Less pessimistic outlook
Upgrade to HOLD, TP raised to S$3.39 on better GDP outlook.
Since our downgrade from HOLD to FULLY VALUED in April 2016, the stock has fallen by more than 12% to S$3.53 currently. Results had been lackluster on the back of weak adex spend and GDP growth. This has also led to DPS cut from 20 Scts in FY15 to 18 Scts in FY16. We are now less pessimistic on SPH as we believe valuations have largely priced in negatives and see some positives from the possibility of SPH monetising its M1 stake; and GDP acceleration from 2% in 2016 to 2.8% in 2017. In addition, the recent relaxation of Total Debt Servicing Ratio (TDSR) framework to allow borrowers to borrow against their properties for additional cash could support private consumption and expenditure in the overall economy. The stock is now trading at 22.7x forward PE with dividend yield decent at 5.1%.
Scooped by Borr Drilling
■ Keppel is novating five Super B jack-up rigs from Transocean to Borr Drilling at US$216m per rig, almost at a zero discount to its original price of US$219m per rig.
■ Three of the rigs will be delivered in 2017 and the remaining two in 2020. A new deposit of US$275m will be paid, bringing total deposits to 45%.
■ The good terms secured are commendable, especially in the current oversupply situation in the rig market.
■ Upgrade to Hold with a higher target price of S$7.24 based on SOP valuation, comprising 0.8x P/BV for property, 1.5x O&M P/BV and 18x Keppel Capital.
■ Upside risk could come from stronger-than-expected orders and unlocking of noncore assets at attractive valuations. Downside risk is provisions for impairment.
M1 Ltd: Stay cautious pending further clarity
After last Friday’s news that M1 Ltd’s (M1) three substantial shareholders are conducting a strategic review of their respective stakes, M1’s share price has since risen 6.9% to close at S$2.17 yesterday. M1 also announced the same evening that there is no assurance any transaction will materialize from such review. All said, we are not ruling out the potential sale of the three substantial shareholders’ combined stake of 61% as a result of the strategic review. In our view, if a sale does take place, M1’s valuation could be in the range of S$2.27-S$2.62 per share, based on EV/EBITDA multiple of 8-9x, applied to the average of M1’s FY17F and FY18F EBITDA. Without further clarity and not ruling out a potential takeover scenario, we incorporate a 30% probability of a takeover of M1 based on the average of 8-9x EV/EBITDA [i.e. (S$2.27+S$2.62) / 2=S$2.45], and 70% probability that no transaction materializes (i.e. S$1.75), we upgrade M1 to HOLD with a higher FV of S$1.96 (prev: S$1.75).
Navigating The Market After The Outperformance
The FSSTI looks fairly valued after a 9.9% ytd rise. We highlight some screens and stocks to position in for further outperformance in 2017.
What now after the firm outperformance? The FSSTI has done well, rising 9.9% ytd and is currently above our year-end target of 3,050. Our target is based on a 15% discount to the long-term mean PE and P/B for the FSSTI. At current levels, the market is trading at 15.3x 2017F PE, which is its long-term mean since 1995. Since the FSSTI is not cheap, we would look for outperformance in:
a) quality laggards,
b) top slicing outperformers,
c) deep-value cash-rich companies, and
d) special situation stocks.
Oversea-Chinese Banking Corp
Selling Its Stake in Hong Kong Life Insurance
OCBC announced last night it has entered into a share sale agreement to sell it 33.33% stake in Hong Kong Life Insurance to First Origin International. The consideration for the sale is HKD2.367bn (~SGD426m) payable in cash. The unaudited NTA of HK Life was HKD793m as at 31Dec 2016. The sale is conditional upon regulatory approvals. The sale could give OCBC a one-time gain of HKD1.574bn (~SGD283m). This represents 8% of our forecast FY17 net profit of SGD3.46bn. Whilst this one-time gain would be a positive for OCBC’s financials, we remain concern on OCBC’s need for more loan loss provisioning from rising NPL ratio and falling values of its oil & gas loan collaterals. We have a NEUTRAL recommendation on OCBC with TP of SGD8.90 (8% downside from 20Mar close of SGD9.63), pegged to 1x 2017F P/BV.
Check out our compilation of Target Prices