singapore market focus monthly strategy - vickers...forex losses while first resources was affected...

ed: JS / sa: AS, PY

STI : 3,136.48

Analyst Janice CHUA +65 6682 3692 Yeo Kee Yan CMT +65 6682 3706 [email protected] [email protected] Ling Lee Keng +65 66823703 [email protected]

Key Indices

Current % Chng STI Index 3,136.48 0.4% FS Small Cap Index 395.58 -0.6% USD/SGD Curncy 1.41 -0.2% Daily Volume (m) 2,777 Daily Turnover (S$m) 1,712 Daily Turnover (US$m) 1,214

Source: Bloomberg Finance L.P. Market Key Data

(%) EPS Gth Div Yield 2016 (5.1) 3.7 2017F 14.9 3.7 2018F 7.4 3.9

(x) PER EV/EBITDA 2016 17.3 14.0 2017F 15.1 12.6 2018F 14.0 11.6

Source: DBS Bank

DBS Group Research . Equity 6 Mar 2017

Singapore Market Focus

Monthly Strategy Refer to important disclosures at the end of this report

Inflation bets, M&A plays • March events to hold back the bull temporarily

• Earnings upgrades push up growth to 9.3% for

2017(F)

• Pare exposure to REITS, place inflation bets and

ride on M&A fever

March events to drive volatility. Macro events are back in focus this month. Consensus expectations for a FED rate hike on March 15 shot up to 90% chance on optimism that inflation will continue to rise and the labour market tightens further as the US economy is poised for further recovery. A March hike could set the path for four hikes this year. The Dutch parliamentary elections on March 15 will set the stage for key elections across Europe this year. Keep a watch on far-right populist Dutch Freedom Party (PVV), which has called for a Dutch referendum on leaving the EU and is campaigning to stop the alleged “Islamisation of the Netherlands”.

Earnings upgrades, not downgrades! For the first time in two years, the earnings revision trend has turned positive, +2.4% for FY17F and +4.1% for FY18F, pushing up STI’s earnings growth to 9.3% in FY17F and 6.1% in FY18F. Key upgrades came from the banks UOB and OCBC as well as crude palm oil (CPO) stocks Bumitama Agri, First Resources and Wilmar International.

STI to pause, 3200 a formidable resistance. We expect a short-term pause to the current rally as the uncertainty over a possible March rate hike and the French elections in April may offset optimism that the Singapore economy is turning for the better. We peg a short-term range from 3050 to 3150 and any attempt to break above 3150 will not sustain in the near-term as the 3200 level that coincides with 14.04x (+0.25sd) 12-mth forward PE is a formidable short-term resistance.

Rising interest rates negative for SREITs. A 1% interest rate increase will see SREITs’ dividend distribution falling by 2.9%. Any funds flow out of the S-REITs sector will affect the large-cap stocks. Those with currently less than 10% upside to our TPs are Ascendas REIT, Suntec REIT, Mapletree Commercial Trust, Mapletree Logistics Trust and CapitaLand Commercial Trust. Top slice Suntec REIT, SPH REIT and OCBC.

Inflation bets -ride on O&G/commodity sectors. We prefer the Oil & Gas (O&G) and commodity sectors to ride on the global economic recovery and inflationary environment. Our O&G picks are Sembcorp Industries, Sembcorp Marine, Ezion, Mermaid Maritime and PACC Offshore Services Holdings (POSH). While Sembcorp Marine has exceeded our fundamental TP of S$1.78, our technical objective is S$2.20 followed possibly by S$2.47. Our CPO picks are First Resources and Bumitama Agri.

M&A plays on the roll. 2017 started with a bang, with five takeover and privatization deals announced in just two months. This trend will continue. Our privatization and takeover picks are Venture Manufacturing, Bukit Sembawang, POSH, Mermaid, PEC and Fu Yu.

STOCKS

Price Mkt Cap 12mth Target Price

Performance (%)

S$ US$m S$ 3 mth 12 mth Rating

First Resources 1.89 2,119 2.15 (2.6) 1.3 BUYBumitama Agri 0.785 975 0.99 0.0 6.1 BUYSembcorp Industries 3.26 4,118 3.80 12.8 16.4 BUYEzion Holdings 0.37 543 0.62 2.8 (19.8) BUYVenture Corporation 11.13 2,199 11.37 13.2 35.7 BUYPACC Offshore 0.365 469 0.42 14.1 15.9 BUYMermaid Maritime 0.22 220 0.25 58.3 109.5 BUYBukit Sembawang 5.23 958 7.55* 14.7 22.2 NRFu Yu Corp Ltd 0.205 109 0.25* 8.5 29.8 NRPEC Ltd 0.62 111 0.73* 14.8 57.0 NR

* Potential Target Source: DBS Bank, Bloomberg Finance L.P. Closing price as of 2 Mar 2017

Market Focus

Closing 2016 with earnings decline of 7.3%

Looking back at February The benchmark Straits Times Index built upon January’s 167 point rally by adding a further 50 points last month, underpinned by a firm fourth quarter result season that saw the first upward revision to overall earnings in two years. The O&G sector was the best performer with the FTSE ST Oil & Gas Index higher by close to 10% on optimism that OPEC member countries are complying with their assigned output cuts and

news that Russian producers may trim output by more than 100,000 bpd from Feb 2017. Sector sentiment received another boost after Sembcorp Marine reported no major impairments for its 4QFY16 results. The consumer goods sector was the worst performer as CPO stocks gave back intra-month gains, in line with the decline in CPO prices on concerns about slowing production.

Performance of key indices

Source: DBS Bank

4Q2016 results review

Sector in line below above

Banking 2% 1%

Commodities Related 5%

Consumer Goods 1% 1%

Consumer Services 6% 2% 2%

Financials 3%

Health Care 5% 1%

Industrials 8% 3% 3%

Oil & Gas 2% 6%

Real Estate 3% 1% 2%

REITS 24% 5% 5%

Technology 1% 2%

Telecommunications 1% 2%

Grand Total 56% 28% 16%

Source: DBS Bank

The results for the December quarter were generally better than expected, with only 28% of the companies reporting earnings that were below our expectations. This came mainly from cyclical sectors such as oil and gas, and commodities related companies. Oil and gas companies were affected by asset impairments, and core operating losses due to lower

utilisation and rates. CPO stocks like Bumitama were hit by forex losses while First Resources was affected by higher borrowing costs, and lower contributions from non-controlling interests. The report card for full year 2016 revealed a decline in overall corporate earnings of 5.2% for stocks in our coverage list. Almost all sectors reported lower earnings except REITS, Technology, and Telecoms. Performance was dragged down by a combination of factors. Provisions and asset write downs affected asset based companies like Keppel Corp (write-down on O&M assets) and SIA (write-down on Tigerair brand); operating losses for the oil and gas sector (Ezra, Vard, Nam Cheong, Pacific Radiance, POSH), higher provisions by banks, especially OCBC, and start-up losses by healthcare companies (IHH Healthcare). Earnings upgrades instead of downgrades! For the first time in two years, the earnings revision trend has turned a positive 2.4% for FY17F and 4.1% for FY18F. Overall, we now expect earnings growth of 9.3%(FY17F) and 6.1% (FY18F) for STI stocks. STI’s target levels are lifted by around 35 points as a result of the upward earnings revision.

% change YTD

Page 2

Market Focus

STI at various forward PE levels

-0.5 sd

12.87x

PE

-0.25 sd

13.25x

PE

Avg

13.64x

PE

+0.25 sd

14.02x

PE

+0.5 sd

14.41x

PE

FY17 2,909

(+25)

2,994

(+27)

3,083

(+27)

3,168

(+25)

3,257

(+28)

FY18 3,086

(+41)

3,177

(+41)

3,270

(+43)

3,361

(+43)

3,455

(+46)

Avg 17 &

18

2,997

(+33)

3,086

(+36)

3,176

(+34)

3,265

(+35)

3,356

(+37)

12-mth

fwd PE

2953 3040 3130 3216 3306

Source: DBS Bank Key earnings upgrades came from banks UOB and OCBC; we raised earnings by 6.3% for FY17F and 8.8% for FY18F on account of improvements in net interest margin (NIM), lower credit cost and better loan growth. We raised earnings for the Industrial sector by 13.2% for FY17F and 3.8% for FY18F, mainly attributed to ST Engineering, to reflect stronger growth assumptions at the Electronics segment, and SIA Engineering, to account for better associate/JV profit. The Healthcare sector suffered earnings downgrades dragged lower by RHT Health Trust, Raffles Medical Group and Riverstone. In terms of recommendations, we upgraded UOB, UMS Holdings, Cambridge Industrial Trust and Sembcorp Marine to BUY. The worst could be over for UOB. Of its peers, UOB stood out with asset quality prospects appearing more optimistic. UMS is well positioned to benefit from positive global semiconductor equipping trends, and is also an attractive takeover target. There could be potential synergies introduced by the new sponsor for Cambridge Industrial Trust. We see re-rating catalysts ahead for Sembcorp Marine stemming mainly from: 1) SMM as a pure play to ride the oil price recovery; and 2) sizeable new orders for non-drilling solutions. We downgraded OCBC, Jumbo, HPH Trust, iFAST and Procurri to HOLD. We believe that positives are priced in for OCBC and we have yet to see the worst for non-performing loans (NPLs). The valuation for Jumbo is rich while operating environment for HPH Trust remains tough. There are no catalysts in sight for iFAST. Procurri needs to demonstrate better execution to gain market confidence and trades at a superior PE multiple.

Market Outlook

Will a March hike set the path for quarterly rise? Macro events are back in focus this month. The first is the FOMC meeting on March. With January inflation rising to a 5-year high of 2.5% and the unemployment rate falling to 4.8%, the odds for a rate hike this month spiked to 90% with consensus expecting three rate hikes this year (source: Bloomberg). A rate hike in March could set the path for one rate hike per quarter or four hikes this year as the previous hike was in December last year. DBS Research has forecast four rate hikes this year, lifting the FED funds rate to 1.75% and expects a total of 7-8 hikes (200 bps) by the end of 2018. Dutch election sets stage for key elections across Europe The Dutch parliamentary elections on March 15 will set the stage for key elections across Europe this year. Far-right populist Geert Wilders and his Dutch Freedom Party (PVV) continues to fare well in polls, running neck-and-neck or even taking the lead to the incumbent’s People's Party for Freedom and Democracy. Wilders has called for a Dutch referendum on leaving the EU and campaigns to stop the alleged “Islamisation of the Netherlands”. The Euro will come under pressure if populist anti-EU parties win at elections across Europe. Singapore companies with currency and business exposure to Europe may be affected if the Euro weakens sharply. Companies with more than 20% Euro exposure are Ascott Residence Trust (21% of net property income (NPI)), IREIT Global (100% NPI) and HPH Trust (20-30% of outbound cargo to Europe) Key Events

Date Event Comments

March 14-15 FOMC meeting Consensus sees a 90% chance of rate

hike lifting FED funds rate to 1%

March 15

Holland’s

parliamentary

elections

Sets the stage for key elections across

Europe this year. Far-right populist

Geert Wilders and his Dutch Freedom

Party (PVV) will contest. He has called

for a Dutch referendum on leaving

the EU and campaigned to stop the

alleged “Islamisation of the

Netherlands”. The PVV continues to

fare well in polls, running neck-and-

neck or even taking lead to the

incumbent’s People's Party for

Freedom and Democracy.

Source: DBS Bank, Bloomberg Finance L.P.

Page 3

Market Focus

End to earnings downgrade trend

Source: DBS Bank

Overall earnings revision by sector

Source: DBS Bank

Sector Performance

EPS Growth (%) EPS CAGR PER (x) Div Yld

Sector 2016 2017F 2018F 16-18 2016 2017F 2018F 2016 Banking -4.0 15.6 6.1 10.8 11.6 10.0 9.4 3.4

Consumer Goods -9.4 29.2 9.5 19.0 20.1 15.5 14.2 2.0

Consumer Services -3.8 10.3 11.0 10.7 23.9 21.6 19.5 3.4

Financials -0.2 -5.3 7.2 0.8 19.3 20.4 19.0 5.9

Health Care -15.4 25.0 13.8 19.3 49.0 39.2 34.5 1.0

Industrials -9.4 74.2 8.2 37.3 34.9 20.0 18.5 3.4

Oil & Gas -29.4 26.8 24.7 25.8 27.2 21.4 17.2 2.2

Real Estate -8.1 11.4 10.5 10.9 19.0 17.0 15.4 3.7

REITS 1.6 3.8 2.1 2.9 16.1 15.5 15.2 6.2

Technology 10.1 10.3 7.6 8.9 16.1 14.6 13.6 4.5

Telecommunications 0.7 2.8 4.6 3.7 16.3 15.9 15.2 4.7

DBS Coverage -5.1 15.0 7.4 11.2 17.3 15.1 14.0 3.7 STI DBSV Forecast Avg (Before EI)

-7.3 9.3 6.1 15.0 13.8 13.0

STI Consensus -7.3 6.5 7.2 15.1 14.2 13.2


Sector F Y17 F Y18

Banking 6.3% 8.8%

Commodities Related 13.9% 11.6%

Consumer Goods -1.6% 4.0%

Consumer Serv ices -0.3% -0.7%

Financials 0.6% 1.9%

Health Care -8.1% -8.9%

Industrials 13.2% 3.8%

Oil & Gas -9.7% -1.1%

Real Estate -7.6% 1.5%

REITS -0.3% 0.3%

Technology 3.3% 6.8%

Telecommunications -0.8% -0.5%

Grand Total 2.4% 4.1%

Ex Property 3.3% 4.3%

Ex Bank 0.3% 1.6%

Current v s Prev . % Chng

Page 4

Market Focus

Chartist view : STI’s uptrend losing momentum In the short-term, we expect a pause to the current rally. The uncertainty over a possible March rate hike and the French elections in April offsets optimism that the Singapore economy is turning for the better, and the April-May ex-dividend period. On the technical charts, we observe negative divergences on both the daily MACD and the 14-day RSI indicators. The 14-day RSI has also turned down from an overbought level of 70. These forewarns that STI’s YTD rally is losing momentum. We

peg a short-term range from 3050 to 3150. The 3050 support level coincides with 13.25x (-0.25sd) 12-month forward PE. To the upside, we believe any attempt to break above 3150 will not sustain in the short-term as the 3200 level that coincides with 14.04x (+0.25sd) 12-mth forward PE is a formidable short-term resistance. Equity markets may have to get pass the March FOMC meeting and the April French elections before resuming their climb.

Straits Times Index

Source: DBS Bank

Page 5

Market Focus

Strategy

Riding an inflationary, rising interest rates environment The probability of a FED rate hike this month has shot up to 90% on optimism that the US economy is poised to recover further this year. DBS Research forecasts four rate hikes this year lifting the FED funds rate to 1.75% and expects a total of 7-8 hikes (200 bps) by the end of 2018. Our Singapore economist lifted 2017 CPI forecast to +1.2% (from +0.9%), reversing from a deflationary -0.5% figure in 2016. Look to ride upon an inflationary and rising interest rates environment. Negative for SREITS SREITs, which have underperformed most other sectors YTD, will continue to do so. DBS Research forecasts the MAS 2-year

& 10-year SGS yields rising to 1.95% and 3.05% respectively by end-2017. A 1% interest rate increase will see SREITs dividend distribution falling by 2.9%. Top slice selected REITS which have outperformed Any funds flow out of the S-REITs sector will affect the large-cap stocks. Those with currently less than 10% upside to our TPs are Ascendas REIT, Suntec REIT, Mapletree Commercial Trust, Mapletree Logistics Trust and CapitaLand Commercial Trust. Small-cap S-REITs with less than 5% upside to our TPs are Cache Logistics Trust, IREIT Global, Cambridge Industrial Trust, Ascendas India Trust, SPH REIT and OUE Commercial REIT. Top slice Suntec REIT and SPH REIT.

SREITs

Company Price 1 Mar

12-mth Target

Target Return

Mkt Cap (S$m) Rcmd Div Yield

17 (%)

Net Debt / Equity 17

(%)

P/BV 16 (x)

Large caps with <10% upside to TP Suntec REIT 1.735 1.75 1% 4,414 HOLD 5.8 0.4 0.8 Ascendas Reit 2.490 2.65 6% 7,177 BUY 6.2 0.4 1.2 OCBC 9.53 10.3 8% 39,867 HOLD 3.8 cash 1.1 Mapletree Logistics Trust 1.065 1.15 8% 2,663 BUY 7.0 0.4 1.1 Mapletree Commercial Trust 1.500 1.62 8% 4,307 BUY 6.0 0.4 1.2 CapitaLand Commercial Trust 1.550 1.69 9% 4,593 BUY 6.0 0.4 0.9 Small caps with <5% upside to TP Singapore Post 1.395 1.31 -6% 3,172 HOLD 3.6 cash 2.2 Cache Logistics Trust 0.820 0.77 -6% 738 HOLD 8.9 0.4 1.1 IREIT Global 0.760 0.75 -1% 470 HOLD 8.2 0.4 1.2 Ascendas India Trust 1.130 1.12 -1% 1,051 BUY 5.5 0.4 1.7 Cambridge Industrials 0.580 0.60 3% 757 BUY 6.9 0.4 0.9 SPH REIT 0.970 1.00 3% 2,477 HOLD 5.9 0.3 1.0 OUE Commercial REIT 0.700 0.74 5% 912 HOLD 7.2 0.4 0.8

Source: DBS Bank Banks have done well - pause for a breather While banks should be underpinned by NIM uplift from rate hikes, we do not see stock prices powering much further in the short-term because (1) higher NIM expectations have been factored-in with the strong share price performances since Trump won the elections last November (2) NIM uplift could be muted for OCBC and only become more apparent in 2H17 for UOB. Take profit on OCBC.

Commodity, oil and gas stocks are good inflation bets We prefer the O&G and commodity sectors to ride on the global economic recovery and rising inflation environment. Our O&G picks are Sembcorp Industries, Sembcorp Marine, Ezion, Mermaid Maritime and PACC Offshore Services Holdings. While Sembcorp Marine has exceeded our fundamental TP of S$1.78, our technical objective is S$2.20 followed possibly by S$2.47. Our CPO picks are First Resources and Bumitama Agri.

