, Hypermart, Giant Hypermarket and Studio 21 Cinema. LMIR also has a welldiversified portfolio, with no particular trade sector accounting for more than 17% of total net leasable area (NLA), and no single property accounting for more than 18% of total net property income (NPI).

Potential acquisition pipeline. We also noted that LMIR's gearing ratio of 10.8% is relatively low, compared to other retail REITs. This should place it in a favorable position to use debt financing to embark on inorganic growth in year 2011. Its sponsor, Lippo Karawaci, currently owns and manages 25 malls throughout Indonesia with some 940k sq m of NLA. LMIR has been given rights of first refusals (ROFR) for these malls, and this should provide LMIR with a ready pipeline of potential assets for future acquisitions. On the organic-growth front, we understand LMIR is also exploring asset enhancement opportunities at some of its existing malls. The investment

case for LMIR remains compelling, with Indonesia's growth story and LMIR's quality assets. Maintain BUY with a revised fair value of S$0.59. Key risks to our rating include reversal of recovery trends for the Indonesian economy, forex risk and deterioration in credit and capital markets.

OCBC: Suntec REIT Downgrade to HOLD on valuation

Suntec REIT
Downgrade to HOLD
Previous Rating: BUY
Current Price: S$1.49
Fair Value: S$1.50
Downgrade to HOLD on valuation

Private placement to fund MBFC buy. Suntec REIT recently closed the book of orders for its private placement to partly fund the acquisition of Marina Bay Financial Centre (MBFC) Phase 1. (Recall that Suntec REIT has proposed to acquire a one-third stake in MBFC Phase 1 from Cheung Kong Holdings Ltd and Hutchinson Whampoa Ltd. on an agreed property value of S$1,495.8m, which includes rental support of S$113.9m over a 60-month period from the completion date of the acquisition.) The private placement of 313m new units was 3.1 times oversubscribed, with the issue price per new unit fixed at S$1.37 following an accelerated book-building process. The trading of the new units on SGX-ST has commenced on 9 Dec 2010. The gross proceeds from the private placement amount to approximately S$428.8 million - 97.5% of it will be used to partially finance the acquisition, while 2.5% will be utilized to pay for advisory, underwriting, selling and management fee as well as other estimated fees and expenses

Tight initial yields. Suntec estimated that the FY11 net property income (NPI) for the MBFC acquisition to be around S$60.6m. This gives a fairly tight initial yield of 4% on the acquisition. The acquisition will, however, further enhances the income diversification of Suntec and reduce its reliance of income stream on any single property (~75.9% of total NPI of existing portfolio is currently derived from Suntec City). The MBFC acquisition will also act as the trend-setter for the emerging "Premium Grade A" office space that is debuting around Marina Bay area, on the back government's commitment to pump more than S$1b into infrastructure works to support Marina Bay's growth over the next 10-15 years.

Downgrade to HOLD. While the effective interest rate of 3.12% per annum for the S$1,105m debt facility came in lower than expected, we see the need to increase our cost of equity from 6.0% to 8.2%, as we further fine-tune our CAPM assumptions to account for the slightly heightened risk aversion in the equity market. This in turn raises our WACC rate from 5.08% to 6.09% and lowers our fair value from S$1.63 to S$1.50. Hence we downgrade our rating to HOLD on valuation grounds, given that its estimated total return is less than 10%, even though we continue to like the trust for its high quality assets and exposure to the Marina Bay area.

OCBC: Outlook for Retail REITs

Outlook for Retail REITs

Six Retail REITs to date. There are six Retail S-REITs listed on the SGXST, with three of them having strictly local presence, two with solely overseas assets, and one mixed with both local and overseas. The total amount of their investment properties adds up to S$17.6m and they have collectively S$11b of market capitalization.

Positive near-term but less so for 2011. Barring any unforeseen external shocks, prospects for the retail property market are expected to remain positive in the last month of 2010, which traditionally is a peak season for the retail sector, given the year-end festivities and school holidays. Nonetheless, we expect retailers to remain price-sensitive in 2011, with the impending new supply of 612k sq ft of lease-able retail space next year; overall outlook may also be less rosy as the continued appreciation of the SGD could dent the spending power of foreign visitors. The recovery of retail rents have also not picked up as much as that of office or industrial rents YTD. According to estimates by CBRE, office (Grade A Office Space) and industrial rents have risen by 10.45% and 15.63% respectively YTD. However, prime retail rents have in fact fallen 3.42% YTD, while suburban retail rents have only risen 3.2% YTD. As such, any potential quarterly upside in retail rents in 2011 is thus forecasted to be kept within 3%-5%, in our opinion.

Asset-enhancements/Acquisitions. On the organic-growth front, most REITs stepped up or continued their asset enhancement plans. CMT has completed its asset enhancements for Raffles City in Nov while works for JCube and The Atrium are on track to finish in 1Q2012 and 3Q2012 respectively. FCT has completed 3.4% of its refurbishment for Causeway Point. The $72m facelift, announced in July, for the 12-year-old mall will be carried out over a 30-month period. On the acquisition side, Suntec REIT & K-REIT Asia has announced the proposed acquisition of a one-third interest in Marina Bay Link Mall, with approx. 94,464 sq ft of NLA. Moving into 2011, we are anticipating more sponsor-linked acquisitions such as Ion Orchard, Bedok Point etc.

The rise of the suburban malls. We are also witnessing the rising popularity of the suburban malls. The recent opening of the NEX at Serangoon Central, dubbed the biggest mall in the North East of Singapore, is a case in point, with huge crowds of 70,000 daily and traffic jams inside and outside the carparks. We are overall positive on the suburban retail-sector as neighbourhood malls have mass-market appeal, are strategically located with good transport connections and have immediate residential catchment. In addition, suburban rents are also steadily rising. Looking beyond 2010, we are anticipating the opening of Bedok Point at the end of the year and Clementi Mall, Katong Mall next year to further capture the traffic of the respective neighbourhood residents staying in the vicinity.

Valuations. Retail REITs are trading at an average price-to-book of 0.92x, similar to the broader S-REIT sector. The retail sector also tends to be the most stable portfolio, in comparison. It is relatively more defensible during a crisis, with a smaller percentage drop in asset values. However, this also means that its upside is likely to be limited during a recovery. We also take the view that increasing demand for retail assets may already have pushed prices to levels where Retail REITs may find it challenging to acquire further in Singapore. With new retail supply coming up in 2011 and lesser spending power from foreign visitors affected by the appreciating SGD, we expect retailers to remain cost-sensitive and any upside in retail rents is likely to be conservative. We are therefore less bullish on the retail sector and maintain our NEUTRAL rating. Top of our pick is Starhill Global which is presently trading at 31.4% discount-to-book. We still think that this discount is unwarranted, given Starhill's high-quality assets, healthy balance sheet and strong sponsor. We also like Frasers Centrepoint Trust (FCT) because of its exposure to the suburban retail segment.

