Brokers' Call: Sembcorp Industries

SEMBCORP INDUSTRIES

Broker: Credit Suisse

Call: Neutral

Target price: $3.60

Utilities' net profit of $28 million in the third quarter was impacted by $56 million of impairments in Singapore related to an ageing boiler and goodwill for a cogeneration plant.

This was offset by a $14 million write-back of provision related to Jurong Aromatic Corporation.

Excluding these one-offs, third-quarter profit of $70 million was below expectations, driven by losses in India.

There were no updates on the strategic review, which chief executive Neil McGregor said was in the final stages and would be announced shortly.

No financial targets will be provided in the strategic review. We expect the announcement to be made in late November.

We expect utilities' returns to remain low in the near term.


CHINA AVIATION OIL

Broker: RHB

Call: Neutral

Target price: $1.80

China Aviation Oil (CAO) reported lower-than-expected nine-month results (69 per cent of our 2017 estimate), with third-quarter gross and net profit declining for the first time in 10 quarters.

Lower gains from trading activity and higher costs were the key reasons for its weak performance.

While jet fuel trading volume continues to grow (up 7 per cent year on year), we downgrade CAO to "neutral" (from "buy") amid increased uncertainty in the trading business and poor visibility on the merger and acquisition timeline.

We lower our target price to $1.80 from $1.90.


STARHUB

Broker: Nomura

Call: Reduce

Target price: $2.50

Fixed enterprise was the only segment that grew for StarHub, which has been the case for the last three quarters.

This was driven mostly by consolidation of the cyber-security business, Accel Systems & Technologies Pte Ltd.

However, revenue was still flat, with adjusted earnings before interest, tax, depreciation and amortisation up 3 per cent and earnings down 11 per cent from higher depreciation and amortisation.

We maintain our "reduce" rating and $2.50 target price.


OUE HOSPITALITY TRUST

Broker: DBS Group Research

Call: Buy

Target price: $0.85

With better-than-expected results and in excess of 10 per cent total return over the coming 12 months, we maintain our "buy" call with a revised target price of 85 cents.

We continue to like OUEHT for its relatively high 6.3 per cent yield, quality portfolio and management, as well as its robust underlying distribution per unit growth profile.


FRASERS LOGISTICS & INDUSTRIAL TRUST

Broker: OCBC Investment Research

Call: Buy

Target price: $1.22

Frasers Logistics & Industrial Trust (FLT) reported its fourth-quarter results which met our expectations.

If we look at the period from listing (June 20, 2016) to Sept 30, 2017, distribution per unit came in at 8.85 cents, which beat FLT's initial public offering forecast by 6.1 per cent.

Operationally, FLT maintained a high portfolio occupancy of 99.4 per cent, with a long-weighted average lease expiry of 6.75 years. Although average rental reversion was down 15.9 per cent in the fourth quarter and down 8.2 per cent for the 12-month period in 2017, we believe it was largely due to rents reverting to market levels upon lease expiry as built-in annual rental escalations for FLT's leases typically outpace market rental growth.


SEMBCORP MARINE

Broker: OCBC Investment Research

Call: Buy

Target price: $2.26

Sembcorp Marine's third-quarter revenue fell 64.3 per cent year on year to $316.9 million while its bottom line improved from a net loss of $21.8 million in the third quarter of 2016 to a net profit of $2.7 million in the third quarter of 2017. Results were within expectations. The group continues to receive active enquiries for projects relating to floaters, production platforms, gas solutions and specialised shipbuilding.

Sembcorp Marine is also in advanced discussions with several prospective customers relating to its Gravifloat technology and is hopeful that initial orders will materialise in the foreseeable year.

Meanwhile, Sembcorp Marine has also received the US$500 million (S$682 million) payment from Borr Drilling; with this, net gearing will fall to one time.

We roll our valuations to financial year 2018, and increase our price-to-book ratio from 1.6 times to 1.8 times, taking into account a gradually improving operating environment for the broader industry. As such, our fair value estimate rises from $1.98 to $2.26.

A version of this article appeared in the print edition of The Straits Times on November 06, 2017, with the headline 'Brokers' Call'. Print Edition | Subscribe