O&G and CPO picks

Company Price 1 Mar

S$

12mthTarget Price S$

Target Return

PER 17 (x)

PER 18 (x)

EPS Gth 17 (%)

EPS Gth 18 (%)

Div Yield 17 (%)

Net Debt / Equity 17

(%)

P/BV 16 (x)

CPO First Resources 1.875 2.15 14% 11.9 10.6 41.5 12.2 2.1 0.0 2.4Bumitama Agri 0.770 0.99 29% 10.1 10.0 32.5 0.1 0.0 0.3 2.1O&G SembCorp Industries 3.270 3.80 16% 14.8 13.5 -3.0 9.3 2.2 0.9 0.9SembCorp Marine* 1.905 1.78 -6% 38.1 26.4 32.7 44.0 1.3 0.9 1.6Ezion Holdings 0.380 0.62 63% 25.6 12.2 53.8 110.8 - 1.0 0.5Mermaid Maritime 0.200 0.25 25% 25.4 21.0 -53.8 21.0 - 0.1 0.6POSH 0.360 0.42 16% nm nm nm nm - 1.1 0.7

*Technical objective of S$2.20, possibly even S$2.47 Source: DBS Bank

Page 6

Market Focus

M&A plays on the roll. 2017 started with a bang, with five takeover and privatization deals announced in just two months. This trend will continue given the attractiveness of Singapore’s small medium enterprises vs its valuation. Over the weekend, Kingboard Copper Foil announced a privatization proposal by parent Kingboard Chemical Group at40c per share while Spindex may see a counter takeover offer from Star Engineering at a higher than the privatization offer price of 85c per share from the founder, announced in Feb 2017. Our potential privatization and takeover picks are Venture Manufacturing, Bukit Sembawang, POSH, Mermaid, PEC and Fu Yu. Venture is a global provider of technology products and solutions. It is best known for its superior capabilities in Original Design Manufacturing (ODM) and in providing high mix, high-value and complex manufacturing. It is in net cash position and has fragmented shareholding structure. Founder Mr Wong has about 7% stake in Venture. Bukit Sembawang is one of the few developers in Singapore that still have substantially un-developed landbank in

Singapore and could be an interesting target for investors looking to land-bank. POSH is 81.89%- owned by the Kuok group, and is a more stable long-term bet versus peers with no immediate debt concerns and positive operating cash flows YTD. Mermaid is c.87.3% held by the Thoresen group and its related management, leaving only S$36.6m in free-float market capitalization on the table. Additionally, Mermaid has very low debt levels versus peers, with a net gearing of only 0.04x as of 2Q16, this adds to its attractiveness as a privatization candidate. PEC is deemed an appealing privatization candidate, sitting on a cash hoard of S$148m with minimal debt of S$13m as of end-December 2016, close to its current market cap. In addition, it is tightly held by the founder – Ko family, which collectively owns c.65% of PEC, based on our estimate. For Fu Yu, the stock looks attractive for its 7.2% yield and ex-cash PE of only 3.3x for FY17F (which is the lowest among its peer group), leading to potential for a privatization or takeover offer.

Privatization and Takeover deals in 2017 YTD

Source: SGX Announcement, DBS Bank

Compa nyDa te

a nnounce d Offe r de ta i l sOffe r pric e

La st c lose prio r to offe r Pre mium

Healthway Medical Corp

07-Feb-17 Voluntary cash offer by Lippo-linked group at S$0.042 per share. S$0.042 S$0.040 5%

Auric Pacific 07-Feb-17 Privatization offer by controlling shareholder, (Riady family) at S$1.65 cash per share.

S$1.650 S$1.455 13%

Spindex 09-Feb-17 Proposed privatisation of Spindex by founder via a Scheme of Arrangement at S$0.85 per share

S$0.850 S$0.700 21%

Spindex 03-Mar-17 Scheme was terminated. Founder announced a mandatory general offer at S$0.85 per share, after crossing the 30% take-over threshold.

- - -

Spindex 03-Mar-17 Following the offer announcement, Star Engineering, a subsidiary of Northstar Equity Partners, announced a potential offer at higher than S$0.85 per share. However, Star Engineering did not put forward a firm offer or a specific offer price.

- - -

Kingboard Copper Foil 03-Mar-17 Voluntary offer by the Kingboard Chemical group at S$0.40 cash per share.

S$0.400 S$0.340 18%

International Healthway Corp

16-Feb-17 Mandatory cash offer by major shareholder OUE at S$0.106 per share.

S$0.106 S$0.104 2%

Page 7

Market Focus

Revisions to recommendations Stock Name Current Previous Change Date

Hutchison Port Holdings Trust HOLD BUY 13-Feb-2017

Jumbo Group HOLD BUY 14-Feb-2017

OCBC HOLD BUY 14-Feb-2017

First Resources BUY HOLD 17-Feb-2017

Indofood Agri Resources HOLD BUY 17-Feb-2017

SIIC Environment HOLD BUY 17-Feb-2017

iFAST Corporation HOLD BUY 20-Feb-2017

UOB BUY HOLD 20-Feb-2017

Procurri Corporation Limited HOLD BUY 23-Feb-2017

Sembcorp Marine BUY HOLD 23-Feb-2017

Significant Reports

Date Report Title Sub Title

Regional

10-Feb-17 ASEAN Aviation Flying a little lower

10-Feb-17 Animal Protein An Asian consumption story

17-Feb-17 Plantation Companies Resilient price, volume driven

Singapore

01 Feb 2017 Best World International – Initiating Coverage Buckling down China

06-Feb-17 Wired Weekly

06-Feb-17 DBS Driller Top management shake-up at Pertamina


13-Feb-17 DBS Driller Yards to bid for Shell's Nigeria FPSO contract


20-Feb-17 DBS Driller Saudis : no need to extend OPEC deal

21-Feb-17 Budget 2017 Expansionary budget, targeted approach

21-Feb-17 Small Mid Cap Monthly Jump on the privatisation bandwagon

Source: DBS Bank

Page 8

Market Focus

STI Key Event Chart


Best and worst performing stocks in DBS coverage in February

Big Caps (>US$2bn) Small & Mid Caps (<US$2bn)


-2,500

2,600

2,700

2,800

2,900

3,000

3,100

3,200

Volume STI Index

RMB devaluation

US rate hikeworries

Oil price decline

RMB depreciation

Weak earnings outlook

STI valuation attractive at -2SD

Expectations of further monetary policies easing

Pullback in USD

Rebound in oil price

ST Index @ 3 Mar 2017: 3122; +2.6% m-o-m; +8.4% YTDSTI

Average daily volume: 1.69bn

PBOC cut requirement ratio rates by 50 basis points

USDSGD pullback

STI valuation moved up to -1SD

Weak 1Qearnnigs,Return of US rate hike worries

Expectation of a delay in rate hike

Pul lback in USD

Uncertain outlook; selling ahead of BREXIT

Fl ight to safety -rebound led by REITS and Telco

Britain exit EU

Weak corporate results; O&G companies not meeting loan obligations

Rebound led by Banks (expectation of higher NIM), O&G (rebound in oi l price) and Property (attractive valuation; M&A interest)

US presidential election

Page 9

Market Focus

Macro Data

Key Data Period m-o-m / y-o-y chg

Prev./ Consensus

(y-o-y)

Comment

NODX

Jan-17 +5.0%/ +8.6%

+9.4% / +9.6%

Non-oil domestic exports (NODX) continued to grow for a third straight month in January. January's 8.6% y-o-y increase was below market expectations of a 9.6% gain - and lower than the growth in December (9.1%) and November (15.6%). Electronic and non-electronic NODX exports rose in January. Led by shipments of integrated circuits, parts of PCs and disk media products, electronic NODX extended its rise for a third straight month to 6.1% last month, up from a 5.7 rise in December and 3.5% in November. Non-electronic NODX, after a 21.1% spike in November which eased to a 10.7% rise in December, still chalked up 9.9% growth in January.

CPI

Dec-16 0.2% / +0.6%

0.6% / 0.6% Consumer price index (CPI) in December rose for the first time in more than two years. The all-items CPI in December rose 0.2% y-o-y, on the back of higher private road transport costs, which rose 1.7% from a year earlier due to higher petrol prices and car park fees. Services inflation edged up to 1.6% while food inflation was 2% in December. Core Inflation - which excludes "accommodation" and "private road transport" - was 1.2% in December, slightly lower than the 1.3% in November.

PMI

Jan-17 51.0 50.6 / 50.5 Singapore’s manufacturing sector continued to show optimism in January, with the purchasing manager's index (PMI) recording its highest reading in more than two years. The PMI rose 0.4 from the previous month to hit 51.0 in January. The expansion was primarily driven by faster rates of expansion in factory output, new orders, new exports, and inventory holding. The electronics cluster also saw its PMI rise. It improved by 0.6 to hit 51.8 in January. This was due to a faster rate of expansion in factory output, employment, new orders and new exports.

Retail Sales

Dec-16 -1.9% /

+0.4%

+1.1% / +1.4%

Singapore’s retail sales rose a marginal 0.4% in Dec 2016 compared to a year ago. Excluding motor vehicle sales, retail sales in Dec rose 0.3% year-on year. Compared to the previous month, the seasonally adjusted retail sales declined 1.9%, largely due to a drag in motor vehicle sales which dipped by a seasonally adjusted 11.9% compared to Nov 2016. Stripping out motor vehicle sales, retail sales rose 0.7% month-onmonth.

Manufacturing Output

Jan-17 -6.0% / +2.2%

+21.3% / +9.5%

Industrial production in January 2017 recorded a lower than expected growth of 2.2% compared to the same month a year ago. With the volatile biomedical manufacturing stripped out, output grew 7% y-o-y. Compared to December 2016, factory output dipped 6% in January 2017. Excluding biomedical manufacturing, output was down 1.5%. The January print was led by robust growth of the precision engineering (24%) and electronics (14.8%) cluster, which offset declines in the general manufacturing industries (-13.8%), biomedical manufacturing (-13.5%) and transport engineering sector (-3.8%).

Bank Loan

Jan-17 -/+2.8% +2.9%/- Bank lending in December 2016 grew 2.9% y-o-y, higher than the 1.1% registered in November. This level of growth was last seen in February 2015. Business lending, lending to financial institutions and the construction sector more than made up for persistent weakness in lending to trade-related industries. Overall, business lending rose 2.8% to S$367 billion - again a pace of growth not posted since January 2015. Consumer loans gained 3% in December from a year ago to S$250 billion, similar to the increase in November. Bank lending rose 1.1% in December 2016 from the month before, compared to the 0.4% growth in November. Business loans rose 1.7% in December from November, while consumer loans grew 0.3%.

Property sales

Jan-17 - - Developers in Singapore sold 381 private homes in January 2017, up from 367 private homes in December 2016 and 324 units in January 2016. These figures exclude executive condominiums (ECs). Including ECs, developers found buyers for 565 units in January 2017, down from the 580 units in December 2016 but higher than the 480 units in January 2016.


Page 10

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: AS, PY

BUY Last Traded Price ( 27 Feb 2017): S$1.87 (STI : 3,108.62) Price Target 12-mth: S$2.15 (15% upside) (Prev S$2.19) Potential Catalyst: Consistent 1H17 earnings delivery Where we differ: Higher FY17F and FY18F earnings on higher CPO and PK price forecasts Analyst Ben SANTOSO +65 6682 3707 [email protected]

What’s New • 4Q16 earnings slightly below on higher borrowing

costs, non-controlling interests

• FY17F FFB output growth guided at 15% • FY17F/18F earnings trimmed by 2% each on higher

upkeep costs

• TP adjusted to S$2.15 – reiterate BUY

Price Relative

Forecasts and Valuation FY Dec (US$m) 2016A 2017F 2018F 2019F

Turnover 575 640 675 716EBITDA 268 328 353 376Pre-tax Profit 183 252 279 299Net Profit 125 177 199 216Net Pft (Pre Ex.) 125 177 199 216Net Pft (ex. BA gains) 115 177 199 216Net Pft Gth (Pre-ex) (%) 31.1 41.5 12.2 8.5EPS (S cts) 11.1 15.7 17.6 19.1EPS Pre Ex. (S cts) 11.1 15.7 17.6 19.1EPS Gth Pre Ex (%) 31 41 12 9Diluted EPS (S cts) 11.1 15.7 17.6 19.1Net DPS (S cts) 1.9 3.9 4.7 5.2BV Per Share (S cts) 78.1 89.9 102.8 116.7PE (X) 16.8 11.9 10.6 9.8PE Pre Ex. (X) 16.8 11.9 10.6 9.8P/Cash Flow (X) 7.9 9.0 7.6 7.0EV/EBITDA (X) 8.8 6.7 5.8 5.0Net Div Yield (%) 1.0 2.1 2.5 2.8P/Book Value (X) 2.4 2.1 1.8 1.6Net Debt/Equity (X) 0.2 0.0 CASH CASHROAE (%) 15.5 18.7 18.3 17.4

Earnings Rev (%): (2) (2) -Consensus EPS (S cts): 13.7 17.2 22.7Other Broker Recs: B: 14 S: 0 H: 4

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Strong earnings outlook Consistent delivery. We expect First Resources (FR) to book a strong 54% earnings growth this year – premised on volume recovery. We also expect relatively strong crude palm oil (CPO) and palm kernel (PK) average prices to continue this year; partly offset by slightly lower expected biodiesel output and thin refining margins. In this report, we reiterate our BUY rating on 15% potential upside (excluding 2% dividend yield). FY17F/18F earnings trimmed by 2% each. FR booked core 4Q16 earnings (excluding impact from biological asset gains/losses) of US$48.1m (+176% y-o-y; +34% q-o-q), bringing FY16 core earnings to US$115.5m – slightly below US$120.5m forecast. The group’s core FY16 operating profit of US$194.5m – was slightly ahead of the US$190.8m expected; but was more than offset by higher-than-estimated borrowing costs and non-controlling interests. We lowered FY17F/18F earnings by 2% each; on account of higher expected labour unit costs and feedstock (FFB of fresh fruit bunch and CPO or crude palm oil) costs. TP is adjusted slightly to S$2.15. Volume growth to decelerate from 2019. FR’s aggressive planting in East and West Kalimantan between FY12 and FY14 will contribute to the group’s strong volume and earnings growth through FY18F. Subject to opportunistic acquisitions, we expect FR’s output growth to decelerate from FY19F, as new planting is forecast to moderate from FY16 onwards (excluding new acquisitions). Valuation:

We employed DCF methodology (FY17F base year) to arrive at FR’s fair value of S$2.15/share (WACC 11.4%; TG 3%) – adjusted from S$2.19 previously. We believe the counter’s strong expected earnings growth has not been priced in. Key Risks to Our View:

There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.1m MT) this year. CPO price could also move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop. Changes in fund flows towards or out of emerging markets/commodities would also affect valuations of plantation counters. At A Glance

Issued Capital (m shrs) 1,584Mkt. Cap (S$m/US$m) 2,962 / 2,108Major Shareholders (%)Eight Capital Inc 64.1King Fortune International Inc 5.6

Free Float (%) 30.43m Avg. Daily Val (US$m) 2.9ICB Industry : Consumer Goods / Food Producers

DBS Group Research . Equity 28 Feb 2017

Singapore Company Guide

First Resources Version 8 | Bloomberg: FR SP | Reuters: FRLD.SI Refer to important disclosures at the end of this report

74

94

114

134

154

174

194

214

1.3

1.5

1.7

1.9

2.1

2.3

2.5

2.7

Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Relative IndexS$

First Resources (LHS) Relative STI (RHS)

ASIAN INSIGHTS VICKERS SECURITIES Page 2

Company Guide

First Resources

WHAT’S NEW

Strong earnings outlook

Highlights 4Q16 core earnings slightly below expectations First Resources (FR) booked core 4Q16 earnings (excluding impact from biological asset gains/losses) of US$48.1m (+176% y-o-y; +34% q-o-q), bringing FY16 core earnings to US$115.5m – slightly below US$120.5m forecast. The group’s core FY16 operating profit of US$194.5m – was slightly ahead of the US$190.8m expected; but was more than offset by higher-than-estimated borrowing costs and non-controlling interests. Final DPS of 2.375 Singapore cents was declared (payable 18 May 2017. Overall, 4Q16 gross profit margin (GPM) came in at 54.4% vs. 43.9% in 4Q15 and 53.1% in 3Q16. The group booked a lower tax rate of 25.4% (from 32.6% in 3Q16) as it recognises deferred tax credit from PPE (property plant equipment) revaluation; although this was partly offset by tax expense on the back of the exercise. Continued sequential recovery FR’s own FFB output for the quarter expanded by 15% y-o-y (+12% q-o-q) to 766.3k MT. The group’s 2H16 FFB production pattern hence account for 61% of FY16 – higher than typical rate of 55% due to adverse El Nino earlier in the year. Before elimination, Plantations segment revenue grew by 31% q-o-q (+60% y-o-y); while Refining & Processing revenue expanded 28% q-o-q (+49% y-o-y). These are commensurate with sequentially higher volumes and relatively stable ASP. Despite the rebound in FFB output, Plantations segment saw a stable share of third-party processed FFB (fresh fruit bunches) – helping to boost CPO production 13% q-o-q to 205.5k MT; while CPO sales volume benefitted from inventory drawdown to clock in a 27% q-o-q rise to 212.1k MT. Slower expansion YTD, FR has increased its planted area by just 1,060 ha – against previous guidance of 2k ha. No new acquisitions or replanting were undertaken in FY16 . Based on management’s new guidance of 2k ha of new planting for FY17F; we lowered our expectations – of which 20% would be allocated for smallholder estates – from 3k ha assumed previously. However we kept FY18F expansion target at 3k ha. Last year, the group recognised 11k ha of oil palm new maturities; and expects to recognise an additional 17k ha this year. Refining & Processing segment hit by higher CPO costs Despite having been allocated c.55.3k MT of biodiesel between November 2016 and April 2017, FR’s Refining & Processing segment suffered 4Q16 EBITDA loss of US$8.1m – as CPO feedstock costs had gone up during the quarter; against typical 2-month forward sales. This brought FY16 EBITDA to US$1.3m loss – thanks to profit recognitions in previous quarters.

Decent balance sheet As at end-December 2016, FR’s net gearing ratio is estimated at 20.5% - down from 29.7% in September 2016 – mainly on the back of sequential jump in earnings. FR’s cash flow from operations was US$60.7m – against reported net profit of US$58.0m – primarily reflecting lower receivable days (4-quarter rolling) from 18 days in 3Q16 to 15 days. Cash conversion cycle at end-December 2016 was however extended to 77 days (vs. 62 days in 3Q16) – mainly on the back of lower payable days. We understand the group had inventory build up of c..28k MT – all in Refining & Processing segment. We expect this to be delivered in 1Q17. As forward sales are typically two months ahead; we expect better refined products ASP vis-à-vis 1Q17 spot average. Outlook FY17F/18F earnings tweaked by -2%/-2% We maintained FY17F own FFB output of 2.741m MT (+16% y-o-y) and smallholder FFB output to 348.3k MT (+19% y-o-y) – while third-party FFB processed is expected to decline 18% y-o-y to 208.5k MT – to accommodate spike in internal FFB production. These translate to FY17F CPO output of 745.4k MT (+17% y-o-y) – unchanged. We understand biodiesel offtake in Indonesia could potentially rise to over 3m MT if current margin in biodiesel prices was adjusted to US$100 from US$125 – thereby allowing more blending for non-subsidised diesel consumption. FY17F/18F COGS were adjusted higher, however, mainly to take into account higher expected labour unit costs and higher cost of feedstock (both FFB and CPO). These translate to FY17F/18F being adjusted by 2%/2% lower. Valuation We expect FY17F core earnings to pick up 54% on output recovery and resilient prices. We employed a 10-year DCF methodology to value FR. Based on our revised forecasts, we peg our TP at S$2.15 (WACC 11.4%; TG 3%) – trimmed slightly from previous TP of S$2.19 due to higher expected upkeep & harvesting costs, and lower new planting target. Our BUY rating is reiterated on 15% upside.