OCBC: Outlook for Industrial REITs

Outlook for Industrial REITs

Eight Industrial REITs. There are seven Industrial S-REITs with local and overseas exposure, and one with solely overseas assets to-date. Their total amount of investment properties add up to S$13.7b and they have collectively S$10.7b of market capitalization.

Lags behind office sector. The industrial sector typically lags the office sector by a few quarters. With the upbeat momentum in the office space, Industrial REITs stand to capitalise on the spillovers to business parks, high-tech and light industrial buildings. In addition, economic conditions remain favorable, on the back of increasing non-oil domestic exports (NODX) and manufacturing output. Going forward, the government remains committed to keep manufacturing as a key economic-driver in Singapore with new stimuli to raise the productivity and image of the different industries. These include a new branding campaign called the "We Can" Movement to attract talent to the logistics/SCM industry and the commitment to inject S$16.1b over the next five years to support research, innovation and enterprise in the biomedical sciences, electronics, info-communications, as well as other "white spaces".

Is the space getting crowded? We note that the three REITs that were newly listed on SGX-ST this year were all industrial REITs, namely Cache Logistics Trust (12 Apr), Mapletree Industrial Trust (21 Oct) and Sabana Shari'ah Compliant Industrial REIT (26 Nov). And with a total of 8 industrial S-REITs to date, this segment is the most prolific among its peers. At first glance, this may be a sign that the industrial space is getting crowded, with competition intensifying. However, we note that this has to be taken in context of the proportion of space allocated for each sector. According to DTZ, there is a total of 398m sq ft of industrial stock, 61.7m sq ft of purposebuilt office stock and only 33.6m sq ft of retail stock in 3Q10. We estimate that at least 80% of the industrial stock remains unsecuritized, providing ample acquisition opportunities for even more new Industrial REITs to make their foray into the market.

Positive rental reversion in 2011. We expect industrial rents to continue to strengthen in 2011 for all segments, namely Business & Science Park, Hi-tech industrial, Light Industrial and Logistics. Industrial REITs with new or expiring tenants with at least five-year lease terms are likely to benefit from positive rental reversions. With improved rail connectivity to the suburban regions, we also expect further upside to the industrial buildings situated near the upcoming MRT lines (Downtown, Thomson, Eastern Region).

Acquisitions are back on the table. Mapletree Logistics Trust (MLT) has acquired some 12 properties in Asia YTD following its S$305m equity fund raising (EFR) exercise in Sep 10. A-REIT has also completed the acquisition of 31 Joo Koon Circle and DBS Asia Hub for S$131m in Apr 10, and is now actively looking to expand overseas. Cambridge Industrial Trust has also undertook a S$50.4m EFR to fund the acquisition of 25 Tai-Seng Avenue, 511/513 Yishun Industrial Park A and two other potential sites for S$73.2m. In addition, we expect the three newly-listed REITs - Cache Logistics Trust, Mapletree Industrial Trust and Sabana REIT - to progressively participate in the acquisition spree next year.

Valuations and recommendation. In terms of forward yields, Industrial REITs trade at a premium of 90 basis points to the broader S-REITs sector. We are bullish on the industrial sector recovery and maintain our OVERWEIGHT rating for Industrial REITs. Top of our pick is Mapletree Logistics Trust (MLT) [BUY, FV: S$1.00], which is also our top most prolific acquirer among its industrial peers this year. Year-to- date, MLT has completed the acquisitions of 12 properties at net property income (NPI) yields of 7%-9% in Asia. This was in stark contrast to 2009, where only one acquisition was completed. It now has 94 properties, comprising 52 properties in Singapore, eight in Hong Kong, six in China, 11 in Malaysia, 14 in Japan, two in South Korea and one in Vietnam. Going forward, MLT has stated that it will continue its pipeline of accretive third-party acquisition opportunities in markets such as Japan & Singapore, which offer attractive NPI yields.

OCBC: Outlook for Office REITs

Outlook for Office REITs

Six listed Office REITs. There are four Office S-REITs with local presence and two with solely overseas assets listed here to date. Their total amount of investment properties add up to S$16.3b and they have collectively S$10.7b of market capitalization.

Improving sentiment towards Office REITs. Market sentiment towards Office REITs is improving due to increased leasing activity, better employment outlook, the emergence of a "Premium class" of Grade A office space and proactive lease management tactics taken by office landlords. Major leasing deals were principally concentrated on new Premium Grade- A developments. Financial institutions, legal firms, insurance and professional services remained the major source of occupier demand. Investment activity in the office market has also warmed up. Improving visibility of the office recovery and rental cycle have benefited the Office REITs, as initial oversupply concerns abate, with the new supply progressively being taken up. As for space that will be vacated in existing office blocks as tenants move to newer developments, we understand that that prospect of excessive second-hand space or shadow space hitting the market next year is diminishing as a number of sizeable new tenant commitments are already in place on such space.

Emergence of the "Premium Grade A" Office Space. "Grade A" office space typically refers to high grade office space equipped with broadband, has large, column-free floor plates and is centrally located. It has conventionally been characterized by the much older but strategically located buildings such as 6 Battery Road, Capital Tower, Prudential Tower etc. At its peak in 3Q08, Grade A office space were commanding impressive rental rates of S$18.80 psf pm, but it has since dropped to S$9 psf pm in 3Q10, according to CBRE.

Nevertheless, we envisage the emergence of a new class of "Premium Grade A" office space, very much like what has transpired for the International Financial Centre (IFC) in Hong Kong or the Canary Wharf in UK. In Singapore's context, this will refer to new or soon-to-be-completed buildings such as Marina Bay Financial Centre (MBFC), One Raffles Quay (ORQ), Ocean Financial Centre (OFC), 50 Collyer Quay, Asia Square etc. at the vicinity of Marina Bay (along the Marina Boulevard and Shenton Way stretch). Not only do these newly developed buildings embody excellence in all aspects of development including construction, leasing, facilities management, marketing strategy, use of environmentally-friendly construction techniques and materials (conferred the Green Mark award), but they are also strategically placed at the new focal point (Marina Bay) in Singapore, with stunning water views, landscaped parklands and spectacular cityscapes.

