Strategy 081015 Oir
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SINGAPORE
Strategy Update
MITA No. 007/06/2008
Strategy
15 October 2008
Flight to safety
Refinancing woes. Frozen credit markets have raised concerns globally and central banks are now working together to restore confidence in the market and to induce banks to resume their lending activity. In light of the tight credit market, companies that are highly geared and those that face near term refinancing obligations have come under intense scrutiny. The key risks facing these companies include the ability to secure refinancing under present tight credit situation, soaring finance costs in light of rising LIBOR (Exhibit 1) and widening spreads. Coupled with economic uncertainty. The deteriorating economic outlook also raises questions about companies’ abilities to fulfill their loan repayment obligations. Singapore has slipped into a technical recession, and the Ministry of Trade and Industry (MTI) has trimmed its growth forecast to around 3%, from 4%-5% previously (Exhibit 2). The Monetary Authority of Singapore (MAS) added that “external risks remain on the downside as the ongoing financial turmoil has presented ‘new uncertainties’ for the Singapore economy”. Softening demand for products and services, coupled with pressing inflation, could dampen earnings growth, and in turn, companies’ abilities to repay their loans. Companies with healthy cash positions are in a stronger position. In light of the above, companies with net cash positions or those that have little short term debt obligations are deemed to be in a stronger position. Conversely, those with high net gearing ratios, coupled with sizeable short term debts, are exposed to higher refinancing risk in the near term. Under our coverage, some of the companies that we favour, and have net cash positions, include Biosensors Int’l (BUY, S$1.02), Ezra (BUY, S$3.30), SembCorp Marine (BUY, S$4.98) and Singapore Press Holdings (BUY, S$5.14). While this is not an exhaustive list, these firms are fairly defensive in nature and are likely to be able to weather the ongoing turbulence. Impact of tight credit market more pronounced on Tech, REITS and Trusts. On the other hand, several companies in the technology sector are relatively highly geared and operate on thin margins, and this could expose them to potential risks in the face of macro headwinds. REITS and Trusts are also highly geared, and although most do not require short term refinancing, their further growth, which is typically spurred by asset acquisitions, hinges on their ability to secure debt financing, the terms of which may not be attractive in light of today’s tight credit market.
Research Team (65) 6531 9800 e-mail: [email protected]
Stock
Gross
Net
ST
LT
ST / LT
Gearing
Gearing
Debt
Debt
ratio
39%
Net Cash
(m) 0.2
(m) 45.2
(x)
1 Biosensors Int'l
NTA/
Reporting
share
Currency
(x) 37.3
($) 0.08
USD
2 Ezra
34%
Net Cash
81.2
56.1
26% Net Cash 3 SembMarine 29% Net Cash 4 SPH Source: Company Financials, OIR TIE = Times Interest Earned
241.0 14.5
176.9 573.6
1.4
3.7
0.68
USD
BUY
3.30
1.4 0.0
31.3 29.4
0.77 1.28
SGD SGD
BUY BUY
4.98 5.14
0.0
TIE
Please refer to the important disclosures at the back of this document.
Rating
Fair value
BUY
(S$) 1.02
Strategy Update
Exhibit 1: 12-month Libor rate, Jan 08 – present
4.5 4.0
%
3.5 3.0 2.5
02/10/2008
02/09/2008
02/08/2008
02/07/2008
02/06/2008
02/05/2008
02/04/2008
02/03/2008
02/02/2008
02/01/2008
2.0
Source: Bloomberg
Exhibit 2: Singapore’s Real GDP Growth vs Inflation, 2000 – 2008F
12
7
10
6
8
5
6
4
4
3
2
2
0
1
-2
2000
2001
2002
2003
2004
2005
2006
2007 2008F*
-4
0 -1
Real GDP (%) - LHS
CPI (%) - RHS
Source: Bloomberg *2008 forecasts based on official estimates. Inflation is expected to come in between 6% - 7%.