Company Guide

First Resources

Quarterly / Interim Income Statement (US$m)

FY Dec 4Q2015 3Q2016 4Q2016 % chg yoy % chg qoq

Revenue 130,858 151,525 175,224 33.9 15.6

Cost of Goods Sold (73,411) (71,026) (79,677) 8.5 12.2

Gross Profit 57,447 80,499 95,547 66.3 18.7

Other Oper. (Exp)/Inc (20,123) (16,773) (7,900) (60.7) (52.9)

Operating Profit 37,324 63,726 87,647 134.8 37.5

Other Non Opg (Exp)/Inc 3,265 (147) (413) nm (181.0)

Associates & JV Inc 0.0 0.0 0.0 - -

Net Interest (Exp)/Inc (6,023) (6,742) (5,810) 3.5 13.8

Exceptional Gain/(Loss) 0.0 0.0 0.0 - -

Pre-tax Profit 34,566 56,837 81,424 135.6 43.3

Tax (15,408) (18,530) (20,692) 34.3 11.7

Minority Interest (1,229) (2,450) (2,704) (120.0) 10.4

Net Profit 17,929 35,857 58,028 223.7 61.8

EBITDA 40,589 63,579 87,234 114.9 37.2

Margins (%)

Gross Margins 43.9 53.1 54.5

Opg Profit Margins 28.5 42.1 50.0

Net Profit Margins 13.7 23.7 33.1

Source of all data: Company, DBS Bank


Company Guide

First Resources

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

CPO price. As a commodity producer, FR is a price-taker. Movements in international CPO prices would directly impact the group’s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$659/MT (+3% y-o-y) in CY17 and US$644/MT in CY18 (-2% y-o-y). Volume output. Changes in weather patterns would have a meaningful impact on FR’s productivity with some lag time. It takes 5-6 months from flowering to harvesting of ripe fruits. Hence, a sustained water deficit would not have immediate impact on yields, but has an impact on fruit formation through abortion of female flowers, delayed ripening, reduced fruit weight, as well as fruit abortion. Palm oil is a thirsty crop, requiring a minimum of 1,600mm p.a. and is typically grown in areas with 2,000-2,500mm of rainfall p.a. Oil palm trees are best grown within 10° latitudes on either side of the equator. A drop in rainfall to below 100mm per month for three consecutive months would result in so called “tree-stress”, and a drop in productivity (i.e. Fresh Fruit Bunch yield) would ensue 12 and 24 months thereafter. Regulations. Tariff and non-tariff regulations are common practices in agriculture commodities, and palm oil is no exception. Any changes in export/import tariffs, as well as various taxes and levies would therefore impact trade flows and prices. Biodiesel demand. Driven by high energy prices and climate change concerns, demand for vegetable oils for energy has multiplied since 2005, mainly supported by mandatory mixing of petroleum fuel with biodiesel. This demand has created a link between vegetable oils and energy prices. Oil World estimates that palm oil used for biodiesel accounts for c.16% of total demand – both mandatory and discretionary (driven by positive spreads between diesel and biodiesel prices). Demand seasonality. As a major vegetable oil with c.38% market share globally, palm oil is an important food staple. The other major vegetable oils are soybean oil, with 29% market share, followed by rapeseed/canola oil and sunflower oil with 16% and 10% market shares respectively. There is generally demand substitutability between vegetable oils (high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (i.e. c.5 MT/ha), while soybean oil’s productivity is typically 0.5 MT/ha. Demand for palm oil is dominant in Asia, where local festivities drive higher demand during certain months of the year. For example, Ramadan month, Chinese New Year, and Divali are typically high-demand periods in Asia.

CPO price (RM/MT)

Mature oil palm hectareage

CPO sales volume (MT)

Palm kernel sales vol. (MT)

Avg. USD/IDR rate

Source: Company, DBS Bank

2168

2652

3040 3030 2970

0.0

438.6

877.3

1315.9

1754.5

2193.1

2631.8

3070.4

2015A 2016A 2017F 2018F 2019F

128042140704

154992

172201177869

0.0

36285.3

72570.6

108855.8

145141.1

181426.4

2015A 2016A 2017F 2018F 2019F

669435 660994

745385

813007

884027

0.00

180341.48

360682.95

541024.43

721365.90

901707.38

2015A 2016A 2017F 2018F 2019F

159610151300

173808189576

206136

0.0

41639.6

83279.1

124918.7

166558.3

208197.8

2015A 2016A 2017F 2018F 2019F

1371713237 13608 13764 13719

0.0

2780.3

5560.7

8341.0

11121.3

13901.6

2015A 2016A 2017F 2018F 2019F


Company Guide

First Resources

Balance Sheet:

Net cash position next year. On our estimates, FR’s debts cost a paltry 3.9% p.a. The low cost comes primarily from Sukuk issuances between 2012 and 2014 – which were subsequently swapped into USD. While the group had indicated its intention to refinance maturing Sukuk this year, we are maintaining our debt profile forecast unchanged for now. The group’s net debt to total equity ratio stood at 20% at end-December 2016 vs. 30% at end-September 2016. Strong free cash flow generation. We expect the group to spend c.US$3.5m on biological assets (c.2k ha on new planting and c.39k ha immature) in FY17 and US$2.6m in FY17 (c.3k ha on new planting and 26k ha immature). This would translate into free cash flow generation of US$167m in FY17F and US$187m in FY18F – translating into free cash flow yield of c.7%/8% relative to its intrinsic value. Share Price Drivers:

Trading at a discount. The stock is currently trading close to -1 SD from average historical PE. We believe consistent earnings delivery in 1Q17 and 2Q17 should move the stock price higher. Key Risks:

Volatility in CPO prices and USD exchange rates Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general. Setback in expansion plans Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Regulatory changes Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils. Market sentiment Changes in fund flows towards or out of emerging markets would affect valuations for plantation counters. Company Background

First Resources (FR) is a mid-sized planter with a strong balance sheet and decent growth outlook. FR has been aggressively planting since 2004, and is one of a few upstream planters that have successfully expanded downstream – albeit on a small scale.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.2

0.3

0.3

0.4

0.4

0.5

0.5

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2015A 2016A 2017F 2018F 2019F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

20,000.0

40,000.0

60,000.0

80,000.0

100,000.0

120,000.0

2015A 2016A 2017F 2018F 2019F

Capital Expenditure (-)

US$m

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2015A 2016A 2017F 2018F 2019F

Avg: 16.6x

+1sd: 20.9x

+2sd: 25.2x

-1sd: 12.2x

-2sd: 7.9x7.1

12.1

17.1

22.1

27.1


(x)

Avg: 2.49x

+1sd: 2.8x

+2sd: 3.11x

-1sd: 2.18x

-2sd: 1.88x

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6


(x)


Company Guide

First Resources

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

CPO price (RM/MT) 2,168 2,652 3,040 3,030 2,970 Mature oil palm 128,042 140,704 154,992 172,201 177,869 CPO sales volume (MT) 669,435 660,994 745,385 813,007 884,027 Palm kernel sales vol. (MT) 159,610 151,300 173,808 189,576 206,136 Avg. USD/IDR rate 13,717 13,237 13,608 13,764 13,719

Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F

Revenues (US$m) CPO 362 388 445 474 508 Palm kernel 53 75 90 97 105 Olein, RBDPO, biodesel 209 363 286 281 278 PKO 29 55 51 51 50 Others (200) (306) (233) (228) (225)Total 454 575 640 675 716

Income Statement (US$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 454 575 640 675 716Cost of Goods Sold (222) (308) (303) (313) (331)Gross Profit 232 267 337 362 385Other Opng (Exp)/Inc (62) (60) (74) (78) (83)Operating Profit 170 208 263 284 302Other Non Opg (Exp)/Inc (3) (1) (1) (1) (1)Associates & JV Inc 0 0 0 0 0Net Interest (Exp)/Inc (22) (24) (10) (4) (2)Exceptional Gain/(Loss) 0 0 0 0 0Pre-tax Profit 145 183 252 279 299Tax (45) (51) (65) (70) (72)Minority Interest (4) (6) (9) (10) (11)Preference Dividend 0 0 0 0 0Net Profit 96 125 177 199 216Net Profit before Except. 96 125 177 199 216EBITDA 203 268 328 353 376Growth Revenue Gth (%) (26.3) 26.8 11.2 5.5 6.1EBITDA Gth (%) (32.9) 31.9 22.4 7.8 6.4Opg Profit Gth (%) (37.3) 22.3 26.5 7.9 6.4Net Profit Gth (%) (44.8) 31.1 41.5 12.2 8.5Margins & Ratio Gross Margins (%) 51.1 46.5 52.7 53.7 53.8Opg Profit Margin (%) 37.4 36.1 41.1 42.0 42.2Net Profit Margin (%) 21.1 21.8 27.7 29.5 30.2ROAE (%) 10.6 15.5 18.7 18.3 17.4ROA (%) 5.4 7.7 11.0 12.4 12.1ROCE (%) 6.8 9.9 13.3 14.3 13.9Div Payout Ratio (%) 43.2 17.4 24.8 26.8 27.4Net Interest Cover (x) 7.9 8.6 25.3 69.8 134.8



Company Guide

First Resources


FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016

Revenue 131 113 135 152 175Cost of Goods Sold (73) (78) (79) (71) (80)Gross Profit 57 35 56 80 96Other Oper. (Exp)/Inc (20) (18) (17) (17) (8)Operating Profit 37 16 40 64 88Other Non Opg (Exp)/Inc 3 (1) 1 0 0Associates & JV Inc 0 0 0 0 0Net Interest (Exp)/Inc (6) (6) (6) (7) (6)Exceptional Gain/(Loss) 0 0 0 0 0Pre-tax Profit 35 10 35 57 81Tax (15) (4) (8) (19) (21)Minority Interest (1) 0 (1) (2) (3)Net Profit 18 6 26 36 58Net profit bef Except. 18 6 26 36 58EBITDA 41 16 41 64 87 Growth Revenue Gth (%) 21.4 (13.6) 19.7 11.9 15.6EBITDA Gth (%) (12.2) (60.9) 159.2 54.5 37.2Opg Profit Gth (%) (24.5) (55.9) 142.1 59.9 37.5Net Profit Gth (%) (36.9) (67.8) 353.2 37.2 61.8Margins Gross Margins (%) 43.9 30.8 41.7 53.1 54.5Opg Margins (%) 28.5 14.6 29.5 42.1 50.0Net Profit Margins (%) 13.7 5.1 19.3 23.7 33.1

Balance Sheet (US$m) FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 325 329 384 406 422Invts in Associates & JVs 0 0 0 0 0Other LT Assets 872 936 818 796 773Cash & ST Invts 205 258 154 313 487Inventory 68 78 72 74 79Debtors 40 36 42 44 47Other Current Assets 58 63 60 62 65Total Assets 1,568 1,700 1,529 1,695 1,873 ST Debt 29 224 0 0 143Creditor 51 159 103 107 113Other Current Liab 12 18 17 18 19LT Debt 466 224 190 194 51Other LT Liabilities 236 148 150 152 155Shareholder’s Equity 736 881 1,015 1,160 1,317Minority Interests 38 45 54 64 75Total Cap. & Liab. 1,568 1,700 1,529 1,695 1,873 Non-Cash Wkg. Capital 103 0 54 56 59Net Cash/(Debt) (290) (190) (37) 119 293Debtors Turn (avg days) 31.7 23.9 22.1 23.3 23.2Creditors Turn (avg days) 108.1 154.8 201.8 157.8 156.2Inventory Turn (avg days) 114.5 107.7 115.5 109.8 108.7Asset Turnover (x) 0.3 0.4 0.4 0.4 0.4Current Ratio (x) 4.1 1.1 2.7 4.0 2.5Quick Ratio (x) 2.7 0.7 1.6 2.9 1.9Net Debt/Equity (X) 0.4 0.2 0.0 CASH CASHNet Debt/Equity ex MI (X) 0.4 0.2 0.0 CASH CASHCapex to Debt (%) 15.0 22.6 34.7 33.9 33.7Z-Score (X) 3.1 3.5 4.8 5.0 5.0



Company Guide

First Resources

Cash Flow Statement (US$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 145 183 252 279 299Dep. & Amort. 36 60 66 70 75Tax Paid (45) (51) (65) (70) (72)Assoc. & JV Inc/(loss) 0 0 0 0 0Chg in Wkg.Cap. (57) 104 (54) (2) (3)Other Operating CF (105) (28) 37 1 1Net Operating CF (26) 268 235 278 299Capital Exp.(net) (74) (101) (66) (66) (65)Other Invts.(net) 0 0 0 0 0Invts in Assoc. & JV (18) 0 0 0 0Div from Assoc & JV 0 0 0 0 0Other Investing CF 21 1 27 (4) (2)Net Investing CF (72) (100) (39) (70) (68)Div Paid (41) (22) (44) (53) (59)Chg in Gross Debt (88) (47) (257) 3 1Capital Issues (27) 42 0 0 0Other Financing CF 109 (88) 1 1 1Net Financing CF (48) (115) (300) (49) (57)Currency Adjustments 0 0 0 0 0Chg in Cash (146) 53 (104) 159 174Opg CFPS (S cts) 2 10 18 18 19Free CFPS (S cts) (6) 11 11 13 15


Target Price & Ratings History

Source: DBS Bank

Analyst: Ben SANTOSO

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 10 Mar 16 1.98 1.85 HOLD

2: 11 Apr 16 2.03 1.85 HOLD

3: 10 May 16 1.73 1.85 HOLD

4: 13 May 16 1.65 1.85 HOLD

5: 12 Jul 16 1.55 1.82 HOLD

6: 13 Aug 16 1.63 1.80 BUY

7: 24 Oct 16 1.77 1.90 HOLD

8: 10 Nov 16 1.85 1.90 HOLD

9: 14 Dec 16 1.95 1.90 HOLD

10: 10 Jan 17 1.92 1.90 HOLD

11: 10 Feb 17 1.97 1.90 HOLD12: 17 Feb 17 1.96 2.19 BUY13: 20 Feb 17 1.92 2.19 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

2

34

5

67

8 9

1011

12

13

1.43

1.53

1.63

1.73

1.83

1.93

2.03

2.13

Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17

S$

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: YM, PY

BUY

Last Traded Price ( 23 Feb 2017): S$0.79 (STI : 3,137.57) Price Target 12-mth: S$0.99 (25% upside) Potential Catalyst: Strong 1Q17 and 2Q17 earnings Where we differ: Higher FY17F earings on higher CPO/PK price forecasts Analyst Ben SANTOSO +65 6682 3707 [email protected]

What’s New 4Q16 earnings slightly below on steeper

translation FX losses

FY17F FFB output guided to expand 15% y-o-y FY17F/18F earnings tweaked -3%/-3%

Maintain BUY call for 25% upside to unchanged TP

Price Relative

Forecasts and Valuation FY Dec (Rpbn) 2016A 2017F 2018F 2019F Revenue 6,630 7,626 8,011 8,345 EBITDA 1,874 2,381 2,437 2,437 Pre-tax Profit 1,516 1,892 1,886 1,834 Net Profit 1,005 1,232 1,224 1,192 Net Pft (ex. BA gains) 985 1,232 1,224 1,192 Net Pft (Pre Ex.) 1,005 1,232 1,224 1,192 Net Pft Gth (Pre-ex) (%) 40.8 22.5 (0.6) (2.6) EPS (S cts) 6.02 7.38 7.34 7.14 EPS Pre Ex. (S cts) 6.02 7.38 7.34 7.14 EPS Gth Pre Ex (%) 41 23 (1) (3) Diluted EPS (S cts) 6.02 7.38 7.34 7.14 Net DPS (S cts) 0.52 0.72 1.49 1.48 BV Per Share (S cts) 40.3 46.9 52.8 58.4 PE (X) 13.1 10.7 10.7 11.0 PE Pre Ex. (X) 13.1 10.7 10.7 11.0 P/Cash Flow (X) 5.3 7.2 6.4 6.5 EV/EBITDA (X) 9.8 7.3 6.7 6.5 Net Div Yield (%) 0.7 0.9 1.9 1.9 P/Book Value (X) 2.0 1.7 1.5 1.3 Net Debt/Equity (X) 0.6 0.4 0.2 0.1 ROAE (%) 16.2 16.9 14.7 12.8 Earnings Rev (%): (3) (3) N/A Consensus EPS (S cts): 7.70 8.89 N/A Other Broker Recs: B: 6 S: 1 H: 1


Consistent earnings growth delivery Volume driven. We expect the group’s earnings to expand 7% CAGR between FY16 and FY19F, driven by an 8% CAGR expansion in crude palm oil (CPO) production over the same period. We reiterate our BUY call with a significant c.25% potential upside to our TP (unchanged). We believe there is currently excessive liquidity discount on the counter. 4Q16 earnings slightly below. Excluding Rp54bn deferred tax credit and changes in fair value of biological assets (net of deferred tax), Bumitama Agri (BAL) booked 4Q16 earnings of Rp387.4bn (+95% y-o-y; +154% q-o-q) – slightly below Rp411.7 bn expected, mainly on the back of steeper translation FX losses for the quarter. Imputing FY17F production guidance, expanded biodiesel capacity and FY16 results, we adjusted FY17F/18F earnings slightly by -3%/-3%. The counter’s DCF valuation remains unchanged at S$0.99, offering 25% potential upside from the current level. Drop in planting not impacting medium-term volume growth. Aggressive expansion in FY05-13 has kept BAL’s tree-age profile younger relative to peers. This is forecast to deliver an 11% CAGR in FFB (Fresh Fruit Bunch) output (including smallholder estates) between FY16F and FY19F. Valuation: We employed DCF valuation (FY17F base year) to arrive at BAL’s fair value of S$0.99/share (WACC: 10.4%, Rf: 8.4%, Rm: 13.3%, �: 0.8, TG: 3%) offering c.22% potential upside from the current level. Key Risks to Our View: There would be downside risk to our CPO (Crude Palm Oil) price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.7m MT) next year. CPO price could also move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop in the event of a strong La Nina. Changes in fund flows towards or out of emerging markets/commodities would also affect the valuations of plantation counters. At A Glance Issued Capital (m shrs) 1,755 Mkt. Cap (S$bn/US$m) 1.39 / 982 Major Shareholders (%) Fortune Holdings Ltd 51.5 IOI Corp Bhd 31.7

Free Float (%) 17.3 3m Avg. Daily Val (US$m) 0.58 ICB Industry : Consumer Goods / Food Producers



Bumitama Agri Version 9 | Bloomberg: BAL SP | Reuters: BUMI.SI Refer to important disclosures at the end of this report

65

85

105

125

145

165

185

205

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4


Relative IndexS$

Bumitama Agri (LHS) Relative STI (RHS)

ASIAN INSIGHTS VICKERS SECURITIES

Company Guide

Bumitama Agri

WHAT’S NEW

Consistent earnings growth delivery

Highlights:

4Q16 earnings slightly below Excluding deferred tax credit of Rp54bn and changes in fair value of biological assets (net of deferred tax) of 20.2bn, Bumitama Agri (BAL) booked 4Q16 earnings of Rp387.4bn (+95% y-o-y; +154% q-o-q) – slightly below the Rp411.7bn expected; mainly on the back of steeper translation FX losses for the quarter. This brought FY16 core earnings to Rp930.7bn (+19% y-o-y) – slightly below Rp955.2bn expected. The reported net income came in at Rp461.6bn (=150% y-o-y; +124% q-o-q).