With escalating demand for "Premium Grade A" Office Space at the Marina Bay area, we expect, likewise, the emergence of a higher-tier of "Premium Grade A" office rents. According to DTZ, MBFC, ORQ and OFC are already fetching rental premiums of 10% over existing Grade A office developments in Raffles Place as at Q310, strengthening this phenomenon. We think that "Premium Grade A" asset holders stand to benefit the most from positive rental reversion, since rent escalation is likely to be most significant for "Premium Grade A" office rents in a recovery cycle.

MBFC - the place to watch. Akin to the iconic landmarks of IFC in Hong Kong or the Canary Wharf in UK, we anticipate MBFC to be the next "premium business address" in Singapore, on the back government's commitment to pump more than S$1b into infrastructure works to support Marina Bay's growth over the next 10-15 years. To-date, the distinguished disclosed tenants (international financial institutions and leading corporations ) that have committed to shifting to MBFC Phase 1, which comprises Tower 1 & 2, include American Express, Bank Pictet, Barclays Capital, BHP Billiton, ICAP, Macquarie, Murex, Nomura, OCBC Retail Banking, Prudential, Servcorp, Standard Chartered Bank and Wellington International Management Company. Phase 2 of MBFC, which comprises Tower 3, has also received very strong interest from prospective tenants, notwithstanding that marketing efforts have not even started. We understand that about 56% has already been leased out, with committed or interested tenants including DBS, Wong Partnership and McGraw Hill.

K-REIT Asia and Suntec REIT have each announced their intention to acquire a one-third interest in MBFC Phase-One, Marina Bay Link Mall and slightly less than 700 carpark lots. Noticeably, the acquisitions, if successful, will propel Suntec's investment properties to ~$5.8b, surpassing CapitaCommercial Trust's (CCT) S$5.2b (as reported in 3QFY10 results). K-REIT Asia's investment properties (ex-divestment of both Keppel and GE Towers) will also levitate to above S$2b from the current $1.38b. We view these two enlarged REITs as not only upping the stakes but also exerting pressure on CCT and Fraser Commercial Trust (FCOT), which have yet to announce any local acquisitions YTD.

Valuation and recommendation. We are overall bullish on the Office sector for the simple fact that rentals have fallen much more during the crisis, and thus there is a lot of catch-up potential for Office REITs during the recovery cycle. Office-REITs presently trade at an average forward yield of 5.1% and an average-price-to-book of 0.70x, which compares favourably to the broader S-REIT sector of 0.92x. We like K-REIT Asia due to its wider exposure to the revitalizing Marina Bay area and improved quality of its office space (more premium Grade-A exposure). We noted that CCT is sitting on a cash pile of some S$731m following the sales of Robinson- Point and StarHub-Centre and certainly has the financial muscle for new acquisitions. We also think the current significant discount-to-book for FCOT (-59%) is unwarranted, considering its high-quality assets, strong sponsor and sound financials. Overall, we remain upbeat on the office sector recovery; and maintain our OVERWEIGHT rating on the sector.

OCBC: S-REIT Debt finance

Debt finance. As of 3QCY10, there is approximately S$16b of debt among the S-REITs to be refinanced by 2017. The bulk of the debt, or about 70% in total, matures between 2011 and 2013. The average term to maturity is slightly north of 2.5 years. Given the low interest rate environment, we understand that REITs managers are already in discussion with bankers to refinance their liabilities and are actively seeking longer debt tenures of more than three years.

Overall, debt profiles remain healthy with an average gearing of 29.6% and average borrowing costs of 3.8%. Notably, at least four REITs have average debt tenures (Starhill Global, Parkway Life, A-REIT, Cache Logistics Trust) exceeding three years. There is also debt headroom of S$5.7b for further debt-financed acquisitions, assuming a long-term aggregate leverage ratio of 40%1. This bodes well for S-REITs that are embarking on further acquisition plans or asset enhancement initiatives to drive long-term growth in distribution per unit (DPU) for unitholders.

Expect disproportionate cap rates compression. The low interest rate environment is expected to stimulate the property market and increase construction and property transactions, driving prices up further. According to MAS in its yearly financial stability review, this coupled with the strong liquidity inflows pouring into Asia, is likely to inflate asset prices beyond their fundamentals.

We expect inflationary pressures to spill over into next year, causing capital values of properties to continue the current uptrend. At such, cap rates are likely to compress further. This compression, however, will not be applied proportionately across all sectors. According to our estimates, we think the effect is likely to be more pronounced in the office sector, followed by the industrial sector. This is because their capital values have fallen the most during the financial crisis, and thus there is more catch-up potential for these two sectors. The retail sector tends to be the most stable portfolio, in comparison. It was relatively more defensible during the crisis, with a smaller percentage drop in asset values. However, this also means that its upside is likely to be limited during a recovery. As for the residential sector, we do not foresee any major upside next year in view of the recent spate of government cooling measures and authorities rolling out bumper supply of land for new residential projects.

More REITs likely to go global. With increasing capital values and uninspiring rental yields domestically, we believe that more S-REITs will be looking to acquire assets beyond Singapore. Some REITs managers believe that a geographically diversified portfolio will give unitholders an opportunity to ride on the growth in other international markets and allow them to access real estate markets that they could not access efficiently on their own. For example, Ascendas Real Estate Investment Trust (A-REIT), which at present owns industrial properties only in Singapore, is looking to acquire assets around Asia. It has recently set up a representative office in Shanghai, China, and is also 'actively exploring' investment opportunities in the mainland. Malaysia and Japan are also other countries that may be of interest to A-REIT. In Aug this year, Ascott Residence Trust (ART) also transformed from a Pan-Asian REIT to an International REIT following the acquisitions of 26 service residence properties in Europe. We anticipate more S-REITs may consider switching to a more internationally diversified portfolio next year, given the inflated property prices in their native land, and more appealing rental yields in other markets.

40% Aggregate Leverage: Not uncommon anymore. With mega acquisitions (such as Phase 1 of Marina Bay Financial Centre (MBFC)) and ambitious plans for internationalization, we are seeing more Office REITs and Industrial REITs shoring up their aggregate leverage ratios. Noticeably, Suntec REIT's aggregate leverage will increase from 33% to 41.5% following the completion of the acquisition of one-third interest in MBFC Phase One. Mapletree Logistics Trust (MLT) has also increased its aggregate leverage from 36.7% to 39.9% after its acquisitions of 12 properties in Asia YTD.