Page 2
15 October 2008
Strategy Update
SHAREHOLDING DECLARATION: The analyst/analysts who wrote this report holds NIL shares in the above securities. RATINGS AND RECOMMENDATIONS: OCBC Investment Research’s (OIR) technical comments and recommendations are short-term and trading oriented. However, OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month investment horizon. OIR’s Buy = More than 10% upside from the current price; Hold = Trade within +/-10% from the current price; Sell = More than 10% downside from the current price. DISCLAIMER FOR RESEARCH REPORT This report is solely for information and general circulation only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without our written consent. This report should not be construed as an offer or solicitation for the subscription, purchase or sale of the securities mentioned herein. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. OCBC Investment Research Pte Ltd, OCBC Securities Pte Ltd and their respective connected and associated corporations together with their respective directors and officers may have or take positions in the securities mentioned in this report and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally. Privileged/Confidential information may be contained in this message. If you are not the addressee indicated in this message (or responsible for delivery of this message to such person), you may not copy or deliver this message to anyone. Opinions, conclusions and other information in this message that do not relate to the official business of my company shall not be understood as neither given nor endorsed by it. Co.Reg.no.: 198301152E
Published by OCBC Investment Research Pte Ltd Page 3
For OCBC Investment Research Pte Ltd
Carmen Lee Head of Research 15 October 2008
Strategy Update
MITA No. 007/06/2008
Strategy
15 October 2008
Flight to safety
Refinancing woes. Frozen credit markets have raised concerns globally and central banks are now working together to restore confidence in the market and to induce banks to resume their lending activity. In light of the tight credit market, companies that are highly geared and those that face near term refinancing obligations have come under intense scrutiny. The key risks facing these companies include the ability to secure refinancing under present tight credit situation, soaring finance costs in light of rising LIBOR (Exhibit 1) and widening spreads. Coupled with economic uncertainty. The deteriorating economic outlook also raises questions about companies’ abilities to fulfill their loan repayment obligations. Singapore has slipped into a technical recession, and the Ministry of Trade and Industry (MTI) has trimmed its growth forecast to around 3%, from 4%-5% previously (Exhibit 2). The Monetary Authority of Singapore (MAS) added that “external risks remain on the downside as the ongoing financial turmoil has presented ‘new uncertainties’ for the Singapore economy”. Softening demand for products and services, coupled with pressing inflation, could dampen earnings growth, and in turn, companies’ abilities to repay their loans. Companies with healthy cash positions are in a stronger position. In light of the above, companies with net cash positions or those that have little short term debt obligations are deemed to be in a stronger position. Conversely, those with high net gearing ratios, coupled with sizeable short term debts, are exposed to higher refinancing risk in the near term. Under our coverage, some of the companies that we favour, and have net cash positions, include Biosensors Int’l (BUY, S$1.02), Ezra (BUY, S$3.30), SembCorp Marine (BUY, S$4.98) and Singapore Press Holdings (BUY, S$5.14). While this is not an exhaustive list, these firms are fairly defensive in nature and are likely to be able to weather the ongoing turbulence. Impact of tight credit market more pronounced on Tech, REITS and Trusts. On the other hand, several companies in the technology sector are relatively highly geared and operate on thin margins, and this could expose them to potential risks in the face of macro headwinds. REITS and Trusts are also highly geared, and although most do not require short term refinancing, their further growth, which is typically spurred by asset acquisitions, hinges on their ability to secure debt financing, the terms of which may not be attractive in light of today’s tight credit market.
Research Team (65) 6531 9800 e-mail: [email protected]
Stock
Gross
Net
ST
LT
ST / LT
Gearing
Gearing
Debt
Debt
ratio
39%
Net Cash
(m) 0.2
(m) 45.2
(x)
1 Biosensors Int'l
NTA/
Reporting
share
Currency
(x) 37.3
($) 0.08
USD
2 Ezra
34%
Net Cash
81.2
56.1
26% Net Cash 3 SembMarine 29% Net Cash 4 SPH Source: Company Financials, OIR TIE = Times Interest Earned
241.0 14.5
176.9 573.6
1.4
3.7
0.68
USD
BUY
3.30
1.4 0.0
31.3 29.4
0.77 1.28
SGD SGD
BUY BUY
4.98 5.14
0.0
TIE
Please refer to the important disclosures at the back of this document.
Rating
Fair value
BUY
(S$) 1.02
Strategy Update
Exhibit 1: 12-month Libor rate, Jan 08 – present
4.5 4.0
%
3.5 3.0 2.5
02/10/2008
02/09/2008
02/08/2008
02/07/2008
02/06/2008
02/05/2008
02/04/2008
02/03/2008
02/02/2008
02/01/2008
2.0
Source: Bloomberg
Exhibit 2: Singapore’s Real GDP Growth vs Inflation, 2000 – 2008F
12
7
10
6
8
5
6
4
4
3
2
2
0
1
-2
2000
2001
2002
2003
2004
2005
2006
2007 2008F*
-4
0 -1
Real GDP (%) - LHS
CPI (%) - RHS
Source: Bloomberg *2008 forecasts based on official estimates. Inflation is expected to come in between 6% - 7%.
Page 2
15 October 2008
Strategy Update
SHAREHOLDING DECLARATION: The analyst/analysts who wrote this report holds NIL shares in the above securities. RATINGS AND RECOMMENDATIONS: OCBC Investment Research’s (OIR) technical comments and recommendations are short-term and trading oriented. However, OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month investment horizon. OIR’s Buy = More than 10% upside from the current price; Hold = Trade within +/-10% from the current price; Sell = More than 10% downside from the current price. DISCLAIMER FOR RESEARCH REPORT This report is solely for information and general circulation only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without our written consent. This report should not be construed as an offer or solicitation for the subscription, purchase or sale of the securities mentioned herein. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. OCBC Investment Research Pte Ltd, OCBC Securities Pte Ltd and their respective connected and associated corporations together with their respective directors and officers may have or take positions in the securities mentioned in this report and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally. Privileged/Confidential information may be contained in this message. If you are not the addressee indicated in this message (or responsible for delivery of this message to such person), you may not copy or deliver this message to anyone. Opinions, conclusions and other information in this message that do not relate to the official business of my company shall not be understood as neither given nor endorsed by it. Co.Reg.no.: 198301152E
Published by OCBC Investment Research Pte Ltd Page 3
For OCBC Investment Research Pte Ltd
Carmen Lee Head of Research 15 October 2008
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