BAL had expensed Rp121.7bn (mostly on one-off tax payment on PPE revaluation gain – as part of the government’s 3% tax incentive). The group declared final DPS of 0.5 S cents; representing c.12% payout ratio.

BAL reported 47% and 50% sequential rebounds in 4Q16 CPO and PK (Palm Kernel) output (+11% y-o-y; +11% y-o-y) to 246.9k MT and 47.4k MT, respectively. While PK sales volume (48.3k MT) indicated an inventory drawdown, CPO sales volume (235.1k MT) indicated an inventory build-up – most likely due to timing differences. We expect this to be drawn down in 1Q17.

CPO ASP for the quarter eased 1% q-o-q (+31 y-o-y) to Rp7,770/kg – reflecting the impact of c.195k MT of CPO forward sales secured earlier in the year at lower prices. We understand the group still have remaining forward contracts amounting to 30,800 MT at average price of Rp7,414/kg until the end of February 2017. No new contracts are being considered currently.

FFB output jumped 45% q-o-q As expected, the group’s 4Q16 internal (own + smallholders) FFB output jumped by 41% q-o-q (+11% y-o-y) to 791.7k MT. This brought the group’s FY16 internal FFB output to 2.185m MT (-5% y-o-y).

The group’s 4Q16 FFB production translated to FFB yield of 5.3 MT/ha (+4% y-o-y; +43% q-o-q) and OER to 22.7% – flat from 22.7% in 4Q15, but up from 22.3% in 3Q16 – as El Nino’s adverse impact continues to dissipate.

Excluding acquisition, BAL undertook new planting of 1,390ha in 4Q16 (including smallholders) – bringing its FY16 new planting to 2,688ha. We understand the group intends to undertake new planting of 3k ha (excluding acquisitions) – of

which 70% is attributable to own estates – as well as 2k ha of replanting this year.

Slightly lower biodiesel allocation next year The group sold 8,624 MT of biodiesel in 4Q16 (from 8,773 MT in 3Q16) at Rp10,135/kg. Having received biodiesel allocation of 23,188 kl in May 2016 – October 2016, BAL’s biodiesel allocation in November 16–April 17 amounts to 18,084 kl. We have adjusted our forecasts to impute expanded biodiesel capacity.

Lower net gearing ratio As at end-December 2016, BAL’s net gearing ratio stood at 57.8% – down from 75.3% at end-September 2016 – mainly on account of debt repayment and higher equity. Cash conversion cycle (4-quarter rolling) was calculated at 18 days (from minus 7 days in the previous quarter), due mainly to shorter payable days and longer inventory days.

Outlook

FY17 FFB output growth guidance set at 15% BAL has guided for its internal FFB output this year to grow 15%. We understand the group’s external FFB purchases are expected to remain flat – thus translating to FY17F CPO production volume growth of 13% y-o-y to 790k MT.

FY17F/18F earnings tweaked slightly. Imputing the group’s FY17F production guidance, expanded biodiesel capacity and FY16 results, we adjusted FY17F/18F earnings slightly by -3%/-3%.

We maintain this year’s new planting target at 3k ha – in line with management’s guidance – but added 2k ha of replanting this year and 1.8k ha next year. We also adjusted FY17F dividend payout ratio to a normalised rate of 20% - translating into an FY17F dividend yield of 1%.

Valuation

The counter’s DCF valuation remains unchanged at S$0.99 (WACC: 10.4%, Rf: 8.4%, Rm: 13.3%, beta: 0.8, TG: 3%) – offering 25% potential upside from the current level. Our BUY rating on the counter is reiterated. The counter is a net beneficiary of stronger USD and relatively resilient CPO prices over the next 12 months


Company Guide

Bumitama Agri

Quarterly / Interim Income Statement (Rpbn)


Revenue 1,448 1,495 2,270 56.8 51.9

Cost of Goods Sold (951) (1,070) (1,376) 44.8 28.6

Gross Profit 497 425 894 79.7 110.4

Other Oper. (Exp)/Inc (109) (85.0) (120) 10.4 41.6

Operating Profit 388 340 774 99.2 127.6

Other Non Opg (Exp)/Inc (121) (25.9) (86.9) 28.4 (235.4)

Associates & JV Inc (7.6) 3.82 (2.1) 72.0 nm

Net Interest (Exp)/Inc (3.4) (4.5) 23.2 nm nm


Pre-tax Profit 256 313 708 176.3 125.9

Tax (48.0) (75.6) (144) 200.4 90.9

Minority Interest (23.4) (31.3) (102) (334.9) 225.6

Net Profit 185 206 462 149.9 123.6

EBITDA 260 318 685 163.8 115.4

Margins (%)






Company Guide

Bumitama Agri


Earnings Drivers:

CPO price. As a commodity producer, BAL is a price-taker. Movements in international CPO prices would directly impact the group’s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$659/MT (+3% y-o-y) in CY17 and US$644/MT in CY18 (-2% y-o-y).

Volume output. Changes in weather patterns will have a meaningful impact on BAL’s productivity with some lag time. It takes 5-6 months from flowering to harvesting of ripe fruits. Hence, a sustained water deficit would not have an immediate impact on yields, but would impact fruit formation through abortion of female flowers, delayed ripening, reduced fruit weight, as well as fruit abortion. Oil palm is a thirsty crop, requiring a minimum of 1,600mm of rainfall p.a. and is typically grown in areas with 2,000-2,500mm of rainfall p.a. Oil palm trees are best grown within 10° latitudes on either side of the equator. A drop in rainfall to below 100mm per month for three consecutive months would result in so called “tree-stress”, and a drop in productivity (i.e. Fresh Fruit Bunch yield) would ensue 12 and 24 months thereafter.

Regulations. Tariff and non-tariff regulations are common practice in agriculture commodities, and palm oil is no exception. Any changes in export/import tariffs, various taxes and levies would therefore impact trade flows and prices.

Biodiesel demand. Driven by high energy prices and climate change concerns, demand for vegetable oils for energy has multiplied since 2005, mainly supported by mandatory mixing of petroleum fuel with biodiesel. This demand has created a link between vegetable oil and energy prices. Oil World estimated that palm oil used for biodiesel accounted for c.16% of total demand – both mandatory and discretionary (driven by positive spread between diesel and biodiesel prices).

Demand seasonality. As a major vegetable oil with 38% market share globally, palm oil is an important food staple. The next largest vegetable oil is soybean oil, with 29% market share; followed by rapeseed/canola oils and sunflower oils with 16% and 10% market shares respectively. There is generally demand substitutability between vegetable oils (high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (i.e. c.5 MT/ha), while soybean oil’s productivity is typically 0.5 MT/ha. Demand for palm oil is dominant in Asia, where local festivities drive demand higher in certain months of the year. For example, Ramadan month, Chinese New Year, and Divali are typically high-demand periods in Asia.

CPO price (RM/MT)

Own mature oil palm hectarage

CPO sales volume (MT)

Palm kernel sales vol. (MT)

Avg. USD/IDR rate


2168

2652

3040 3030 2970

0.0

438.6

877.3

1315.9

1754.5

2193.1

2631.8

3070.4

2015A 2016A 2017F 2018F 2019F

89211

104970

113582 112283 115085

0.0

23477.3

46954.7

70432.0

93909.4

117386.7

2015A 2016A 2017F 2018F 2019F

704859734219

789846840545

892470

0.00

182063.78

364127.57

546191.35

728255.13

910318.92

2015A 2016A 2017F 2018F 2019F

137363 141866152720

163172173944

0.0

35136.7

70273.5

105410.2

140546.9

175683.7

2015A 2016A 2017F 2018F 2019F

1371713237 13608 13764 13719

0.0

2780.3

5560.7

8341.0

11121.3

13901.6

2015A 2016A 2017F 2018F 2019F


Company Guide

Bumitama Agri

Balance Sheet:

Balance sheet can withstand downcycle. BAL’s net gearing ratio is forecast to settle at 35% by the end of FY17 and 20% at end-FY18. In our estimation, BAL’s borrowing costs should continue to remain lower than peers'. BAL’s interest coverage is forecast to average 10.2x in FY17 and 13.4x in FY18.

Share Price Drivers:

No urgency to expand downstream. In our estimation, BAL’s mature estates are due to expand by 12,400 ha in FY17F, followed by 3,600 ha in FY18F (reflecting the lack of new expansion in FY14 – as the group had worked towards ensuring sustainable development). BAL’s milling capacity should nevertheless expand through FY21F, and we should see expansion of its workforce to process the exponential growth in harvested FFB. Until its CPO output reaches critical mass of 1m MT or more, we do not anticipate BAL to expand downstream. BAL’s relatively higher margins (even with export tax policies) – vis-à-vis integrated players – should maximise its shareholders’ return on equity, in our view.

Steady expansion ahead. Having committed itself to a sustainable development programme, the group has slowed its expansion pace since FY14, and intends to undertake a more sustainable 3,000ha p.a. expansion (including smallholder estates) from FY17F onwards.

Key Risks:

Where we may go wrong Our earnings expectations and valuation are based on several key assumptions. Any setback in FFB yields (due to severe weather) or expansion (i.e. lower than 3,000ha p.a.) would adversely impact our valuation. BAL’s share price is also linearly driven by CPO price expectations and partly by rupiah movements. A drop in CPO prices may drag the share price lower than our fair value, and vice versa.

Company Background

Fast-growing palm oil producer Bumitama Agri (BAL) was established in 1996 by Harita Group through the acquisition of 17,500ha of land bank in Central Kalimantan. After aggressive new plantings and a string of subsequent acquisitions, BAL controlled an aggregate of c.207,778ha of land as at end-2015 (including land under the smallholder schemes), of which 167,954ha were planted as at end-June 2016. BAL was listed on the Singapore Exchange in April 2012.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.3

0.4

0.4

0.5

0.5

0.6

0.6

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

2015A 2016A 2017F 2018F 2019F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2015A 2016A 2017F 2018F 2019F


Rpm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2015A 2016A 2017F 2018F 2019F

Avg: 15.9x

+1sd: 20.1x

+2sd: 24.3x

‐1sd: 11.6x

‐2sd: 7.4x6.6

11.6

16.6

21.6

26.6

Feb-13 Feb-14 Feb-15 Feb-16

(x)

Avg: 2.56x

+1sd: 2.96x

+2sd: 3.35x

‐1sd: 2.16x

‐2sd: 1.77x

1.5

2.0

2.5

3.0

3.5


(x)


Company Guide

Bumitama Agri

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

CPO price (RM/MT) 2,168 2,652 3,040 3,030 2,970 Own mature oil palm 89,211 104,970 113,582 112,283 115,085 CPO sales volume (MT) 704,859 734,219 789,846 840,545 892,470 Palm kernel sales vol. (MT) 137,363 141,866 152,720 163,172 173,944 Avg. USD/IDR rate 13,717 13,237 13,608 13,764 13,719

Segmental Breakdown

FY Dec 2015A 2016A 2017F 2018F 2019F

Revenues (Rpbn)

CPO 4,889 5,417 6,185 6,496 6,774 PK 580 902 1,118 1,196 1,256 Biodiesel 72.8 310 321 319 314 Glycerin 0.67 0.89 0.93 0.92 0.90 Total 5,542 6,630 7,626 8,011 8,345

Income Statement (Rpbn)

FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 5,542 6,630 7,626 8,011 8,345 Cost of Goods Sold (3,888) (4,654) (5,211) (5,613) (5,983) Gross Profit 1,655 1,976 2,414 2,399 2,362 Other Opng (Exp)/Inc (399) (394) (426) (456) (487) Operating Profit 1,256 1,581 1,989 1,943 1,875 Other Non Opg (Exp)/Inc (177) (62.8) (50.3) (32.2) (33.5) Associates & JV Inc (67.4) (21.8) (19.6) (17.4) (15.2) Net Interest (Exp)/Inc (9.9) 18.9 (27.0) (6.7) 8.39 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.00 Pre-tax Profit 1,002 1,516 1,892 1,886 1,834 Tax (196) (328) (436) (439) (425) Minority Interest (91.8) (183) (224) (223) (217) Preference Dividend 0.0 0.0 0.0 0.0 0.00 Net Profit 714 1,005 1,232 1,224 1,192 Net Profit before Except. 714 1,005 1,232 1,224 1,192 Net Pft (ex. BA gains) 784 985 1,232 1,224 1,192 EBITDA 1,238 1,874 2,381 2,437 2,437 EBITDA (ex. BA gains) 1,329 1,847 2,381 2,437 2,437 Growth

Revenue Gth (%) (3.7) 19.6 15.0 5.1 4.2 EBITDA Gth (%) (37.7) 51.4 27.0 2.4 0.0 Opg Profit Gth (%) (36.7) 25.9 25.7 (2.3) (3.5) Net Profit Gth (Pre-ex) (%) (38.1) 40.8 22.5 (0.6) (2.6) Margins & Ratio

Gross Margins (%) 29.9 29.8 31.7 29.9 28.3 Opg Profit Margin (%) 22.7 23.9 26.1 24.2 22.5 Net Profit Margin (%) 12.9 15.2 16.2 15.3 14.3 ROAE (%) 11.8 16.2 16.9 14.7 12.8 ROA (%) 5.1 6.9 8.2 7.9 7.3 ROCE (%) 7.9 9.2 11.0 10.4 9.6 Div Payout Ratio (%) 36.6 8.6 9.7 20.3 20.7 Net Interest Cover (x) 126.7 NM 73.7 288.8 NM



Company Guide

Bumitama Agri

Quarterly / Interim Income Statement (Rpbn)

FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016

Revenue 1,448 1,488 1,377 1,495 2,270 Cost of Goods Sold (951) (1,075) (1,133) (1,070) (1,376) Gross Profit 497 413 244 425 894 Other Oper. (Exp)/Inc (109) (118) (70.7) (85.0) (120) Operating Profit 388 295 173 340 774 Other Non Opg (Exp)/Inc (121) 41.9 (8.0) (25.9) (86.9) Associates & JV Inc (7.6) (10.0) 2.63 3.82 (2.1) Net Interest (Exp)/Inc (3.4) 9.38 (9.2) (4.5) 23.2 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 256 336 159 313 708 Tax (48.0) (73.7) (34.0) (75.6) (144) Minority Interest (23.4) (32.9) (17.0) (31.3) (102) Net Profit 185 229 108 206 462 Net profit bef Except. 185 229 108 206 462 EBITDA 260 327 168 318 685

Growth

Revenue Gth (%) 22.8 2.8 (7.5) 8.6 51.9 EBITDA Gth (%) 12.6 25.9 (48.6) 89.3 115.4 Opg Profit Gth (%) 47.1 (24.1) (41.2) 96.2 127.6 Net Profit Gth (Pre-ex) (%) 15.6 24.2 (53.1) 91.8 123.6 Margins

Gross Margins (%) 34.4 27.7 17.7 28.4 39.4 Opg Profit Margins (%) 26.8 19.8 12.6 22.7 34.1 Net Profit Margins (%) 12.8 15.4 7.8 13.8 20.3

Balance Sheet (Rpbn)

FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 3,244 3,307 3,597 3,951 4,316 Invts in Associates & JVs 24.0 2.29 2.29 2.29 2.29 Other LT Assets 8,048 9,163 8,853 8,670 8,542 Cash & ST Invts 599 517 667 1,124 1,715 Inventory 651 612 707 761 811 Debtors 599 278 504 529 552 Other Current Assets 1,208 888 820 846 870 Total Assets 14,372 14,767 15,149 15,884 16,807

ST Debt 1,984 1,008 571 3,072 11.6 Creditor 935 572 844 909 969 Other Current Liab 357 336 363 373 381 LT Debt 3,547 3,860 3,204 102 2,834 Other LT Liabilities 1,342 1,469 1,309 1,372 1,392 Shareholder’s Equity 5,661 6,718 7,830 8,806 9,751 Minority Interests 546 804 1,028 1,251 1,468 Total Cap. & Liab. 14,372 14,767 15,149 15,884 16,807

Non-Cash Wkg. Capital 1,165 870 824 855 883 Net Cash/(Debt) (4,932) (4,351) (3,108) (2,050) (1,131) Debtors Turn (avg days) 24.3 24.1 18.7 23.5 23.6 Creditors Turn (avg days) 85.1 64.3 54.4 63.1 63.8 Inventory Turn (avg days) 58.7 53.9 50.7 52.9 53.4 Asset Turnover (x) 0.4 0.5 0.5 0.5 0.5 Current Ratio (x) 0.9 1.2 1.5 0.7 2.9 Quick Ratio (x) 0.4 0.4 0.7 0.4 1.7 Net Debt/Equity (X) 0.8 0.6 0.4 0.2 0.1 Net Debt/Equity ex MI (X) 0.9 0.6 0.4 0.2 0.1 Capex to Debt (%) (10.9) 18.1 28.1 33.0 39.7 Z-Score (X) 2.0 2.5 2.8 2.5 2.5



Company Guide

Bumitama Agri

Cash Flow Statement (Rpbn)

FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 1,002 1,516 1,892 1,886 1,834 Dep. & Amort. 226 377 462 544 611 Tax Paid (196) (328) (436) (439) (425) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.00 Chg in Wkg.Cap. (638) (8.6) (21.9) (5.3) (4.0) Other Operating CF (74.8) 932 (59.5) 60.5 18.0 Net Operating CF 319 2,489 1,837 2,046 2,034 Capital Exp.(net) 603 (883) (1,062) (1,049) (1,131) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 60.2 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.00 Other Investing CF (1,365) (1,072) 586 307 260 Net Investing CF (701) (1,956) (476) (742) (871) Div Paid (261) (86.6) (120) (248) (247) Chg in Gross Debt 1,250 (662) (1,094) (601) (328) Capital Issues 4.74 (37.5) 0.0 0.0 0.0 Other Financing CF (145) (2.3) 1.95 2.05 2.15 Net Financing CF 849 (789) (1,211) (847) (572) Currency Adjustments (179) 174 0.0 0.0 0.0 Chg in Cash 288 (81.7) 149 457 591 Opg CFPS (S cts) 5.74 15.0 11.1 12.3 12.2 Free CFPS (S cts) 5.53 9.62 4.64 5.98 5.41



Source: DBS Bank

Analyst: Ben SANTOSO

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 10 Mar 16 0.81 0.96 BUY

2: 11 Apr 16 0.86 0.96 BUY

3: 10 May 16 0.76 0.96 BUY

4: 13 May 16 0.83 0.96 BUY

5: 12 Jul 16 0.75 0.91 HOLD

6: 05 Aug 16 0.69 0.81 BUY

7: 24 Oct 16 0.72 0.99 BUY

8: 10 Nov 16 0.73 0.99 BUY

9: 15 Nov 16 0.77 0.95 BUY

10: 17 Nov 16 0.76 0.95 BUY

11: 14 Dec 16 0.80 0.95 BUY12: 10 Jan 17 0.81 0.95 BUY13: 10 Feb 17 0.82 0.95 BUY14: 17 Feb 17 0.84 0.99 BUY