Leveraging trend to continue in 2011. The trend of leveraging up among S-REITs is likely to continue into 2011, on the back of the low interest rates environment. Departing from the previous conservatism seen during the financial crisis, it seems that more S-REITs are now comfortable reverting back to the pre-crisis target gearing levels of 40-45%. In fact, apart from Suntec REIT, we think the next likely candidates to test the 40% watermark will be Mapletree Logistics Trust (39.9%), Mapletree Industrial Trust (38.5%) and Cambridge Industrial Trust (39.2%). They belong mostly to the industrial sector because we think industrial REITs need acquisitions to grow as it is comparatively more difficult to enhance their existing assets.

OCBC: S-REIT Acquisitions Pipeline

Acquisitions Pipeline. Sponsor injections are likely to be back in focus in 2011. We anticipate more REITs to exercise their rights of first refusal (ROFR) on sponsor-owned assets in the coming year, alongside nonsponsored acquisitions.

Some of the REITs are also said to be keen to engage in greenfield (new) development projects together with their sponsors to deliver incremental returns to unitholders. These REIT managers believe that they will benefit from the sponsors' expertise in planning, design and construction of properties and lessee networks to mitigate construction and leasing risks.

Mercury: 1,531.99 ! Here I come ?……

The rise of 11.23 point(s) in FBM KLCI was attributed to buying pressure in blue-chip counters such as CIMB (up RM0.20to RM8.90), Maybank (up RM0.03 to RM8.43), AMMB (up RM0.08 to RM6.50), Hong Leong Bank (up RM0.09 to RM9.36) and Tenaga Nasional (up RM0.21 to RM8.79).

What was the chart saying …….
Market took a quick upward move into 1,520 zone yesterday (9/12/2010) on the back of up close scenario on 8/12/2010. That was basically supported by the sudden market turnaround on 8/12/2010 when market was expected to be trading sideways and market crossover into 1,510 zone on 8/12/2010.

Why a sudden turnaround on 8/12/2010 ? An active play was believed to be on the card as the longer this market were to stay in passive mode, more traders would tend to feel jittery about the market upward potential; thus, by engaging in an active play game, traders would at least focus at the price (index movement) action.

On 9/12/2010, we could see the “supportive” play at 1,510 level, because there was an attempt to put the market into this test; but, market did not dip below that level. It showed the “intention” on the part of stock index to make 1510 level as another stepping level to go higher when the rebound from low of 1,474.02 (1/12/2010) to 1,508.41 (3/12/2010) in 3 days had helped to “contain” the negative trading after the recent 3 occasions of downside violations of 1,480 level on 24/11/2010, 29/11/2010, and 1/12/2010, followed by the gap up scenario occurred on 2/12/2010 which suggested the urgency on the part of traders to buy stocks.

Ladies & gentlemen, stock trading is a game. Different traders may have different levels of excitement and expectation about the crossover of 1,500 level; but, certain traders knew very well that this excitement and expectation of positive market outlook would fizzle out if no attempts were to be made to protect the stock index at 1,500 level in due time. And, market buying activity would not increase IF investors and traders do not get to feel the confidence in the game.

With the crossover of 1,510 level, where would the market go from here ? The market was moving fast to break away from 1,510 level on 9/12/2010 after registering an up close above 1,510 level on 8/12/2010. WHY ? The return move into 1,500 zone on 3/12/2010 was accompanied by a higher market into 1,510 zone on 8/12/2010 signified a step forward to jump out of the sell-offs occurred on 11/11/2010 and 12/11/2010. And, the way this market carried itself appeared to be pointing to a level higher than 1,525 mentioned in our report for Thursday, 9 December 2010, probably at 1,532 – 1,535 level.

What were the strong hands doing ..…..
A check of internal market strength on 9/12/2010 showed that buying strength improved with strong hand(s) seen acquiring a portion of buying positions, and the net number of stock positions acquired from 30/11/2010 to 9/12/2010 was about 163% more than what was established between 18/11/2010 and 22/11/2010 compared to 60% in the preceding day..

Conclusion :
Market outlook remained friendly as KLCI was still trading above 50-day MA with key market support level pegged at 1,480.

The analysis of overall daily market action(s) on 9/12/2010 revealed that buying power(s) was stronger compared to selling pressure(s), FBM KLCI would thus likely to trade above 1,521.29.

OCBC: Overweight S-REIT

OVERWEIGHT; Different strokes for different secto

Emerging stronger from Financial Crisis. We see most of the S-REITs emerging stronger from the financial crisis, with healthier balance sheets, forthcoming acquisition proposals and more asset enhancement works. There were also three new REITs entrants that were listed on SGX-ST this year, namely Cache Logistics Trust, Mapletree Industrial Trust (MIT) and Sabana REIT. This was in stark contrast to a year ago when most of the S-REITs were burdened with deleveraging plans, decompressing cap rates and asset sales.

Upside potential remains. The FTSE REIT sub-index is up 15.9% YTD. It has since recovered 145.1% from its trough during the financial crisis in Mar 2009 and is 38.2% shy of its peak in Jun 2007. If we use 2006 levels as a sanity check, the FTSE REIT sub-index still has 25% of headroom before reaching the 2006 summit, and it is only 9.2% ahead of its 2006 nadir. Stepping into 2011, we think there is still upside potential for the index to reach 2006 levels, and this recovery momentum is already playing out nicely among some of the S-REITs. Despite being touted largely as defensive yield plays, we have witnessed some S-REITs (such as CCT, K-REIT Asia, Fortune REIT and Parkway Life REIT) appreciating more than 25% YTD.

Upgrade to OVERWEIGHT. Going into 2011, we upgrade our rating for the S-REITs from NEUTRAL to OVERWEIGHT. The persistently low interest rate environment is expected to stimulate the property market and continue to drive prices higher. Together with "hot capital inflows" pouring into Asia, it is likely that spot rental rates and asset prices will continue to be inflated. At the same time, many REITs managers are capitalizing on the recovery cycle for further asset enhancements initiatives and acquisitions. Being an inflation hedge, we think investors' interest in S-REITs is likely to remain piqued in 2011. However, we noted that different sectors may experience different rates of recovery. In our opinion, the recovery is likely to be more pronounced for the office sector, followed by the industrial sector as the catch-up potential is greatest for these two sectors. The retail sector is likely to remain subdued with moderate rental escalation, new retail supply (additional 612k sq ft of lease-able retail space in 2011) and lesser spending power from foreign visitors affected by the appreciating SGD. Within our coverage universe, our preferred picks are MLT [BUY, FV: S$1.00], ART [BUY, FV: S$1.38] for large-caps and FCOT [BUY, FV: S$0.18], Starhill Global [BUY, FV: S$0.66] for small-caps.

