UOB KH’s target price for Sinotech Fibre is 22 cents
Apart from the likely 10% quarter-on-quarter increase in revenue, Sinotech would not see any other material improvement in 2Q09. Demand for the company’s products was weak, keeping its operations running at below 50% utilisation rate. Average selling prices and margins would remain at low levels, similar to that in 1Q09. Thus, the company is likely to make a net loss again in 2Q09.
Management says there was no sign of recovery in 2Q09 and expects the business environment to remain challenging in 2H09. We, however, do not expect such a negative industry outlook. We believe the recent strength in the chemical fibre industry indicates at least some restoration in the demand from the end-consumer market of apparel and garments, which would sooner or later make a positive impact on synthetic leather producers such as Sinotech.
In addition, the Purchasing Managers Index’s (PMI) new export orders index edged up to 51.4 in Jun 09 from 50.1 in May 09 after staying below 50 for 10 consecutive months from Jul 08 to Apr 09, which implies substantially improving external demand. This is a positive sign for export-oriented industries eg the garment and textile sector. As such, we expect a gradual recovery in 2H09 for Sinotech.
Our target price for Sinotech remains at S$0.22 (recently market price at 12.5 cents) based on Hong Kong-listed peers’ average FY10 PE of 5x. Maintain BUY.
Average selling prices for Sino Techfibre's products.
Nomura Singapore upgrades Keppel Corp to ‘buy’
We upgrade Keppel to a BUY (from Neutral), with our price target raised to S$8.57 (S$7.92 previously), suggesting 23% potential upside. We have adjusted our FY09F earnings forecast to account for an exceptional gain of S$660mn booked in 2Q09. Excluding this item, our FY09-11F earnings have been adjusted downward to reflect the end to SPC earnings contributions.
Built at Keppel FELS in Singapore, the P-52 is one of the world's largest floating production units. Photo: Keppel
Our revised price target of S$8.57 is pegged at a 5% discount to our SOTP (sum of the parts) value of S$9.03. We value the O&M (offshore & marine) division using DCF (discounted cash flow) over a 20-year period.
This factors in a cyclical downturn in earnings from FY11F, and a 7.5% WACC (in line with our WACC (weighted average cost of capital) assumption for SMM). The group’s other businesses are valued at the current market price. We incorporate the divestment price of S$6.25 per share for Keppel’s 45.51% SPC stake into our SOTP valuation.
The shares are trading at FY10-11F P/Es of 12.9x each, up substantially from the lower end of their historical trading range of 6-18x. However, we note that the restructuring of the group’s businesses and strategic redeployment of the funds from the SPC sale should be key catalysts for the stock.
The O&M business alone is trading at FY09-10F P/Es of 12.7x and 12.9x, respectively. A group ROE (return on equity) of 17% looks reasonably attractive for a conglomerate, although we note the downtrend. A forward dividend yield of 4.6% is attractive relative to SCI’s yield of 3.6%, and the group is likely to continue to pay out 50-60% of earnings as dividends, in our view.