Note : Share price and Target price are adjusted for corporate actions. 15: 20 Feb 17 0.84 0.99 BUY

1

2

3

4

56

7

89

10 11

12

13

14

15

0.64

0.69

0.74

0.79

0.84

0.89

0.94


S$

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:JC, PY

BUYLast Traded Price ( 23 Feb 2017): S$3.36 (STI : 3,137.57) Price Target 12-mth: S$3.80 (13% upside) (Prev S$3.10)

Potential Catalyst: Long-term PPA for SGPL, higher oil prices Where we differ: In line Analyst Pei Hwa HO +65 6682 3714 [email protected]

What’s New 4Q16 results broadly in line; Final DPS was 4 Scts,

bringing FY16 DPS to 8 Scts

Second India power plant commenced full

operations in Feb 2017

2017 a transition year; new capacity in India and

China will drive growth in 2018

Reiterate BUY; TP lifted to S$3.80

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016A 2017F 2018F Revenue 9,545 7,907 7,178 7,899 EBITDA 590 1,305 1,281 1,342 Pre-tax Profit 426 537 537 576 Net Profit 549 395 395 431 Net Pft (Pre Ex.) 123 407 395 431 Net Pft Gth (Pre-ex) (%) (84.6) 230.1 (3.0) 9.3 EPS (S cts) 30.7 22.1 22.1 24.1 EPS Pre Ex. (S cts) 6.91 22.8 22.1 24.1 EPS Gth Pre Ex (%) (85) 230 (3) 9 Diluted EPS (S cts) 30.5 21.9 21.9 24.0 Net DPS (S cts) 11.0 7.99 7.07 7.72 BV Per Share (S cts) 360 375 389 406 PE (X) 10.9 15.2 15.2 13.9 PE Pre Ex. (X) 48.7 14.8 15.2 13.9 P/Cash Flow (X) nm 6.9 10.4 2.7 EV/EBITDA (X) 21.8 11.3 12.0 10.5 Net Div Yield (%) 3.3 2.4 2.1 2.3 P/Book Value (X) 0.9 0.9 0.9 0.8 Net Debt/Equity (X) 0.6 0.9 0.9 0.8 ROAE (%) 9.1 6.0 5.8 6.1 Earnings Rev (%): 2 (2) Consensus EPS (S cts): 25.2 30.4 Other Broker Recs: B: 7 S: 3 H: 5

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

Slowly but surely BUY SCI; TP lifted to S$3.80, after imputing higher valuation for Sembcorp Marine (SMM; from S$1.55 to S$1.78) and higher PE multiple (raised from 11x to 15x) for utilities business. Sembcorp Industries (SCI) offers the best risk reward among the three Offshore & Marine (O&M) large caps, trading at an undemanding 0.9x P/BV. It offers a unique value proposition, as a proxy to ride the cyclical O&M upturn and has a defensive utilities business. Our TP translates to 1.0x P/BV. We believe this is fair in view of its 6% ROE and 2% dividend yield. Reiterate BUY on SCI.

Look beyond the transitional 2017. While Thermal Powertech Corporation India (TPCIL) - SCI’s first Indian power plant- is starting to contribute more steadily at S$8-10m a quarter to bottomline, profits could be offset by startup losses of its second plant, SembcorpGayatri Power Ltd (SGPL), which just came online in Feb-2017. SGPL’s profitability will be more volatile as it is exposed to spot and short term markets, until its secure a long-term Power Purchase Agreements (PPA) from 2018 onwards. In China, there is a “loss of income” of c.S$40m following the expiry of its YangCheng power plant at the end of 2016, while the new Chongqing plant will probably contribute more meaningfully from next year. As a result, utility segment may see a 10-15% dip in earnings in 2017 before resuming growth next year.

Emerging markets remain the growth engine. SCI has also made forays into other emerging markets - Bangladesh and Myanmar - and this should underpin the longer-term growth prospects of its utilities segment beyond 2018. Long-term PPAs have been secured for both Myanmar’s 230MW gas fired Myingyan Independent Power Producer (IPP) and Bangladesh’s 427MW gas-fired Sirajganj Unit 4. Construction of the plants are on track and are expected to commence operations in 2H18.

Valuation: Given its diverse earnings stream and various listed assets, we derive our fair value for SCI based on the sum of its different parts: market valuations of its stakes in listed companies Sembcorp Marine (SGX-listed, 60.6% stake), Gallant Venture (SGX-listed, 11.96% stake) and Salalah (Muscat stock exchange, 40% stake) and earnings from utilities and urban development. For its holding company position, we have applied a 10% conglomerate discount to the reappraised net asset value (RNAV). We derive a TP of S$3.80, translating to 1.0x P/BV.

Key Risks to Our View: Key risks to earnings are further deferments/cancellations of marine projects, deterioration of Singapore's power spark spreads, and execution hiccups at its Indian power plants.

At A Glance

Issued Capital (m shrs) 1,785 Mkt. Cap (S$m/US$m) 5,998 / 4,246 Major Shareholders (%) Temasek Holdings Pte Ltd 49.5 Mondrian Investment Partners Ltd 5.0

Free Float (%) 45.5 3m Avg. Daily Val (US$m) 9.8 ICB Industry : Oil & Gas / Oil Equipment; Services & Dist



Sembcorp Industries Version 11 | Bloomberg: SCI SP | Reuters: SCIL.SI Refer to important disclosures at the end of this report

49

69

89

109

129

149

169

189

209

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0


Relative IndexS$

Sembcorp Industries (LHS) Relative STI (RHS)


Company Guide

Sembcorp Industries

WHAT’S NEW

A decent quarter

4Q16 in line: Overall group net profit of S$147.5m in 4Q16 was in line with expectations as this included a S$34.5m gain on disposal of YangCheng power plant in China.

There were also quite a number of small one-offs, impairments and write-backs in 4Q16, for instance, prepayment penalty for TPCIL (-S$8m), mark-to-market loss for Gallant Venture (-S$5.8m) write-back of impairment of Utilities UK (S$6.7m).

This brought full year profit to S$394.9m, down 28.1% y-o-y as 2015 recorded substantial gains on disposal of Sembsita, Sembcorp Bournemouth and Zhumadian, which totalled S$425.6m, partially offset by massive provisions of its Marine business.

India power business could be volatile in 2017: The first unit of SGPL commenced operations in Nov-2016 and second unit

in Feb-2017. The plant incurred relatively high startup losses of S$27m in 4Q16. Besides the potential teething issues, earnings can be volatile in the absence of long-term PPA and coal cost pass-through mechanism, while short term market is competitive.

Earnings revision We have adjusted our FY17-18F earnings marginally largely to reflect earnings revisions in SMM.

Quarterly / Interim Income Statement (S$m)


Revenue 2,419 2,140 2,026 (16.3) (5.3)

Cost of Goods Sold (2,619) (1,841) (1,776) (32.2) (3.6)

Gross Profit (200) 298 250 nm (16.1)

Other Oper. (Exp)/Inc (677) (83.9) (36.7) (94.6) (56.3)

Operating Profit (877) 214 214 nm (0.4)

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - -

Associates & JV Inc (114) 3.49 47.9 nm nm

Net Interest (Exp)/Inc (72.6) (83.3) (127) (74.6) (52.1)

Exceptional Gain/(Loss) 371 (46.2) 30.4 (91.8) nm

Pre-tax Profit (692) 88.3 165 nm 87.0

Tax 121 (30.0) (12.2) nm (59.1)

Minority Interest 207 (4.5) (5.5) nm 23.7

Net Profit (365) 53.9 147 nm 173.4

Net profit bef Except. (736) 100 117 nm 16.9

EBITDA (990) 218 262 nm 20.1

Margins (%)

Gross Margins (8.3) 13.9 12.4

Opg Profit Margins (36.2) 10.0 10.5

Net Profit Margins (15.1) 2.5 7.3



Company Guide

Sembcorp Industries

SOTP valuation for SCI

Value (S$ m)

Basis

Sembcorp Marine 2,254 Fair value for Sembcorp Marine Gallant Ventures 75 Share price Salalah 347 40% stake

2,676 Less: book value of listed companies (1,859) Surplus / (Deficit) from listed companies 817

Utilities 4,420 Based on 15x FY17 PE translates to 1x P/Bv

Urban Development 504 Based on 15x FY17 PE 4,925

Less: book value of Utilities (4,418) book value of Urban Development (766)

(5,184) Surplus / (Deficit) from unlisted companies (260) Net Surplus / (Deficit) 557 Book value as of end FY15 6,953 RNAV 7,511 RNAV per share (S$) 4.17 Fair value (S$) 3.80 10% conglomerate discount Implied FY17 PE (x) 17.2 Implied FY17 PB (x) 1.1



Company Guide

Sembcorp Industries


Earnings Drivers:

Utilities’ project pipeline should progressively add to earnings. New facilities will add to SCI’s power generation and water treatment capacities, which should increase earnings, assuming that the operations are profitable. A total of 3,800MW of power generation capacity, 140 tonnes per hour of steam capacity and 1.3m cubic metres per day of water treatment capacity is expected to be added from now until 2018. This roughly translates to 36%, 3% and 14% increase in power, steam and water treatment capacities respectively.

Narrowing spark spreads in Singapore hit power generation earnings. Growth in supply of electricity outpacing the growth in consumption led to a 22% y-o-y fall in the Uniform Singapore Energy Price (USEP) in 2013, 21% in 2014 and a further 29% in 2015, shrinking the generator’s spark spreads – a barometer of profits on electricity sales. However, the impact will not be significant, as Singapore power generation only makes up <5% of SCI’s net income. Nonetheless, an increase in USEP prices will help earnings. Greater contribution from non-Singapore power generation facilities would also alleviate the pressure on profitability.

Marine business (SMM) earnings are orderbook-driven. Sembcorp Marine (SMM)’s orderbook had declined to S$7.8bn as at Dec 2016, in tandem with the downturn in the offshore oil & gas industry. Order wins of S$3.2bn in 2015 were weak but respectable amid the current environment; 2013 and 2014 saw full-year order wins of S$4.2bn but order wins in 2016 amounted to only S$320m. The current orderbook stretches until 2020, but there is risk of order deferments – which would spread revenues and earnings thinner – given that drilling units account for 75% of its value. Low oil prices led oil majors and asset owners to defer capex spending, hence, a rebound in oil prices should trigger more order wins for SMM, which would be positive for earnings.

Urban Development business provides growth opportunities. Urban Development accounts for c.8% of SCI’s bottom line. Thus, a strong performance of this segment will not move the needle too much for now, but represents an avenue for growth. SCI has about 3,500ha of saleable land remaining across China, Indonesia and Vietnam, which it can develop. However, headwinds in the form of delays in China land sales have proven to be a stumbling block recently; better sales momentum, which we are seeing a glimmer of, would give some earnings uplift.

Marine contract wins

SCI Group Net Profit for FY16 - Total S$394m

Utilities FY16 Net Profit by Geography - Total S$348m

Utilities in Singapore FY16 Net Profits - Total S$132.1m


4192

3150

1500

2000

2500

0.0

604.8

1209.7

1814.5

2419.4

3024.2

3629.1

4233.9

2014A 2015A 2016A 2017F 2018F

45%

22%

33%

Energy

Water

On‐site Logist ics & Sol id Waste

Management

33%

4%

31%

4%

14%

10%

2% 1%Singapore

India

China

Rest of ASEAN, Australia & India

Middle East & Africa

UK & the Americas

Corporate

Significant Item


Company Guide

Sembcorp Industries

Balance Sheet:

SCI’s gearing stood at 0.9x as at Dec 2016 – a stark contrast to a net cash position in 2013; increasing leverage at SMM has been the main reason for the increase in debt levels. Overall, gearing remains at palatable levels and there is adequate debt headroom of approximately S$1-2bn for SCI’s expansion capex and working capital.


Oil price rebound would drive SCI’s share price higher. Investors would have greater confidence in the Marine business, as the operating environment improves. While drilling rig orders may lag oil price recovery, we could expect orders for non-drilling, production-related facilities to flow through.

Order wins in the Marine segment and land sales from Urban Development would bode well for SCI’s share price. While the oil price rebound would be an early indicator, securing contract wins by SMM is more tangible. More momentum in land sales would signal more hope for growth, and be positive to share price.

Widening spark spreads at Singapore power plants. Signs of positive and widening spark spreads in Singapore would alleviate a key concern of investors and provide support to the share price.

Key Risks:

Increasing competition in the Singapore power market. Total power generation supply in Singapore rose by over 9% y-o-y in the past two years, marking the biggest y-o-y jumps since the electricity market started. This has depressed prices and hurt SCI’s bottom line. The oversupply of capacity and over-commitment of gas supply issues will likely continue to plague Singapore's power market in the near-to-medium term.

Execution of Indian power plants. The availability of coal supply and power purchase agreements (PPA) for SCI’s power plants in India are concerns. We find comfort that the TPCIL plant is up and running, with 86% of capacity committed on long-term PPAs and operating using both domestic and imported coal.

Company Background

Sembcorp Industries (SCI) is a trusted provider of essential energy and water solutions to both industrial and municipal customers. It has facilities with 10,600MW of gross power capacity and over 10m cubic metres of water per day in operation and under development. It is also a world leader in marine and offshore engineering (via Sembcorp Marine) as well as an established brand name in urban development (comprising industrial parks as well as business, commercial and residential space) in Vietnam, China and Indonesia.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.3

0.4

0.4

0.5

0.5

0.6

0.6

0.7

0.7

0.8

0.8

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2014A 2015A 2016A 2017F 2018F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

2014A 2015A 2016A 2017F 2018F


S$m

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2014A 2015A 2016A 2017F 2018F

Avg: 19.6x

+1sd: 31.5x

+2sd: 43.3x

‐1sd: 7.8x

-3.6

6.4

16.4

26.4

36.4

46.4

56.4

66.4


(x)

Avg: 1.33x

+1sd: 1.8x

+2sd: 2.26x

‐1sd: 0.87x

‐2sd: 0.41x0.3

0.8

1.3

1.8

2.3


(x)


Company Guide

Sembcorp Industries

Key Assumptions

FY Dec 2014A 2015A 2016A 2017F 2018F

Marine contract wins 4,192 3,150 1,500 2,000 2,500

Segmental Breakdown

FY Dec 2014A 2015A 2016A 2017F 2018F

Revenues (S$m)

Utilities 4,850 4,227 4,112 4,281 4,456 Marine 5,831 4,967 3,544 2,690 3,274 Industrial Parks 6.54 7.95 7.05 10.3 12.4 Other Businesses and Corporate 208 342 245 196 157

Total 10,895 9,545 7,908 7,178 7,899 Net Profit before EI

Utilities 408 701 348 305 334 Marine 340 (176) 48.3 87.6 91.2 Industrial Parks 44.3 33.5 33.3 33.6 34.0

Other Businesses and Corporate

8.78 (9.7) (34.7) (31.2) (28.1)

Total 801 549 395 395 431 Net Profit before EI

Utilities 8.4 16.6 8.5 7.1 7.5 Marine 5.8 (3.6) 1.4 3.3 2.8 Industrial Parks 678.1 421.3 472.2 325.5 274.0

Other Businesses and Corporate

4.2 (2.8) (14.2) (15.9) (17.9)

Total 7.4 5.8 5.0 5.5 5.5

Income Statement (S$m)

FY Dec 2014A 2015A 2016A 2017F 2018F

Revenue 10,895 9,545 7,907 7,178 7,899 Cost of Goods Sold (9,480) (8,813) (6,802) (6,086) (6,761) Gross Profit 1,415 732 1,105 1,092 1,138 Other Opng (Exp)/Inc (352) (950) (349) (323) (331) Operating Profit 1,062 (218) 756 769 807 Other Non Opg (Exp)/Inc 76.7 418 39.6 (7.8) (7.8) Associates & JV Inc 158 6.20 125 97.6 99.5 Net Interest (Exp)/Inc (50.7) (205) (372) (322) (323) Exceptional Gain/(Loss) 0.0 426 (12.1) 0.0 0.0 Pre-tax Profit 1,246 426 537 537 576 Tax (162) 28.1 (100) (111) (114) Minority Interest (283) 94.5 (42.3) (31.0) (31.0) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 801 549 395 395 431 Net Profit before Except. 801 123 407 395 431 EBITDA 1,612 590 1,305 1,281 1,342 Growth

Revenue Gth (%) 0.9 (12.4) (17.2) (9.2) 10.0 EBITDA Gth (%) (0.4) (63.4) 121.2 (1.8) 4.8 Opg Profit Gth (%) 12.0 nm nm 1.7 5.0 Net Profit Gth (Pre-ex) (%) (2.4) (84.6) 230.1 (3.0) 9.3 Margins & Ratio

Gross Margins (%) 13.0 7.7 14.0 15.2 14.4 Opg Profit Margin (%) 9.7 (2.3) 9.6 10.7 10.2 Net Profit Margin (%) 7.4 5.8 5.0 5.5 5.5 ROAE (%) 14.8 9.1 6.0 5.8 6.1 ROA (%) 5.2 3.0 1.9 1.8 1.9 ROCE (%) 8.3 (1.5) 3.6 3.3 3.4 Div Payout Ratio (%) 35.7 35.8 36.2 32.0 32.0 Net Interest Cover (x) 21.0 (1.1) 2.0 2.4 2.5



Company Guide

Sembcorp Industries


FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016

Revenue 2,419 1,895 1,847 2,140 2,026 Cost of Goods Sold (2,619) (1,627) (1,559) (1,841) (1,776) Gross Profit (200) 269 288 298 250 Other Oper. (Exp)/Inc (677) (78.8) (110) (83.9) (36.7) Operating Profit (877) 190 178 214 214 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (114) 35.6 38.1 3.49 47.9 Net Interest (Exp)/Inc (72.6) (76.6) (85.1) (83.3) (127) Exceptional Gain/(Loss) 371 12.1 (8.3) (46.2) 30.4 Pre-tax Profit (692) 161 123 88.3 165 Tax 121 (29.9) (28.2) (30.0) (12.2) Minority Interest 207 (24.0) (8.3) (4.5) (5.5) Net Profit (365) 107 86.5 53.9 147 Net profit bef Except. (736) 95.0 94.8 100 117 EBITDA (990) 225 216 218 262

Growth

Revenue Gth (%) 0.8 (21.7) (2.6) 15.9 (5.3) EBITDA Gth (%) nm nm (4.1) 0.7 20.1 Opg Profit Gth (%) nm nm (6.1) 20.3 (0.4) Net Profit Gth (Pre-ex) (%) nm nm (0.2) 5.7 16.9 Margins

Gross Margins (%) (8.3) 14.2 15.6 13.9 12.4 Opg Profit Margins (%) (36.2) 10.0 9.7 10.0 10.5 Net Profit Margins (%) (15.1) 5.6 4.7 2.5 7.3