Thursday, December 9, 2010

KE: AIMS AMP Capital Industrial REIT One of few undervalued players around

AIMS AMP Capital Industrial REIT
Share price (S$) : 0.22
Price‐to‐NTA: 0.8x
Dividend per share / yield: $0.019 /8.6%
Net gearing: 34.8%

Background: AIMS AMP Capital Industrial REIT, formerly MacarthurCook Industrial, was listed in April 2007 and currently has a portfolio size of $797m, made up of 25 logistics, warehousing and manufacturing properties in Singapore and a warehouse in Japan.

Recent developments: Just last month, AAREIT divested 23 Changi South Ave 2. It launched a 7‐for‐20 rights issue in October ($79.6m) and signed a new loan ($280m) for the acquisition of a ramp‐up warehouse ($161m) as well as for debt refinancing.

Our view
One of few undervalued players around. AAREIT is still trading at a 20% discount to book even after a steep $41m write‐down in the value of its investment properties in FY Mar10. The capital values of industrial properties in Singapore have since recovered from the global financial crisis. AAREIT’s gearing ratio is comfortable at 35%, with no near‐term refinancing need. Any further write‐down is unlikely. That AAREIT is still trading at a discount to its peers is likely due to its relatively small market capitalisation and turbulent history in 2009 which saw AMP Capital Investors and AIMS Financial Group emerging as Manager after a major equity cash call and asset injection.

Near‐term catalyst. Asset enhancement opportunities abound for AAREIT as at least half of its 26 properties have plot ratios that are underutilised. Capital recycling exercise is ongoing and the potential sale of its single asset in Japan could be a near‐term catalyst.

CIMB: Playing catch-up with the big boys?

Small Cap

Playing catch-up with the big boys?

• Playing catch-up? Our universe of small-cap stocks did much better in the 3Q10 reporting season than in the previous quarter. Out of the 19 small caps that we cover, only 27% failed to meet our expectations compared to 33% in 2Q. Furthermore, 21% topped our expectations compared to only 17% in the previous quarter. Performance-wise, the FBM Small Cap Index (SCI) underperformed the KLCI but started to catch up in early Oct. From Oct to Nov, the SCI outperformed the KLCI, gaining 3.4% compared to a 1.6% rise for the latter. The small caps remain attractively priced, trading at an average CY11 P/E of 8.3x (ex-MTD ACPI) compared to 14.4x for the KLCI. We continue to OVERWEIGHT the sector. Muhibbah Engineering, which we began covering in mid-Nov, replaces Latexx Partners as our top pick among the small caps.

• An improved quarter. The results of the small caps in the 3Q10 reporting season were much better than the previous quarter. Out of the 19 small caps that we cover, 27% failed to meet our expectations, down from 33% in 2QCY10. Furthermore, 21% beat our expectations compared to only 17% in the previous quarter.

• Small Cap Index (SCI) outperformed since early Oct. In Jan-Nov 10, the SCI outperformed the KLCI, gaining 17.9% compared to a 16.8% rise for the KLCI. In 3Q11, it underperformed but started to catch up from early Oct onwards. From Oct to Nov, the SCI outperformed the KLCI, gaining 3.4% compared to the latter’s 1.6% rise.

• Muhibbah is our top pick. Our search for construction laggards throws up Muhibbah Engineering, a midsized contractor that has diversified into cranes, shipbuilding and airport/road maintenance concessions. This stock is now our top small-cap pick. We continue to rate it a Trading Buy with a target price of RM2.00, which imputes a 20% discount to its RNAV. Muhibbah’s outstanding order book of RM3bn is good for another three years and has room for upside as the group is actively bidding for jobs, both locally and overseas.

Wednesday, December 8, 2010

CIMB: Underweight Property

Underweight premised on negative view of residential developers. Our bearish call on the residential sector is premised on the meteoric rise in physical prices in 2010, which has defied rising supply. Even if an economic recovery, abnormally low interest rates and increasing west-to-east migration continue to offer support, we believe these positives will be overshadowed by policy hawkishness. Active government intervention has already been felt. The prospects of harsher cooling measures have not dimmed. It is difficult to see stocks performing in such an environment. On a relative basis, our preference remains the office sector, where we believe the upturn has yet to run its course. Rents remain well below previous peaks. Net take-up is firmly in positive territory. Cap-rate compression should stay supportive of asset values, with undemanding supply the driver of higher reversionary yields. Our analysis shows a drastic shrinkage of office space per person employed (financial services) since 2004, with the trend expected to continue, lending fundamental support in the longer term. KepLand and OUE remain our top picks for the year for their exposure to prime office assets.

2007-10 exuberance to be felt over next three years. Over 50k new units have been sold since 2007 or around 12.5k new units p.a. While much has been said about ample liquidity and low interest rates, what has been left in the backburner is supply. We foresee an unfolding of the effects of the 2007-10 exuberance in the next three years. The URA estimates physical completion of over 59k units over 2010-14 or an average of 11.9k units p.a., a number that does not compare well with average physical take-up of 7.2k units per year. Over 50% of the completing supply in 2011 will come from the Core Central Region (CCR). We believe rents have room for downside. Property bulls point to the strong population growth of the last few years. With the government’s adoption of a more stringent immigration policy, population growth should slow. Overall, we expect the market to tone down its expectations by end- 2011, as the sector adjusts to an influx of inventory in 2012-14. Key risk to our assumptions is rising Chinese buying. The Chinese accounted for 20% of foreign demand for private homes in Singapore in 3Q10, on par with the Indonesians.

More demand, more measures. Strong capital inflows and low interest rates have made policy risks an Asia-centric phenomenon. In Singapore, there have been two rounds of control measures. On the supply side, the government has made available 14.3k units in its 1H11 Government Land Sale (GLS) programme, and is expected to add 22k HDB units in 2011. A capital gains tax and a further tinkering of credit availability to buyers are other potential outcomes, in our view. We see government intervention a dominant threat in 2011. This comes on the back of strong sales volume with more than 1.5k units sold in October and more than 13k units sold YTD.

Office recovery yet to run its course. Although the recovery in the office sector has been well flagged, valuations have yet to reflect all the positives. Yield compression should persist in 2011 as easy credit conditions and ample liquidity remain supportive of capital values. The outlook for reversionary yields is positive, premised on: 1) rents still 40-45% below previous peaks; and 2) positive net take-up. As at 3Q10, net takeup was slightly over 2msf, according to Jones Lang LaSalle (JLL). Tenants that have committed to relocation from older buildings to newer ones have effectively expanded their office space take-up. Industry sources indicate renewed optimism in the leasing market. The glut that many had feared has eased substantially with over 50% of the 2011 office space already pre-committed. Office supply is expected to fall meaningfully after 2012 especially in the CBD. Our analysis shows a drastic shrinkage of office space per person employed (financial services) since 2004, with the trend expected to continue. This should lend fundamental support in the longer term. We believe landlords positioned with Grade-A office space will continue to do well.

