Brokers' Call

CHINA AVIATION OIL

Broker: CIMB

Call: Buy

Target Price: $2

China Aviation Oil (CAO) is the sole jet fuel importer in China, supplying 30 per cent to 40 per cent of the country's overall jet fuel supply. It is seen as a proxy for China's burgeoning international aviation.

Benefiting from Shanghai Pudong airport's capacity expansion, CAO has a 33 per cent stake in the exclusive refueller for Shanghai Pudong International Airport. This associate has been a major contributor to CAO's historical profit before tax.

Completion of the fifth runway in end-2017/2018 and the satellite terminal in 2019 would cause this associate's contribution to lift off.

In the first half of calendar year 2016, CAO's international revenue accounted for 51 per cent of total revenue. It has also expanded its trading network to 42 airports outside mainland China.

The company's vision to trade globally would propel earnings growth. Its links to two of the world's busiest airports (Los Angeles and Hong Kong) and strong support structure (via strategic assets) provide the foundations for this global expansion.

CAO currently has a net cash position of about US$202.8 million (S$289.7 million), which gives it the freedom to capitalise on any M&A opportunities that may emerge.


CAPITALAND LIMITED

Broker: MayBank Kim Eng

Call: Buy

Target Price: $3.46

CapitaLand announced the sale of the remaining 45 units at The Nassim for about $2,300 per sq ft, which is 19 per cent lower than the actual sales price for the first 10 units sold last year.

While the pricing is not particularly compelling, the avoidance of potential qualifying certificate (QC) penalties from August 2017 and the ability to recycle capital into new projects with potentially higher returns are key positives.

Offloading this project ahead of its first QC deadline has allowed the developer to avoid $9 million of QC penalty for the first year, according to management.

Due to the low carrying value of this project, the latest transaction will lead to a decent earnings accretion of 3.8 cents or about S$161 million, based on proforma disclosures.

With the latest deal, CapitaLand has further de-risked its exposure to the Singapore residential market with very limited stock left for sale.


FIRST REIT

Broker: OCBC Investment Research

Call: Hold

Target Price: $1.32

First Reit (Freit) reported a stable set of fourth-quarter results in 2016 which met expectations.

Gross revenue and distribution per unit rose 5.1 per cent and 1.9 per cent year on year to S$27 million and 2.13 cents, respectively. However, it recorded a net fair value loss of S$8.9 million for its investment properties in the same period.

Looking ahead, Singapore's CPI growth is expected to be positive in 2017 and 2018, which would be a reprieve for Freit's base rental revision for its Indonesian properties.

While Freit has a healthy balance sheet (gearing of 30.8 per cent as at end of the financial year) and exposure to Indonesia's robust healthcare sector, limited upside potential is seen at current price levels.

A version of this article appeared in the print edition of The Straits Times on January 23, 2017, with the headline 'Brokers' Call'. Print Edition | Subscribe