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016A 2017F 2018F

Net Fixed Assets 7,725 8,685 11,226 11,804 12,359 Invts in Associates & JVs 2,074 2,349 1,746 1,773 1,802 Other LT Assets 1,246 1,273 1,694 1,694 1,694 Cash & ST Invts 1,663 1,609 1,887 1,393 2,595 Inventory 3,205 4,233 3,466 3,589 2,633 Debtors 1,200 1,568 1,958 1,595 1,436 Other Current Assets 63.8 201 317 317 317 Total Assets 17,176 19,915 22,290 22,161 22,831

ST Debt 1,086 1,801 2,126 2,126 2,126 Creditor 2,745 3,388 3,398 3,085 3,395 Other Current Liab 1,526 758 492 393 416 LT Debt 3,649 5,032 7,096 7,096 7,096 Other LT Liabilities 938 894 1,016 1,016 1,016 Shareholder’s Equity 5,616 6,433 6,701 6,953 7,258 Minority Interests 1,616 1,610 1,461 1,492 1,523 Total Cap. & Liab. 17,176 19,915 22,290 22,161 22,830

Non-Cash Wkg. Capital 198 1,856 1,852 2,024 576 Net Cash/(Debt) (3,071) (5,223) (7,335) (7,828) (6,626) Debtors Turn (avg days) 39.2 52.9 81.4 90.3 70.0 Creditors Turn (avg days) 108.3 132.8 193.0 208.9 187.2 Inventory Turn (avg days) 108.4 161.0 218.9 227.3 179.7 Asset Turnover (x) 0.7 0.5 0.4 0.3 0.4 Current Ratio (x) 1.1 1.3 1.3 1.2 1.2 Quick Ratio (x) 0.5 0.5 0.6 0.5 0.7 Net Debt/Equity (X) 0.4 0.6 0.9 0.9 0.8 Net Debt/Equity ex MI (X) 0.5 0.8 1.1 1.1 0.9 Capex to Debt (%) 27.4 20.2 8.8 10.8 10.8 Z-Score (X) 1.6 1.2 1.2 1.2 1.2



Company Guide

Sembcorp Industries

Cash Flow Statement (S$m)

FY Dec 2014A 2015A 2016A 2017F 2018F

Pre-Tax Profit 1,246 426 537 537 576 Dep. & Amort. 315 405 454 422 444 Tax Paid (119) (150) (85.8) (189) (111) Assoc. & JV Inc/(loss) (158) (6.2) (125) (97.6) (99.5) Chg in Wkg.Cap. (1,414) (1,961) (395) (93.6) 1,445 Other Operating CF 72.9 525 487 0.0 0.0 Net Operating CF (57.4) (761) 872 578 2,255 Capital Exp.(net) (1,298) (1,381) (810) (1,000) (999) Other Invts.(net) 4.30 9.98 0.0 0.0 0.0 Invts in Assoc. & JV (280) (427) (60.9) 0.0 0.0 Div from Assoc & JV 122 129 122 70.0 71.0 Other Investing CF 10.9 471 (51.6) 0.0 0.0 Net Investing CF (1,441) (1,199) (801) (930) (928) Div Paid (539) (415) (225) (143) (126) Chg in Gross Debt 393 2,046 1,107 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 1,049 261 (668) 0.0 1.00 Net Financing CF 903 1,892 214 (143) (125) Currency Adjustments 1.78 14.7 (35.0) 0.0 0.0 Chg in Cash (594) (53.0) 250 (494) 1,202 Opg CFPS (S cts) 76.1 67.3 70.9 37.6 45.3 Free CFPS (S cts) (76.0) (120) 3.46 (23.6) 70.3



Source: DBS Bank

Analyst: Pei Hwa HO

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 22 Feb 16 2.70 3.30 BUY

2: 11 Mar 16 3.03 3.30 BUY

3: 15 Mar 16 3.00 3.30 BUY

4: 20 Apr 16 3.06 3.30 BUY

5: 03 May 16 2.82 3.30 BUY

6: 05 May 16 2.84 3.10 BUY

7: 31 May 16 2.79 3.10 BUY

8: 03 Aug 16 2.74 3.10 BUY

9: 28 Sep 16 2.53 3.10 BUY

10: 29 Sep 16 2.60 3.10 BUY

11: 28 Oct 16 2.53 2.90 BUY12: 28 Nov 16 2.73 2.90 BUY13: 01 Dec 16 2.89 3.10 BUY14: 24 Jan 17 3.27 3.10 BUY


1

2

3

4

5

6

7

8

9

10

11

1213

14

2.32

2.52

2.72

2.92

3.12

3.32


S$

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: JC, PY

BUYLast Traded Price ( 23 Feb 2017): S$0.395 (STI : 3,137.57)

Price Target 12-mth : S$0.62 (57% upside) (Prev S$0.56)

Potential Catalyst: Increase in utilisation and rates

Where we differ: In line

Analyst Pei Hwa HO +65 6682 3714 [email protected]

What’s New 4Q16 earnings below expectations on impairment

losses and lower utilisation

Indefinite postponement of four new service rigs

reduces capex by US$270m

Successful revision of debt repayment to match

cash flow generation alleviate balance sheet stress

Maintain BUY; TP S$0.62

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2015A 2016A 2017F 2018F

Revenue 351 318 320 445 EBITDA 267 203 224 273 Pre-tax Profit 38 (31) 31 56 Net Profit 37 (34) 29 54 Net Pft (Pre-Ex, Aft Pref Div)*

95 14 22 46

EPS (S cts) 3.3 (2.3) 2.0 3.6 EPS Pre Ex, Aft Pref Div (S cts)

8.5 1.0 1.5 3.1

EPS Gth (%) (84) nm nm 82

EPS Gth Pre Ex, Aft pref div (%)

(47) (89) 54 111

Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 98.0 79.6 81.1 84.2 PE (X) 12.0 nm 19.8 10.8 PE Pre Ex, Aft Pref Div (X)

4.6 40.8 26.5 12.6 P/Cash Flow (X) 2.1 4.0 4.4 2.6 EV/EBITDA (X) 7.3 9.9 9.1 7.6 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 0.4 0.5 0.5 0.5 Net Debt/Equity (X) 1.1 1.0 1.0 1.0 ROAE (%) 2.1 (3.7) 1.8 3.8

Earnings Rev (%): (40) (22) Consensus EPS (S cts): 3.9 5.8

Other Broker Recs: B: 9 S: 2 H: 1


Positive initiatives to manage cash flow Maintain BUY on Ezion; TP lifted to S$0.62, based on higher PB multiple of 0.7x FY17 impaired book (0.6x previously). We have slashed FY17-18F earnings by 22-55% after pushing back vessel deliveries. Nonetheless, we believe core earnings are near bottom and we are comforted by Ezion’s positive operating cash flows and lower gearing which are much needed in this environment. Ezion is among the stronger players with good assets, positive operating cash flow and decent cash balance. Re-rating catalysts stem from oil price rebound, earnings recovery with the resumption of service rigs currently under repair/upgrades in 2017/2018, and successful diversification of its customer base to win new charter contracts.

4Q16 earnings disappointed on impairment and lower utilisation. Ezion’s reported a net loss of US$66.6m in 4Q16, resulting in full year losses of US$33.6m. 4Q16 was dragged by US$70.9m impairment on assets and receivables as guided. Core profit in 4Q16 was also weaker, with 9% q-o-q decline in revenue to US$72.6m, due to lower utilisation and gross margin contraction of 5.4ppts to 12.1%. The lower revenue was due to the off hire of two service rigs.

Windfarm venture shaping up. China had set a target of 5GW of installed offshore wind capacity by 2015 and 30GW by 2020 in its current 5-year plan. It is behind schedule with approximately only 2.5GW offshore wind capacity installed. A liftboat would facilitate installations of 200MW offshore wind capacity a year. Assuming 27.5GW of wind capacity to be installed over the next five years or 5.5GW per year, there would 25-30 liftboats required in China. Ezion has signed an MOU (Memorandum of Understanding) with one of the top five largest state-owned power generation enterprises in China – Huadian – and several partners to speed up the installation of offshore windfarms using liftboats. The first service rig for a China windfarm is expected to commence in 1Q17.

Valuation: We value Ezion based on 0.7x FY17 impaired book, arriving at a target price of S$0.62. This implies 57% upside potential.

Key Risks to Our View: Rate reduction and contract terminations We estimate that every 1% decline in average day rates will reduce Ezion’s bottom line by 7% due to a low-base effect. We have prudently assumed that rates to fall by 10% in FY17. Five service rigs are due for charter renewals in FY17. Meanwhile, the Mexican contracts appear to be at risk of termination as these consist of a few units that are deployed for drilling and there have been several cancellations in that region. Competition may be keener ahead with more new entrants attracted to the growing liftboat market.

At A Glance Issued Capital (m shrs) 2,074

Mkt. Cap (S$m/US$m) 819 / 580

Major Shareholders (%)

Thiam Keng Chew 13.4

Prudential Plc 9.1

Macarios Pte Ltd 6.9

Free Float (%) 70.6

3m Avg. Daily Val (US$m) 8.3

DBS Group Research . Equity

24 Feb 2017


Ezion Holdings Version 11 | Bloomberg: EZI SP | Reuters: EZHL.SI Refer to important disclosures at the end of this report

17

67

117

167

217

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0


Relative IndexS$

Ezion Holdings (LHS) Relative STI (RHS)


Company Guide

Ezion Holdings

WHAT’S NEW

Positive developments

4Q16 below. Ezion’s reported a net loss of US$66.6m in

4Q16, resulting in full year losses of US$33.6m. 4Q16 was

dragged by US$70.9m impairment on assets and receivables

as guided in its profit warning.

Two more service rigs on offhire in 4Q16. Core profit in 4Q16

was also weaker, with 9% q-o-q decline in revenue to

US$72.6m due to lower utilisation. Two more service rigs

were taken off the operating fleet in 4Q16, leaving only 15

units contributing in the quarter. The lower revenue yet high

cost base led to a drop in gross margins by 5.4ppts q-o-q to

12.1%. Ezion also recorded US$5m in share of associate

losses due to an impairment exercise undertaken by the

associates / JVs. The weakness was mitigated by forex gain of

US$20m. Excluding forex gains and exceptionals, Ezion would

have made a loss of US$15m in the quarter.

Four service rig under construction are indefinitely postponed.

These include two newbuild liftboats and two refurbished

jackups as charter rates offered by customers were not

economically viable. Ezion is in talks with two potential

shipyards to partner and build cost efficient solutions that

meet these clients’ requirement. Ezion will have the options

to acquire / charter the units with no initial capital outlay.

Capex further reduced. Ezion is now looking at capex of

US$110m (from US$160-180m) this year and US$100m (from

US$200m) next year following the indefinite postponement

of four rigs

Repayment schedule to match cash flow generation. Ezion

has successfully renegotiated the repayment schedule to

match the cash flow generation of the rig. This alleviates the

pressure to make principal repayments when vessels are

offhire and allows flexibility on repayment amount based on

the rig’s ability to generate cash flow.

Is impairment adequate? The additional US$70.9m

impairment in 4Q16 brings total impairment since 4Q15 to

US$152m, representing 12% of NTA and 7% of fleet value.

The impairment in 4Q16 comprised largely of losses due to

the indefinite postponement of the four service rigs under

construction, and trade receivables.

For Swissco JV units, management believes the potential

negative goodwill resulting from the acquisition of the

remaining Swissco stake at a discount will offset any asset

impairment that may arise. While management believes the

impairment should suffice at this juncture, we remain wary of

further impairment on the existing fleet.

Earnings revision. We cut FY17-18 earnings by 22-55% after

pushing back the delivery schedule.


Company Guide

Ezion Holdings



Revenue 84.8 79.8 72.6 (14.3) (9.0)

Cost of Goods Sold (64.6) (65.8) (63.9) (1.1) (3.0)

Gross Profit 20.2 14.0 8.78 (56.5) (37.3)

Other Oper. (Exp)/Inc (2.4) (1.8) 7.60 nm (533.2)

Operating Profit 17.8 12.3 16.4 (8.0) 33.8


Associates & JV Inc 9.01 5.32 (5.0) nm nm

Net Interest (Exp)/Inc (5.6) (7.2) (6.5) (15.0) 10.4

Exceptional Gain/(Loss) (84.3) 0.0 (70.9) 15.9 nm

Pre-tax Profit (63.1) 10.4 (65.9) (4.6) nm

Tax (0.5) (1.0) (0.7) 43.9 (30.1)

Minority Interest 0.0 0.0 0.0 - -

Net Profit (63.5) 9.38 (66.6) (4.9) nm

Net profit bef Except. 20.7 9.38 4.26 (79.5) (54.6)

EBITDA 62.1 55.7 50.7 (18.4) (8.9)

Margins (%)



Net Profit Margins (74.9) 11.8 (91.7)



Company Guide

Ezion Holdings


Earnings Drivers:

Charter-backed fleet expansion. Since the delivery of its first

liftboat, the Lewek Leader, in January 2010, Ezion has expanded

its fleet rapidly to 26 service rigs (excluding unit #10 that was

taken out for conversion into MOPU). Based on the existing

schedule, management expects another 2/5 units to come on

stream in 2017/18. All the vessels under construction have

already secured back-to-back contracts and will start

contributing to earnings upon delivery to customers.

Rate reduction and uncertainty. While we expect sequential

improvement from the maiden contribution of the six new

service rigs to be delivered the next three years and resumption

of the ten vessels currently under repair/upgrade/conversion at

the yards, the pace of earnings growth is dependent on the

magnitude of rate reduction. With oil price hovering at current

levels, rate renegotiation is inevitable. Against this backdrop, we

have factored in a rate reduction of 10% in 2017.

Pick-up in offshore logistic revenue. Ezion’s Australian offshore

logistic fleet comprises ten tugs and 30 ballastable barges.

Ballastable barges, which have specially reinforced decks, have

been modified to carry heavy offshore platforms and jackets.

Demand for such high-end vessels has fallen off the cliff since

4Q14, with the construction of major Australian LNG projects

coming to an end. This was exacerbated by depressed oil prices

that have discouraged customers from exercising charter

options after the initial term of 18 months.

We estimate overhead costs to be around US$15-20m a year,

taking into account depreciation, crew costs and interest

expenses. Upside potential would come from a stronger-than-

expected demand or disposal of the fleet, which has a carrying

value of around US$250m. However, it is not easy to find

buyers in the current climate.

Contract wins from windfarm expansion to fuel growth. During

the peak of its contract wins, Ezion won 12/9/7 new charter

contracts in 2012/13/14 respectively. The contracting pace had

slowed down, constrained by Ezion’s stretched balance sheet.

But the unexpected collapse in oil prices accelerated the decline

as some customers have held back the award of new contracts

or have negotiated down charter rates.

We believe demand will continue to grow in this region as

liftboats/service rigs are in early stages of the industry cycle, to

substitute workboats and barges that are traditionally used to

support offshore production platforms. Ezion enjoys first-mover

advantage to tap the industry’s growth. In addition, its recent

venture into offshore windfarm could be a medium-term

growth engine as well.

Total fleet

Operating fleet


21

26 2628

33

0.0

4.8

9.5

14.3

19.0

23.8

28.6

33.3

2014A 2015A 2016A 2017F 2018F

18 18

15

22

33

0.0

6.7

13.5

20.2

26.9

33.7

2014A 2015A 2016A 2017F 2018F


Company Guide

Ezion Holdings

Balance Sheet: Net gearing hovering at 0.9-1.0x post right issues in July. Ezion completed the rights issue (which saw subscription of 2.06x for each rights issued) in July 2016, raising c.US$100m worth of equity in this capitalisation exercise.

Relatively better financial health in current climate. Net debt/EBITDA is expected to hover around 6x in 2017. The current ratio of c.1.0x indicates Ezion’s ability to service short-term financing needs that may arise. Ezion should be able to meet its interest payments with c.1.5x net interest coverage ratio.

Share Price Drivers: Oil price rebound. Oil price is a leading indicator and key re-rating catalyst for O&G sector as the market has widely priced in the weak earnings and new lower norm of oil prices. We believe Ezion is one of the best proxies to ride the recovery, given its earnings resiliency and growth potential.

Vessel deliveries. Besides the delivery rescheduling, 11 of Ezion’s service rigs have been withdrawn from its fleet for repairs/upgrades/conversions. The resumption of these rigs in 2017-18 should drive earnings recovery. In addition, Ezion is expected to take delivery of 2/5 vessels in 2017/18, driving recovery into 2018. Management has indefinitely postponed four service rigs under construction. Key downside risk is a rate reduction greater than the 10-15% p.a. factored into our model.

New contracts/renewals at good rates. Securing new/renewal of charter contracts at good rates would alleviate concerns over contract cancellations and rate reductions and thus lower the risk premium ascribed to the company.

Key Risks: Rising interest rates. About 50% of its debts are either on fixed rates or swapped to fixed rates, lowering the sensitivity. We estimate that every 100-bps increase in interest rates could reduce Ezion's net profit by approximately 8%.

Rate reduction and contract terminations. Three service rigs are due for charter renewals in FY17. In terms of termination, the Mexican contracts appear to be at risk as these consist of the few units that are deployed for drilling and PEMEX has exercised early termination clauses on a couple of drilling rigs last year and is facing a liquidity crunch because of the oil price collapse.

Keener competition. The rising acceptance and growing demand for liftboats have attracted new entrants to the market. We estimate that there are c.20 new liftboats currently under construction to be delivered largely in 2017. We believe demand growth should outpace supply growth in the under-penetrated Asia-Pacific region.