CIMB: Small-Cap Ideas

In the KDR/TDR space, Combine Will International (COMW SP; BUY, TP S$0.52) and ECS (ECS SP; BUY, TP S$1.22) are cheap against listed peers and offer dividend yields of 3.5 and 6.2% respectively. With the Singapore market undervaluing these companies, a listing on a foreign exchange is likely to trigger a re-rating. The share price of ECS's Hong Kong-listed competitor, Digital China, is a case in point, jumping to a record high as the completion of its TDR listing drew near. Digital China now trades almost on par with Taiwanese competitor, Synnex’s 14x CY12 P/E. ECS, on the other hand, is still trading below 4x CY12 P/E. China Animal Healthcare (CAL SP; BUY, TP S$0.52) could see earnings upside in 2011 via an M&A which could happen in late 2011. Having secured three of the four mandatory vaccine- production licences, China Animal could be looking at the final licence for bird-flu vaccines via M&As. A dual listing in Hong Kong could occur by end-Dec 10, which already has led to a share-price re-rating.

In the textile sector, recent quarterly results show qoq improvements as demand returned and inventories were disposed of. In this space, we like Foreland Fabrictech (FLFT SP; BUY, TP S$0.16) and China Taisan Technology (CTSAN SP; BUY, TP S$0.30). Foreland Fabrictech trades at just 2.4x CY12 P/E with an average yield of 5.3% for FY10-12. EPS CAGR for Foreland Fabrictech over FY12-13 is a robust 60.5%. China Taisan trades at 3.6x CY12 P/E with an average yield of 2.5% for FY10-12. China Taisan has started to buy back shares, suggesting it feels its shares are undervalued.

CIMB: Turning negative on large-caps REIT

Turning negative on large-caps; REITs trading at book levels (vs. mean 0.8x).
The REIT sector has recovered with the market and now trades at book levels, above their last two years’ average of 0.8x. The largest-cap REITs, CMT and AREIT, trade at about 30% premiums to the REIT sector, which is their historical mean premium. Peak valuations for the large caps had been above 1.5x P/BV, or 50% premium to the sector average. Despite expectations of sustained low interest rates, we do not expect the large caps to reach the peak valuations of 2008, as the significant growth in the number of REIT listings offers plenty of alternatives. Yield-accretive acquisitions are also not easy as other institutional investors have intensified the competition for assets in Singapore. Even REITs with pipeline assets from sponsors have inherent difficulties in executing asset injections. Furthermore, AUM for CMT and AREIT is much larger than peers, making materially-accretive acquisitions more difficult than for smaller peers. We anticipate that large-cap REITs, in particular, would be pressured into seeking acquisition targets outside Singapore, as sizeable local targets dwindle. This will increase risks from forex and tax leakages. Where organic growth is concerned, while we are fairly confident in the ability of the large-cap managers to sustain rents and occupancy, organic growth should be capped by their high base levels of occupancy and rents.

Not all acquisitions are positive. ART kick-started mega-acquisitions in 2010 with the purchase of a S$1.4bn European portfolio in August. KREIT and Suntec REIT followed suit by acquiring their respective one-third interests in MBFC Phase 1 for S$1.4bn and S$1.5bn respectively. All the assets were injected from their respective REIT sponsors or associates. We expect acquisitions to be the highlight of 2011, particularly sponsor injections that could include CapitaMall Asia’s 50% stake in Ion Orchard Shopping Mall (to CMT), Keppel Land’s Ocean Financial Centre (to KREIT), and Parkway Holding’s Pantai Hospitals in Malaysia (to PLife REIT). However, acquisitions could increase cashflow risks for unitholders: 1) with expensive assets financially engineered to be “high-yielding”; or 2) when assets with limited operational histories have to rely on income support to justify DPU accretion. Net asset values and organic growth may not be sustainable when the financial engineering is termed out. We see this as the main negative.

Mega-acquisitions are also likely to entail more cash calls as most REIT managers are unlikely to go for long-term gearing ratios beyond 45%. Furthermore, an increasing preference for private placements over rights issues in recent equity fund-raising points to a less equitable position for minority investors

CIMB: Shipping worst is over

Shipping: worst is over, managing capacity increase next year. We are positive on container shipping as the supply-demand balance should improve again in 2012.
Box freight rates should rise strongly after a mild correction in 2011. We believe that NOL is expecting a much more profitable year next year. In 2011, 7-9% supply growth should lag 7-8% demand growth. Rates may weaken from 2010 highs, but should recover in 2012 as anticipated 7-8% demand growth exceeds 6-8% supply growth. Sector-wise, capacity for newbuilding orders remains constrained by problems besetting KG funds and traditional European shipping banks.

NOL is moving towards more ownership and less chartering, to improve its cost structure. It has admitted to being disadvantaged (vs. OOIL) by a higher proportion of leased ships (vs. owned). In the long term, chartering is more expensive than ownership, even if it gives liner operators the flexibility to return charters when the market takes a turn for the worse. NOL acknowledged that having this flexibility may have cost it more than expected. We have assumed that NOL’s own-to-lease ratio will increase from 34% to 62% from 2009 to 2013. This will align it more with OOIL’s 35:65 mix. We believe this will be a major contributor to reducing NOL’s asset costs and improving its structural profitability. NOL is rated an Outperform.

CIMB: Liquidity spill, multiples thrill

• Maintain Overweight on Singapore; unchanged end-CY11 FSSTI target of 3,560. We believe that QE2, austerity measures and tax reforms in developed economies will benefit Singapore. The former, in its waterfall effect of raising prosperity levels in developing Asia, should drive up demand for regional travel and other leisure services. The latter should spur a clustering of investment services in Singapore. Our end-CY11 FSSTI target is set at 3,560, bottom up. Our target implies 1.9x CY11 P/BV (slightly above mean) and 14.4x CY12 P/E (below mean).