Company Background Ezion provides service rigs and offshore logistics support services to the offshore oil & gas industry. It was one of the first companies to introduce liftboats in Asia and the Middle East regions. Ezion had a total of 26 service rigs delivered and 15 service rigs in operation as of Dec 2016. The fleet is expected to grow to 28 vessels by end-2017 and 33 by end-2018.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.2

0.2

0.2

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2014A 2015A 2016A 2017F 2018F


0.0

100.0

200.0

300.0

400.0

500.0

600.0

2014A 2015A 2016A 2017F 2018F


US$m

0.0%

5.0%

10.0%

15.0%

20.0%

2014A 2015A 2016A 2017F 2018F

Avg: 16.5x

+1sd: 23.1x

+2sd: 29.8x

-1sd: 9.8x

-2sd: 3.1x2.8

7.8

12.8

17.8

22.8

27.8

32.8

37.8


(x)

Avg: 1.48x

+1sd: 2.43x

+2sd: 3.38x

-1sd: 0.52x

-0.3

0.2

0.7

1.2

1.7

2.2

2.7

3.2

3.7


(x)


Company Guide

Ezion Holdings

Key Assumptions

FY Dec 2014A 2015A 2016A 2017F 2018F

Total fleet 21.0 26.0 26.0 28.0 33.0

Operating fleet 18.0 18.0 15.0 22.0 33.0

Segmental Breakdown

FY Dec 2014A 2015A 2016A 2017F 2018F

Revenues (US$ m) Production and maintenance support

376 312 276 241 366

Exploration and development support

10 38 42 79 79

Others 0 0 1 1 1

Total 387 351 318 320 445

Operating profit (US$ m) Production and maintenance support

195 26 23 22 54


(8) 0 11 9 10

Others (8) 83 10 10 10

Total 179 109 45 42 75

Operating profit Margins (%) Production and maintenance support

51.8 8.4 8.4 9.2 14.7


(78.6) 0.1 26.7 11.5 13.1

Others 99.7 100.0 103.0 100.0 100.0

Total 46.2 31.1 14.1 13.1 16.8

Income Statement (US$ m)

FY Dec 2014A 2015A 2016A 2017F 2018F

Revenue 387 351 318 320 445 Cost of Goods Sold (191) (233) (257) (266) (351) Gross Profit 196 118 61 54 94 Other Opng (Exp)/Inc (17) (9) (19) (12) (19) Operating Profit 179 109 42 42 75 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 28 23 11 24 27 Net Interest (Exp)/Inc (17) (22) (28) (36) (46) Exceptional Gain/(Loss) 36 (72) (56) 0 0 Pre-tax Profit 226 38 (31) 31 56 Tax (2) (2) (3) (1) (2) Minority Interest 0 0 0 0 0 Net Profit 224 37 (34) 29 54 Net Profit before Except. 188 109 23 29 54 Preference Dividend (9) (14) (8) (8) (8) Net Pft Pre-Ex, Aft Pref Div 179 95 14 22 46 EBITDA 309 267 203 224 273 Growth Revenue Gth (%) 37.1 (9.1) (9.4) 0.6 39.1 EBITDA Gth (%) 58.3 (13.6) (24.1) 10.4 21.7 Opg Profit Gth (%) 49.9 (38.9) (61.5) (0.2) 78.6 Net Profit Gth (%) 39.4 (83.6) nm nm 82.5 Net Pft Pre-Ex Aft Perf Div Gth (%)

34.8 (46.7) (85.1) 53.8 110.8

Margins & Ratio Gross Margins (%) 50.7 33.6 19.2 17.0 21.1 Opg Profit Margin (%) 46.2 31.1 13.2 13.1 16.8 Net Profit Margin (%) 57.9 10.5 (10.6) 9.2 12.1 ROAE (%) 24.5 2.1 (3.7) 1.8 3.8 ROA (%) 8.6 0.8 (1.4) 0.7 1.6 ROCE (%) 7.5 3.7 1.5 1.5 2.6 Div Payout Ratio (%) 0.5 0.0 N/A 0.0 0.0 Net Interest Cover (x) 10.7 5.0 1.5 1.2 1.6



Company Guide

Ezion Holdings

Quarterly / Interim Income Statement (US$ m)

FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016

Revenue 85 82 84 80 73

Cost of Goods Sold (65) (61) (66) (66) (64)

Gross Profit 20 21 18 14 9

Other Oper. (Exp)/Inc (2) (19) (6) (2) 8

Operating Profit 18 2 12 12 16

Other Non Opg (Exp)/Inc 0 0 0 0 0

Associates & JV Inc 9 8 3 5 (5)

Net Interest (Exp)/Inc (6) (8) (7) (7) (6)

Exceptional Gain/(Loss) (84) 13 1 0 (71)

Pre-tax Profit (63) 16 9 10 (66)

Tax 0 0 (1) (1) (1)

Minority Interest 0 0 0 0 0

Net Profit (64) 15 8 9 (67)

Net profit bef Except. 21 2 7 9 4

Preference Dividend 0 0 0 0 0

Net Pft (Pre-Ex, Aft Pref Div) 21 2 7 9 4

EBITDA 62 46 51 56 51

Growth

Revenue Gth (%) (1.7) (3.1) 2.0 (4.7) (9.0)

EBITDA Gth (%) (15.1) (26.6) 11.8 9.1 (8.9)

Opg Profit Gth (%) (35.6) (89.8) 541.6 5.5 33.8

Net Profit Gth (%) nm nm (47.5) 15.3 nm

Margins

Gross Margins (%) 23.8 25.2 21.3 17.5 12.1

Opg Profit Margins (%) 21.0 2.2 13.9 15.3 22.6

Net Profit Margins (%) (74.9) 18.9 9.7 11.8 (91.7)

Balance Sheet (US$ m)

FY Dec 2014A 2015A 2016A 2017F 2018F

Net Fixed Assets 2,136 2,284 2,198 2,204 2,265

Invts in Associates & JVs 173 204 250 275 302

Other LT Assets 14 12 5 5 5

Cash & ST Invts 372 230 205 18 49

Inventory 0 0 0 0 0

Debtors 160 193 179 200 247

Other Current Assets 128 186 164 164 164

Total Assets 2,981 3,108 3,002 2,865 3,032

ST Debt 288 375 331 331 331

Creditor 70 116 112 108 180

Other Current Liab 69 109 49 44 45

LT Debt 1,208 1,230 1,160 1,011 1,058

Other LT Liabilities 33 36 34 34 34

Shareholder’s Equity 1,313 1,241 1,315 1,337 1,383

Minority Interests 0 0 0 0 0

Total Cap. & Liab. 2,981 3,108 3,002 2,865 3,032

Non-Cash Wkg. Capital 148 153 182 212 186

Net Cash/(Debt) (1,125) (1,375) (1,286) (1,325) (1,341)

Debtors Turn (avg days) 125.9 183.4 213.4 216.1 183.4

Creditors Turn (avg days) 288.9 345.8 388.8 372.5 291.5

Inventory Turn (avg days) N/A N/A N/A N/A N/A

Asset Turnover (x) 0.2 0.1 0.1 0.1 0.2

Current Ratio (x) 1.5 1.0 1.1 0.8 0.8

Quick Ratio (x) 1.2 0.7 0.8 0.5 0.5

Net Debt/Equity (X) 0.9 1.1 1.0 1.0 1.0

Net Debt/Equity ex MI (X) 0.9 1.1 1.0 1.0 1.0

Capex to Debt (%) 34.9 23.8 3.0 12.2 16.7

Z-Score (X) 0.9 0.7 0.7 0.7 0.8



Company Guide

Ezion Holdings

Cash Flow Statement (US$ m)

FY Dec 2014A 2015A 2016A 2017F 2018F

Pre-Tax Profit 226 38 (31) 31 56

Dep. & Amort. 103 135 150 158 171

Tax Paid (2) (4) (3) (6) (1)

Assoc. & JV Inc/(loss) (28) (23) (11) (24) (27)

Chg in Wkg.Cap. (62) (32) (43) (26) 25

Other Operating CF (23) 94 84 0 0

Net Operating CF 214 209 146 133 224

Capital Exp.(net) (522) (382) (45) (164) (233)

Other Invts.(net) (19) (4) 0 0 0

Invts in Assoc. & JV 15 0 (29) 0 0

Div from Assoc & JV 0 0 0 0 0

Other Investing CF 6 8 2 0 0

Net Investing CF (520) (378) (72) (164) (233)

Div Paid (1) (1) 0 0 0

Chg in Gross Debt 290 180 (146) (149) 47

Capital Issues 272 (87) 100 0 0

Other Financing CF (30) (38) (38) (8) (8)

Net Financing CF 530 54 (84) (156) 40

Currency Adjustments (18) (27) (15) 0 0

Chg in Cash 206 (142) (25) (187) 31

Opg CFPS (S cts) 17.5 15.2 9.1 7.6 9.6

Free CFPS (S cts) (19.5) (10.9) 4.8 (1.5) (0.4)



Source: DBS Bank

Analyst: Pei Hwa HO

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 23 Feb 16 0.45 0.77 BUY

2: 02 Mar 16 0.47 0.77 BUY

3: 15 Mar 16 0.55 0.77 BUY

4: 03 May 16 0.49 0.77 BUY

5: 13 May 16 0.44 0.77 BUY

6: 11 Aug 16 0.29 0.58 BUY

7: 05 Sep 16 0.25 0.58 BUY

8: 29 Sep 16 0.29 0.58 BUY

9: 03 Oct 16 0.28 0.58 BUY

10: 10 Oct 16 0.37 0.58 BUY

11: 25 Nov 16 0.37 0.56 BUY

12: 28 Nov 16 0.35 0.56 BUY

13: 01 Dec 16 0.36 0.56 BUY

14: 24 Jan 17 0.42 0.56 BUY

Note : Share price and Target price are adjusted for corporate actions. 15: 20 Feb 17 0.35 0.56 BUY

1

23 4

5

6

7

8

9

10

11

12

13

14

15

0.19

0.24

0.29

0.34

0.39

0.44

0.49

0.54

0.59


S$


ed: TH / sa: YM, PY

BUYLast Traded Price ( 24 Feb 2017): S$10.32 (STI : 3,117.03)

Price Target 12-mth: S$11.37 (10% upside) (Prev S$10.90)

Potential Catalyst: Major deceleration in the macro environment

Where we differ: FY17 EPS in line Analyst Sachin MITTAL +65 6682 3699 [email protected]

What’s New 4Q16 net profit of S$54.1m (+26% y-o-y, +14% q-

o-q) was 8-9% above expectations; higher revenue

due to new products/programmes helped increase

earnings

Business mix, exchange movement to support

earnings growth in FY17

Maintaining BUY with a revised TP of S$ 11.37.

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016A 2017F 2018F

Revenue 2,657 2,874 3,087 3,273 EBITDA 229 263 283 300 Pre-tax Profit 182 216 237 250 Net Profit 154 181 198 210 Net Pft (Pre Ex.) 154 181 198 210 Net Pft Gth (Pre-ex) (%) 10.2 17.3 9.6 5.8 EPS (S cts) 56.2 64.8 71.0 75.2 EPS Pre Ex. (S cts) 56.2 64.8 71.0 75.2 EPS Gth Pre Ex (%) 10 15 10 6 Diluted EPS (S cts) 56.2 64.8 71.0 75.2 Net DPS (S cts) 50.0 50.0 50.0 50.0 BV Per Share (S cts) 690 703 724 749 PE (X) 18.4 15.9 14.5 13.7 PE Pre Ex. (X) 18.4 15.9 14.5 13.7 P/Cash Flow (X) 12.1 12.4 16.1 14.3 EV/EBITDA (X) 11.0 9.4 8.7 8.1 Net Div Yield (%) 4.8 4.8 4.8 4.8 P/Book Value (X) 1.5 1.5 1.4 1.4 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 8.2 9.4 10.0 10.2

Earnings Rev (%): 4 8 Consensus EPS (S cts): 69.4 75.4 Other Broker Recs: B: 8 S: 0 H: 0


Consistency is the key

Consistent revenue growth over the past 13 quarters. The math

works inVenture's favour as growing segments comprise over 40%

while fast-shrinking segments make up only 11% of the total

business. Venture's exposure to growing segments such as the Test,

Measurement, Medical & Life Science, coupled with the fact that

Venture has added 100 new customers over the last six years (33%

of its customer base), is likely to keep the momentum going. Fixed

dividend commitment of 50 Scts (4.8% yield) coupled with 10%

earnings growth prospects in FY17F is attractive in our opinion.

4Q16 net profit was 8-9% above our expectations. Net profit of

S$54.1m (+26% y-o-y, +14% q-o-q) was ~8-9% above our

expectations. Revenue was boosted by new product and

programme introductions as well as new customer wins. The

growth was largely in the Test, Measurement, Medical and Life

Science segment, which commands superior margins. Net profit

would have been S$4-5m higher excluding one-off provision.

Changing business mix to support healthy margins. Venture's

evolving business mix, with increasing contribution from the Test,

Measurement, Medical and Life Science segments and declining

contribution from computer peripherals and printing, is likely to

sustain its gross margins. We believe that the specialised nature of

the Medical and Life Science segment permits Venture to realise

better margins. Along with revised revenue, this has resulted in

4%/8% revisions to our FY17/FY18 earnings.

Valuation:

Maintain BUY with a revised TP of S$ 11.37. We revise up our TP

to S$11.37 as we increase our earnings expectation for FY17F. Our

TP is based on 16x FY17 PE, which is +1SD of its historical mean

PE as we expect the market to re-rate Venture following 13

consecutive quarters (y-o-y) of steady revenue and profit growth.

The counter also offers a dividend yield of 4.8%.

Key Risks to Our View:

Weakening global growth prospects. As Venture has exposure to

the US, EU and Asia, a broad global slowdown is likely to impact

Venture due to its vulnerability to business cycles. Potential

weakening of the USD could also dampen growth in revenues.

At A Glance Issued Capital (m shrs) 279

Mkt. Cap (S$m/US$m) 2,880 / 2,050

Major Shareholders (%)

Aberdeen Asset Management 7.0

Ngit Liong Wong 6.9

Sprucegrove Investment 6.0

Free Float (%) 75.2

3m Avg. Daily Val (US$m) 5.1

ICB Industry : Industrials / Electronic & Electrical Equipment

DBS Group Research . Equity

27 Feb 2017


Venture Corporation Version 5 | Bloomberg: VMS SP | Reuters: VENM.SI Refer to important disclosures at the end of this report

73

93

113

133

153

173

193

213

6.4

6.9

7.4

7.9

8.4

8.9

9.4

9.9

10.4

10.9


Relative IndexS$

Venture Corporation (LHS) Relative STI (RHS)


Page 2

Company Guide

Venture Corporation

WHAT’S NEW

New product launch boost earnings/revenue

New product introductions a boost to revenue: 4Q16 revenue

of S$855m (+23% y-o-y, +21% q-o-q) was well above our

expectations. The revenue bump was due to Venture

introducing new products and programmes as well as new

customer wins. The growth largely came from the Test,

Measurement, Medical and Life Science segment, which has

seen continuous growth over the past 2-3 years. Net profit

would have been S$4-5m higher excluding one-off provision

Top-line boost lead to better bottom line: Net profit of S$

54.1m (+26% y-o-y, +14% q-o-q) was ~8-9% above our

expectations. Venture maintained strong GP margins (24.7%

in 4Q16) which resulted in the earnings surprise. However,

the bottom-line increase was tempered by the increase in

other operating expenses and higher depreciation costs.

Other operating expenses increased mainly due to legal

expenses of S$22.6m and an impairment loss of S$5.9m.



Revenue 694 706 855 23.1 21.1

Cost of Goods Sold (535) (529) (643) 20.3 21.6

Gross Profit 159 177 211 32.7 19.6

Other Oper. (Exp)/Inc (108) (121) (148) 37.0 22.8

Operating Profit 49.2 56.1 63.2 28.5 12.7

Other Non Opg (Exp)/Inc 1.01 0.64 0.86 (14.6) 34.3

Associates & JV Inc 1.11 0.12 1.24 11.1 958.1

Net Interest (Exp)/Inc (0.3) (0.2) (0.2) 13.3 (10.8)


Pre-tax Profit 53.1 56.7 65.1 22.7 14.9

Tax (8.3) (9.2) (11.1) 34.3 20.3

Minority Interest 0.02 0.0 0.05 126.1 (233.3)

Net Profit 44.8 47.4 54.1 20.6 14.0

Net profit bef Except. 42.8 47.4 54.1 26.2 14.0

EBITDA 62.1 67.2 78.9 27.1 17.4

Margins (%)






Company Guide

Venture Corporation


Earnings Drivers:

Growth in Test, Medical and Life Science segment. Venture has

established strong relationships with companies researching on

Genome sequencing, which could see healthy growth over the

medium term with increasing investments and use of MedTech.

Further, an increased focus on lower-cost technologies in

healthcare is likely to boost the Test, Measurement, Medical and

Life Science segment. The segment contributed 43% to the top

line in FY16 compared to 34.1% in FY15, which has helped in

covering for the weak performance of Computer Peripherals &

Data Storage segment.

Changing business mix could lead to better margins. Venture's

evolving business mix, with increasing contribution from the

Test, Measurement, Medical and Life Science segment and

declining contribution from computer peripherals and printing is

likely to improve its gross margins. We believe that the

specialised nature of the medical and life science segment

permits Venture to realise better margins on contracts.

Weakening MYR to benefit Venture. MYR has depreciated

against the SGD by ~4% since 3Q16 which should benefit

Venture in FY17. Almost 60% of Venture’s staff cost is incurred

in Malaysia and staff costs amount to c.10% of group revenue.

Along with the improvement in margins due to business mix,

the impact of lower costs we expect FY17 EBITDA to increase to

9.1%, compared to 8.6% in FY16.

Location of the newly acquired land could benefit Venture.

Venture completed the acquisition of a 60-year leasehold land

for S$13.0m in 2Q16, of which S$5.7m was paid in 1H16.

Development of the land is expected to start in 2017. The land

is located in the Batu Kawan Industrial park near Penang Island,

well known for its high-tech electronics manufacturing industry.

Venture could benefit from specialised labour and improved

supply chain networks with its presence in this area.

Gross margin (%)

% of SGA (%)

USD/SGD

SGD/MYR


23.2 23.224.4

23.4 23.4

0.0

3.5

7.0

10.6

14.1

17.6

21.1

24.7

2014A 2015A 2016A 2017F 2018F

17.116.5

17.216 16

0.0

3.5

7.0

10.5

14.0

17.5

2014A 2015A 2016A 2017F 2018F

1.281.37

1.42 1.42 1.42

0.00

0.29

0.58

0.87

1.16

1.45

2014A 2015A 2016A 2017F 2018F

2.572.72 2.82

3.25 3.25

0.0

0.7

1.3

2.0

2.6

3.3

2014A 2015A 2016A 2017F 2018F


Company Guide

Venture Corporation

Balance Sheet:

Strong balance sheet position. The company has maintained a

net cash position, which should support its current dividend

payout that offers a yield of ~4.8%. Anticipated land

development could strain cash flows mildly but we do not

foresee any dividend cutbacks over the medium term.


Consistent revenue and profit growth over 13 quarters.

Venture has seen consistent revenue and profit growth

(excluding exceptional items) over the past 13 quarters (on a y-

o-y basis), despite the weak economic conditions of its customer

markets. The company’s strategy of pursuing the more resilient

Test, Measurement, Medical and Life Science segment has been

successful in generating revenue and profits. We believe the

recent successes would result in a more bullish market

perception for Venture, re-rating the stock. In addition, the

better-than-expected revenue performance has prompted us to

revise up our forecast for Venture for FY17/18, resulting in a

4%/8% increase in earnings respectively.

Key Risks:

Weakening global markets a concern. As Venture has exposure

to the US, EU and Asia, a broad global slowdown is likely to

impact Venture due to its vulnerability to business cycles.

Possible weakness in the Eurozone due to the exit of Britain

from the European Union or the adoption of restrictive trading

policies by the US could weaken global growth prospects.

Deterioration in the world economy could affect corporate

spending, which will in turn adversely impact Venture's results.

Weakening USD could impact the top line. A weakening USD

against SGD amid weak US economic growth and a prolonged

accommodative monetary policy could impact Venture’s

earnings.