• Key trends. Dominant trends are west-to-east migration and a widening income divide. QE2 lowers the value of fiat money, stimulates commodity price/asset price appreciation, and triggers hoarding and speculation. We believe that QE2 will also widen the wealth gap for consumers. Among corporates, trends are likely to be more M&As and/or share buybacks. This has not yet unfolded because of known risks holding back corporates’ propensity to risk-take. Key threat to the FSSTI is inflation and social unrest globally. We expect a pensive market at the turn of the year to explode suddenly before end-1H11, as perceptions of risks fade. As liquidity spills over, multiples will thrill, reflecting optimism that the world is back on an even keel. This could bring the FSSTI well ahead of our target by mid-year. Depending on how events unfold, the market might also mark its high for the year.

• Sector calls. Plantations/Commodities are back to Overweight for us. We recognise risks in this trade as it is a crowded trade. Yet, conditions are ripe for runaway commodity prices once well-flagged areas of concern (euro risks, US slow growth) go out of focus. As a play on commodity price inflation, we believe Offshore & Marine offers better value, though. We also put Financials on a non-consensus Overweight, benefiting from a broadening out of economic growth in Singapore. Our Underweights are Property (hawkish policy and supply avalanche) and Telco (low beta, cost pressures, multi-year margin erosion).

• Top picks. We take exposure to Singapore’s transformation via OUE, Keppel Land and SIA; we think these are the cheaper options available. Genting is not cheap but should remain central to the themes of growing Asian wealth and Singapore tourism. We opt to play the commodity theme through Golden Agri and Keppel Corp. We would avoid Wilmar for trading uncertainties and negative newsflow on food price controls in China. DBS is our preference among Financials, as a beneficiary of anticipated capital-market flows. Yangzijiang should benefit from an anticipated uptick in container orders. Cache Logistics and Venture helm our portfolio as defensive or value stocks with positive structural changes.

CIMB: Chart View 08.12.2010

As prices remain below its channel turned resistance, now at 3,200 and recent high of 3,216, things look bearish. A good indication would be that prices close below its 50-day SMA, currently at 3,181 as it would signal a test of 3,119 next, the key neckline support of its head & shoulders pattern. This pattern still holds the key to near and medium term prices movement. On the other hand, if this support holds, then another test of 3,250- 3,260 is possible

Tuesday, December 7, 2010

KE: GMG buy 55% stake in a loss‐making Thai rubber producer, Teck Bee Hang (TBH)

GMG Global
Share price (S$) 0.31
Issued shares (m) 3,839.1
Market cap (S$m) 1,190.1
Free float (%) 30.5

Major shareholders
Sinochem Int’l (51.0%)
Gondobintoro family (18.5%)

YTD change +181.8%

52‐wk price range S$0.095- 0.345

Background: GMG is an integrated producer of natural rubber (NR) with plantations and facilities in Cameroon (41,000ha; 50,000tpa), Ivory Coast (1,600ha; 36,000tpa) and Kalimantan (55,000tpa). Key products are centrifuged latex (for gloves, condoms) and tyre‐grade rubber.

Outlook: Positive. GMG’s share price is up by 226% over the past year, with profits driven by higher NR prices. Earnings are expected to be underpinned by China’s projected demand growth of 10% pa for the next 10 years. GMG has the full support from parent Sinochem, China’s largest rubber player which controls over 10% of the domestic rubber supply.

Our View
GMG and its newly‐established Thai JV, GP Sentosa (GPS), have agreed to buy a combined 55% stake in a loss‐making Thai rubber producer, Teck Bee Hang (TBH). While the purchase price is negligible, GMG will lend TBH US$15m for working capital and lend GPS a further US$32.5m to restructure debts.

TBH is an established producer and trader of technically specified rubber, but ran into trouble during the 2008 financial crisis. It now has a negative net asset value of Bt124.7m (US$4.1m).

GMG’s rationale is that TBH will allow it to tap into one of the world’s largest rubber‐producing countries, with synergies and strong turnaround potential from a fundamentally sound company.

GMG trades at a P/B of 3.0x. The market has priced in its sharp earnings turnaround with 9M annualised PER of around 30x. However, the TBH acquisition has the potential to provide the next earnings leg‐up.










MIDF: KLCI Bottom-up Valuation

. The inclusion of Petronas Chemical into the FBM KLCI at the expense of Berjaya Sports Toto had some impact on our bottom-up valuation of the KLCI. To start with, the biggest loser, in terms of reduction in weightage are Maybank, Tenaga and Sime Darby. From the position as at 21 Nov to that as at 3 Dec, Maybank lost -0.68%-point while Tenaga lost -0.25% point and Sime Darby -0.21%-point. The biggest gainer was Axiata with +0.25%-point, Genting +0.23%-point and KL Kepong +0.12%-point. Axiata and KL Kepong are among our Top 10 big cap picks for 2011.

. Our bottom-up valuation for FBM KLCI for 2011 is now 1,695 (see table). This represents a 13% upside from the close on Friday. The variance from our 2011 Annual Outlook (.Its The Climb. - dated 1 December) is about +15 points. On this score, our optimism for 2011 is in fact, higher. However, we are maintaining our top-down valuation at 1,650 based on 18 times 2011 earnings, assuming a 15.8% growth next year.

Monday, December 6, 2010

DBS: REITS price Target

DBS: What’s in store for Singapore in 2011

Services to lead growth On the economics front, the economy will outperform market expectations with a solid 7% expansion. Inflation will inch higher to 3.2% owing to both domestic and external factors Monetary policy will remain biased towards further tightening. But that’s not all. Services will overtake the manufacturing sector in 2011 as the key contributor to growth. Gaming should steal the pole position from pharmaceuticals as the fastest growing sector. Strong capital flows, both inward and outward, will bolster financial sector growth. And Asian demand, particularly from China, will drive Singapore’s growth going forward.

Sectors with Overweight rating are REITS, Banks, Industrial, Consumer Goods and Consumer Services.
Based on FSTS sectorial indices, all except REITS outperformed the STI since the market bottomed in May this year.

S-REITs trades at a FY11 distribution yield of 6.1%, 400 bps above 10-year bond, above its long-term average of 300 bps. We expect the sector to deliver a total return of 14.5%. Sector’s average gearing remains low at c34.3%, implying debt-funded headroom for more acquisitions.

Hospitality and retail REITS
Hospitality and retail focused REITs continue to offer the brightest organic earnings potential. Buoyed by the improving economic outlook, retails sales have been showing positive yoy growth since Dec 09, contributed by Singapore’s growing economy, healthy employment market and strong tourist arrivals.

Looking ahead, we expect retail sales to remain robust in the coming months boosted by a slew of events. From 4Q10, Resort World Sentosa will unveil new attractions and rides in Universal Studios @ Sentosa while Singapore will be geared up to host larger conferences and meetings throughout the course of 2011. New milestones with the opening of Gardens by the Bay, International Cruise Terminal in 2011, will underpin further visitor records.

Our picks for hospitality and retail reits are CDL HT, Frasers Centrepoint Trust and Starhill Global CDL HT will be one of the biggest beneficiaries of the robust hospitality outlook and should enjoy strong operational performance. In addition, a lowly geared balance sheet of 21% implies ample headroom for the trust to utilize to grow its portfolio. Its hotels are mainly in Singapore, New Zealand and Australia.

FCT offers investors a decent FY11-12F yield of 5.6%, backed by resilient earnings from its portfolio of sub-urban malls in Singapore.

Valuations for Starhill Global are attractive, trading at 0.75x P/BV, and offering forward FY11-12 yields of 6.4% to 7.1%, compared to other SREIT peers who trade at 1.05x P/BV, and offer a weighted average yield of 6.1%. Its portfolio includes two retail malls – Wisma and Ngee Ann City, and other malls in China, Japan, Australia and Malaysia.

Industrial REITS
Demand for industrial space is expected to remain relatively strong, fueled by continued expansion and more firms setting up their operations in Singapore. Average occupancy rate for industrial REITS is expected to be stable going forward. Physical rental market is also trending up, on the back of an uptick in manufacturing activities. Our pick for industrial Reits is Cache Logistics Trust.

Cache Logistics Trust (CLT) offers investors the highest yield protection amongst Sreits. It has defensive rental income stream derived from a master lease arrangement on a portfolio of modern, high quality logistics assets with inbuilt rental escalation, ensuring stable growth and limited earnings downside. CLT also offers good earnings visibility and stability with a weighted average lease expiry of 6.4 years, longer than industrial peers of c5 years. With gearing of 26%, Cache has more debt-funded headroom for acquisitions, based on 35% limit.

2) Banks
Though banks have generally underperformed the market in the past few months, we expect the bank stocks, which together make up close to 30% of STI’s weighting, to move out of their trading range, in line with our view for the STI’s target of 3438 in 1Q11.

Singapore banks are regional laggards, trading at undeservedly huge discounts to the ASEAN peers. Accumulate Singapore banks for their strength in asset quality and capital vs. ASEAN peers. Moving towards 2011, we have imputed slower loan growth of 8% (compared to 17% projected in 2010), slightly lower NIM (as the interest rate environment is still expected to remain low for most of 2011) and benign provisions. Noninterest income should be strong as regional efforts start to pay off. Compared to 30% earnings growth projected in 2010 as a recovery year, we expect Singapore banks to deliver a more normalized 11% earnings growth in 2011. Upside risk to our forecasts would be earlier-than-expected hikes in SIBOR and out performance from wealth management and private banking. Stock pick: OCBC.

Among the Singapore banks, OCBC was the one that stood out in terms of NIM and loan growth. That, we believe came largely from Malaysia and Indonesia apart from Singapore. There are further expansion plans on the cards including more branch openings in Malaysia for both the conventional and Islamic banking operations. Its non-interest income segment, in particular, insurance is also expected to continue to do well. In terms of share price performance from May, OCBC is the leader among the banks, but still under performed the STI. Other Overweight sectors include Industrial (O&M), Consumer Goods (CPO related) and Consumer Service (Hospitality), which we have highlighted last week

3) Industrial - O&M
Revival in jackup rig market is positive for Singapore rigbuilders, which are global leaders in jackup construction. Top pick in O&M sector is Keppel Corp, which is currently in a sweet spot for US$3.5b to US$8bn contracts from Petrobras.

4) Consumer Goods – CPO related
DBSV Research expects CPO prices to resume its uptrend from the end of this year through 1Q11, supported by weak US$ and strong demand from China. We favour upstream plantation counters to capitalise on strong soft commodity prices. Our picks: Indo Agri Resources and First Resources.

5) Consumer Service - Hospitality
We maintain our preference for Hospitality stocks. We expect the Hospitality sector to end 2010 on a high note. Expectations are high with tourist arrivals busting historical records. YTD arrivals of 8.6m visitors stand within 69-75% of STB’s target of 11.5-12.5m, which we believe is achievable. On a quarterly basis, visitor arrivals for 4Q10 are expected to grow about 60% from 4Q09. We expect hospitality related stocks to continue delivering strong earnings. Stock picks: Genting Singapore, SIA, UOL and CDL HT.

HwangDBS: Chart View 06.12.2010

Continuing from where it left off last week, there is a chance that the FBM KLCI may build on the recovery momentum in the coming weeks, albeit slowly and steadily.

From peak-to-trough, the bellwether has pulled back as much as 3.8% in 12 days before bouncing up to its present level. From a technical perspective, it could have found a short-term bottom already. This is indicated too by the 39-day moving average (MA) line after it had cushioned the index’s slide last week. On the eight previous occasions (since mid-Mar 09) when this had happened, the FBM KLCI turned up and made a subsequent recovery (see chart overleaf).

A recent breakout from a minor negative sloping channel also suggests that the momentum is on the rise. If so, then the FBM KLCI could be making its way to the immediate resistance hurdle of 1,525.
Thereafter, the benchmark index is expected to climb over its record peak of 1,531.99 (reached on 10 Nov) and chart new highs going forward, extending the market rally towards the next resistance target of 1,550.

On the downside, should the consolidation persist, we expect 1,495 and 1,465 to act as the first and second support levels for the FBM KLCI.

CIMB: Chart View 06.12.2010

The index gapped up again on Friday but it could not sustain gains, forming a bearish engulfing pattern. We were expecting the rebound to reach at least 3,235 but the selling was strong. Prices closed back below its 50-day SMA as well as its channel support. The failure to push on could be due to the fact that there is a chance it could be forming a head & shoulders pattern. Prices are likely to head lower to test the key neckline support at 3,119 soon. Breaking below would signal a deep correction to test its 200-day SMA. On the other hand, if this support holds, then another test of 3,250- 3,260 is possible. These upcoming few weeks would likely be crucial for the index.
Warren E. Buffett(沃伦•巴菲特)
Be fearful when others are greedy, and be greedy when others are fearful
别人贪婪时我恐惧, 别人恐惧时我贪婪
投资只需学好两门课: 一,是如何给企业估值,二,是如何看待股市波动
吉姆·罗杰斯(Jim Rogers)

乔治·索罗斯(George Soros)



高估期间, 卖对, 不卖也对, 买是错的。
低估期间, 买对, 不买也是对, 卖是错的。

Tan Teng Boo

There’s no such thing as defensive stocks.Every stock can be defensive depending on what price you pay for it and what value you get,
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