Company Background

Venture is a global provider of technology products and

solutions. It is best known for its superior capabilities in

Original Design Manufacturing (ODM) and in providing high-

mix, high-value and complex manufacturing.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.9

1.0

1.0

1.1

1.1

1.2

1.2

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

2014A 2015A 2016A 2017F 2018F


0.0

10.0

20.0

30.0

40.0

50.0

60.0

2014A 2015A 2016A 2017F 2018F


S$m

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2014A 2015A 2016A 2017F 2018F

Avg: 14x

+1sd: 15.2x

+2sd: 16.3x

-1sd: 12.8x

-2sd: 11.7x

10.4

11.4

12.4

13.4

14.4

15.4

16.4

17.4

18.4

19.4


(x)

Avg: 1.2x

+1sd: 1.29x

+2sd: 1.38x

-1sd: 1.11x

-2sd: 1.02x

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7


(x)


Company Guide

Venture Corporation

Key Assumptions

FY Dec 2014A 2015A 2016A 2017F 2018F

Gross margin (%) 23.2 23.2 24.4 23.4 23.4

% of SGA (%) 17.1 16.5 17.2 16.0 16.0

USD/SGD 1.28 1.37 1.42 1.42 1.42

SGD/MYR 2.57 2.72 2.82 3.25 3.25

Segmental Breakdown

FY Dec 2014A 2015A 2016A 2017F 2018F

Revenues (S$m)

Printing & Imaging 275 255 180 180 180

Computer Peripherals/Data Storage

240 277 197 187 178

Networking/Comms 417 473 533 555 571

Retail Store solutions 742 746 720 734 742

Others 792 906 1,244 1,431 1,602

Total 2,465 2,657 2,874 3,087 3,273


FY Dec 2014A 2015A 2016A 2017F 2018F

Revenue 2,465 2,657 2,874 3,087 3,273

Cost of Goods Sold (1,894) (2,041) (2,172) (2,364) (2,507)

Gross Profit 572 616 702 722 766

Other Opng (Exp)/Inc (421) (438) (491) (491) (521)

Operating Profit 150 178 211 231 245

Other Non Opg (Exp)/Inc 2.52 2.99 3.06 3.06 3.06


Net Interest (Exp)/Inc (1.0) (1.0) (0.9) (0.7) (0.7)

Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 156 182 216 237 250

Tax (16.6) (27.6) (35.2) (38.6) (40.8)

Minority Interest 0.0 (0.1) 0.0 0.0 0.0

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net Profit 140 154 181 198 210

Net Profit before Except. 140 154 181 198 210

EBITDA 199 229 263 283 300

Growth

Revenue Gth (%) 5.8 7.7 8.2 7.4 6.0

EBITDA Gth (%) 8.9 14.7 15.0 7.7 5.9

Opg Profit Gth (%) 11.1 18.2 18.6 9.8 6.0

Net Profit Gth (Pre-ex) (%) 6.6 10.2 17.3 9.6 5.8

Margins & Ratio

Gross Margins (%) 23.2 23.2 24.4 23.4 23.4

Opg Profit Margin (%) 6.1 6.7 7.3 7.5 7.5

Net Profit Margin (%) 5.7 5.8 6.3 6.4 6.4

ROAE (%) 7.6 8.2 9.4 10.0 10.2

ROA (%) 5.6 6.1 6.8 7.1 7.2

ROCE (%) 6.6 7.4 8.6 9.3 9.5

Div Payout Ratio (%) 98.1 89.0 77.1 70.4 66.5

Net Interest Cover (x) 148.1 181.9 235.5 317.5 336.5


Test/Measurement/Medical and Life Science growing

Healthy profit growth over next two years


Company Guide

Venture Corporation


FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016

Revenue 694 631 683 706 855

Cost of Goods Sold (535) (478) (523) (529) (643)

Gross Profit 159 153 161 177 211

Other Oper. (Exp)/Inc (108) (111) (111) (121) (148)

Operating Profit 49.2 41.9 49.5 56.1 63.2

Other Non Opg (Exp)/Inc 1.01 0.81 0.75 0.64 0.86



Exceptional Gain/(Loss) 2.00 0.0 0.0 0.0 0.0

Pre-tax Profit 53.1 42.5 51.6 56.7 65.1

Tax (8.3) (6.6) (8.2) (9.2) (11.1)

Minority Interest 0.02 0.0 0.0 0.0 0.05

Net Profit 44.8 35.8 43.4 47.4 54.1

Net profit bef Except. 42.8 35.8 43.4 47.4 54.1

EBITDA 62.1 53.4 62.3 67.2 78.9

Growth

Revenue Gth (%) 0.2 (9.1) 8.3 3.3 21.1

EBITDA Gth (%) 6.8 (14.0) 16.7 7.9 17.4

Opg Profit Gth (%) 5.5 (14.8) 18.1 13.4 12.7

Net Profit Gth (Pre-ex) (%) 8.3 (16.3) 21.1 9.2 14.0

Margins

Gross Margins (%) 22.9 24.3 23.5 25.0 24.7

Opg Profit Margins (%) 7.1 6.6 7.2 8.0 7.4

Net Profit Margins (%) 6.5 5.7 6.4 6.7 6.3

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016A 2017F 2018F

Net Fixed Assets 188 186 203 204 202

Invts in Associates & JVs 81.3 19.4 20.3 23.2 26.2

Other LT Assets 720 703 661 644 627

Cash & ST Invts 393 459 500 509 541

Inventory 553 556 623 669 709

Debtors 557 570 713 766 812

Other Current Assets 36.3 33.4 38.3 38.3 38.3

Total Assets 2,528 2,528 2,759 2,853 2,955

ST Debt 169 109 92.6 92.6 92.6

Creditor 386 353 491 527 559

Other Current Liab 102 141 211 211 211

LT Debt 0.0 26.5 0.0 0.0 0.0

Other LT Liabilities 6.24 3.14 1.80 1.80 1.80

Shareholder’s Equity 1,862 1,893 1,960 2,019 2,089

Minority Interests 2.47 2.58 2.42 2.43 2.44

Total Cap. & Liab. 2,528 2,528 2,759 2,853 2,955

Non-Cash Wkg. Capital 658 666 673 735 790

Net Cash/(Debt) 224 324 407 416 448

Debtors Turn (avg days) 79.7 77.5 81.5 87.4 88.0

Creditors Turn (avg days) 71.0 67.6 72.5 80.2 80.7

Inventory Turn (avg days) 106.5 101.5 101.3 101.7 102.3

Asset Turnover (x) 1.0 1.1 1.1 1.1 1.1

Current Ratio (x) 2.3 2.7 2.4 2.4 2.4

Quick Ratio (x) 1.4 1.7 1.5 1.5 1.6

Net Debt/Equity (X) CASH CASH CASH CASH CASH

Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH

Capex to Debt (%) 33.5 10.8 36.2 32.4 32.4

Z-Score (X) 4.8 5.1 5.2 5.1 5.1


Revenue bump due to new product/programme introductions

Strong GP margins due to business mix

Healthy cash balance


Company Guide

Venture Corporation


FY Dec 2014A 2015A 2016A 2017F 2018F

Pre-Tax Profit 156 182 216 237 250

Dep. & Amort. 41.9 46.1 46.4 46.1 49.1

Tax Paid (6.1) (9.6) (33.5) (38.6) (40.8)

Assoc. & JV Inc/(loss) (4.6) (2.0) (3.0) (3.0) (3.0)

Chg in Wkg.Cap. (10.5) 48.7 (8.2) (62.5) (54.8)

Other Operating CF (9.3) (31.0) 13.6 0.0 0.0

Net Operating CF 168 234 231 179 201

Capital Exp.(net) (56.7) (14.6) (33.5) (30.0) (30.0)

Other Invts.(net) (14.3) 2.37 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 1.05 0.0 0.0

Other Investing CF 33.9 (1.5) 2.06 0.0 0.0

Net Investing CF (37.2) (13.7) (30.4) (30.0) (30.0)

Div Paid (137) (138) (138) (139) (139)

Chg in Gross Debt 1.89 (33.5) (42.0) 0.0 0.0

Capital Issues 0.0 0.0 17.7 0.0 0.0

Other Financing CF 0.0 0.0 (1.1) 0.0 0.0

Net Financing CF (135) (172) (164) (139) (139)

Currency Adjustments 7.11 17.4 3.33 0.0 0.0

Chg in Cash 2.37 66.0 40.5 9.29 31.5

Opg CFPS (S cts) 65.1 67.5 85.9 86.5 91.7

Free CFPS (S cts) 40.6 80.0 71.0 53.3 61.3



Source: DBS Bank

Analyst: Sachin MITTAL

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 26 Feb 16 8.22 9.00 BUY

2: 29 Apr 16 8.37 9.00 BUY

3: 31 May 16 8.32 9.00 BUY

4: 08 Aug 16 8.98 9.20 HOLD

5: 07 Nov 16 9.54 10.90 BUY


1

2

3

45

7.58

8.08

8.58

9.08

9.58

10.08

10.58

Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16

S$

Stable dividend payments

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: JC, PY

BUYLast Traded Price ( 21 Feb 2017): S$0.37 (STI : 3,094.19) Price Target 12-mth : S$0.42 (14% upside) (Prev S$0.41) Potential Catalyst: Contract wins, higher oil prices, privatisation Where we differ: More bearish on earnings

Analyst Suvro SARKAR +65 6682 3720 [email protected] Singapore Research Team [email protected]

What’s New Impairments of US$310m dragged down headline

profit in FY16

Oil majors’ capex increases in FY17 should boost

sentiment towards the stock

We expect gradual earnings recovery from 2H17

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2015A 2016A 2017F 2018F Revenue 281 183 188 232 EBITDA 90 24 66 86 Pre-tax Profit (129) (370) (28) (16) Net Profit (131) (371) (28) (16) Net Pft (Pre-Ex) 17 (61) (28) (16)

EPS (S cts) (10.2) (29.1) (2.2) (1.3) EPS Pre Ex (S cts) 1.4 (4.8) (2.2) (1.3)

EPS Gth (%) nm (184) 92 42

EPS Gth Pre Ex (%) (67) nm 54 42

Net DPS (S cts) 0.5 0.0 0.0 0.0 BV Per Share (S cts) 83.0 53.9 51.6 50.4 PE (X) nm nm nm nm PE Pre Ex, Aft Pref Div (X) 26.7 nm nm nm P/Cash Flow (X) 6.7 12.2 10.8 7.2 EV/EBITDA (X) 11.2 48.5 18.7 13.7 Net Div Yield (%) 1.4 0.0 0.0 0.0 P/Book Value (X) 0.4 0.7 0.7 0.7 Net Debt/Equity (X) 0.5 1.0 1.1 1.1 ROAE (%) (11.5) (42.5) (4.2) (2.5) Earnings Rev (%): 131 537 Consensus EPS (S cts): (1.1) N/A Other Broker Recs: B: 2 S: 0 H: 1


Poised to ride capex recovery

Maintain BUY as we see green shoots appearing. Sentiment for oil services stocks should improve as we see more evidence of an inflexion point in oil majors’ capex plans – some oil producers have already surprised on the upside (e.g. Exxon/ CNOOC increasing 2017 capex by 14%/20-30+% y-o-y respectively). A ramp-up in activity at cheaper onshore regions (e.g. US shale) should lead the recovery, but we believe an offshore activity recovery is also showing green shoots. We have seen the offshore working rig count increase in February 2017 for the first time since July 2014 (albeit only slightly). Thus, despite a still-dismal 4Q16, we expect a gradual earnings recovery in 2018. With no bonds outstanding, positive operating cash flows, and a proven ability to secure work for its vessels even during the downturn, we like PACC Offshore Services Holdings (POSH) as a beta play on the capex recovery. In addition, POSH is among the potential privatisation candidates with high ownership of 81.89% by majority shareholder, Kuok (Singapore) Ltd.

Kitchen-sinking impairments were expected. POSH reported impairments of c.US$310m in 4Q16, mainly on its OSV assets and goodwill attributable to the Transportation & Installation segment. Together with impairments of c.US$148m taken in 4Q15, we estimate that POSH has written down close to 30% of its aggregate fleet value. Together with a more sanguine outlook on oil prices, we think major impairments going forward are unlikely.

Expecting gradual recovery from 2H17 onwards. Ex-impairments, POSH recorded a core loss of S$35.3m for the quarter, higher than core losses of US$12.9m in 3Q16. This was due to across-the-board weakness at its four operating segments, as well as higher depreciation on five newbuild vessels taken into the fleet. We expect core losses to contract going forward, with US$28m/US$16m losses in FY17/18 respectively.

Valuation: We maintain our BUY call but adjust our valuation peg to 0.8x on an impaired book which lifts out TP slightly to S$0.42.

Key Risks to Our View: Failure to secure/extend charter contracts for the SSAVs. Our model assumes that the POSH Xanadu is 50%-utilised during FY17, while the POSH Arcadia should start its 6-month contract mid-2017. If contracts for the Semi-Submersible Accommodation Vessels (SSAVs) are not renewed, or if there are delays, there could be downside risk to earnings.

At A Glance

Issued Capital (m shrs) 1,814 Mkt. Cap (S$m/US$m) 662 / 467 Major Shareholders (%) Kuok (Singapore) Limited 81.8

Free Float (%) 18.2 3m Avg. Daily Val (US$m) 0.17 ICB Industry : Oil & Gas / Oil Equipment; Services & Distribution



PACC Offshore Services Holdings Version 7 | Bloomberg: POSH SP | Reuters: PACC.SI Refer to important disclosures at the end of this report


Company Guide

PACC Offshore Services Holdings

WHAT’S NEW

A dismal quarter, as anticipated – but expect a better FY17/18

Impairments drag down 4Q16 headline profit. Impairments totalling US$310m this quarter (US$111m on goodwill attributable to the T&I segment where PSA Marine’s assets were acquired back in 2007; US$198m on the vessel fleet – mainly the OSV segment fleet) resulted in POSH reporting a net loss of US$345.4m for 4Q16 and a net loss of US$371.5m for full-year FY16. EBITDA moved into the red this quarter, as continued pressure on day rates across vessel segments impacted profitability. We continue to see 2H17/FY18 as the more likely period for a gradual recovery in earnings, as higher capex spending by E&P companies filter through to greater demand for offshore support vessels.

Gearing up on impairments, but we see POSH as a strong name that will survive the downturn. As of 4Q16, POSH has 14 vessels under construction (of which 10 are for the Middle East with firm 5+2 year contracts), with US$85.6m of capex outstanding. However, it has undrawn bank lines of US$282.9m to fund this, and operating cash flows (OCF) have generally been positive, with the group having generated US$38.2m in positive OCF in FY16. With no bonds outstanding a big plus point, we believe POSH is far from being at risk of facing liquidity issues. The jump in gearing to 1.01x this quarter (up from c.0.6x in 3Q16) has primarily been a result of accounting impairments, rather than additional debt drawdowns. POSH benefits from having a strong parentage in the form of Kuok Group, which will help it retain access to financing amid the downturn.

Offshore Support Vessel (OSV) segment gross losses widened. Despite a q-o-q increase in OSV utilisation from 59% in 3Q16 to 62% in 4Q16, the OSV segment saw marginally higher gross losses in 4Q16 of US$4.9m, implying continued dayrate weakness, though higher depreciation on two newbuilds – one AHTS and one PSV – taken onto the fleet could have also played a part. Aside from the expected demand-led recovery

from higher capex (as mentioned) towards the latter half of the year, FY17 performance should see a pickup on the back of long-term contract commencements in the Middle East for four utility vessels and six AHTS currently under construction but scheduled for delivery during the year.

Offshore Accommodation (OA) segment – waiting on contracts. The OA segment recorded its first gross loss in 4Q16, which was attributed to lower charter rates (presumably on the smaller vessels) as well as higher depreciation charges on one Light Construction Vessel (LCV) taken onto the fleet during the quarter. The key for this segment remains securing jobs for the two large Semi-Submersible Accommodation Vessels (SSAVs) – POSH Xanadu and POSH Arcadia. The Xanadu is coming off contract with Petrobras in March 2017, while the Arcadia is slated to begin work in June 2017. Securing extensions of contracts or new jobs would go a long way in raising profitability at this segment.

Transportation & Installation (T&I) segment also hit by lower day rates. The T&I segment sustained gross losses of US$2.8m in 4Q16, versus breakeven gross profit in 3Q16. Again, lower day rates, as well as lower utilisation of 34% (vs. 38% in 3Q16) were the culprits. Nonetheless, management expects that higher decommissioning activity globally could help bolster the segment in FY17. Potential towing work on the Shell Prelude FLNG project could also help utilisation levels.

Harbour Services and Emergency Response (HSER) segment profitable at the gross level. Gross profit at this segment came in at US$0.4m for the quarter, down from US$1.1m in 3Q16, though it is difficult to ascertain any trend as revenues/profits at this segment are lumpy due to the nature of emergency response jobs. This segment remains a small contributor to the overall pie.


Company Guide




Revenue 71.8 41.6 36.7 (48.9) (11.9)

Cost of Goods Sold (54.6) (43.1) (46.1) (15.6) 7.1

Gross Profit 17.2 (1.4) (9.5) nm (558.6)

Other Oper. (Exp)/Inc (4.0) (7.0) (6.7) 67.7 (4.2)

Operating Profit 13.2 (8.4) (16.1) nm (91.9)

Other Non Opg (Exp)/Inc 1.44 (0.2) 0.04 (97.2) nm

Associates & JV Inc (12.4) (0.1) (15.5) (25.1) nm


Exceptional Gain/(Loss) (148) 0.0 (310) (108.9) nm

Pre-tax Profit (149) (12.7) (346) (132.4) nm

Tax (0.8) (0.2) 0.37 nm nm

Minority Interest 0.0 0.02 0.03 nm 81.3

Net Profit (150) (12.9) (345) (130.8) nm

Net profit bef Except. (1.2) (12.9) (35.3) nm (172.9)

EBITDA 18.7 9.02 (12.1) nm nm

Margins (%)

Gross Margins 23.9 (3.4) (25.8)

Opg Profit Margins 18.4 (20.2) (44.0)

Net Profit Margins (208.4) (31.1) (942.1)



Company Guide



Earnings Drivers:

Four key vessel segments. POSH, one of the largest Asia-based providers of offshore support vessels, is the result of the M&A of several companies in the industry. There are four key business segments now: 1) Offshore support vessels (OSV), 2) Transport & Installation (T&I), 3) Offshore Accommodation (OA), and 4) Harbour Services and Emergency Response (HSER). Thus, while POSH has a more diversified business mix than peers, but other than the HSER segment, it is still rather dependent on the level of offshore oil & gas activity, and in turn, oil prices.

SSAVs are a bold bet. The economics of these accommodation units are very attractive, owing to niche market dynamics, but finding continuous employment for these deepwater-capable high-spec vessels is proving to be challenging given that low oil prices have curtailed interest in deepwater E&P. We think the two SSAVs would easily account for over 50% of group profits if they are fully employed. The first SSAV had secured a 1-year renewal of its contract with Petrobras (ending in March 2017), while the second has secured a 6-month contract with Technip Oceania beginning in mid-2017 (with a 3-month extension option). We will continue to watch for news of contract renewals/fixtures for these two units.

OSV division struggling to remain profitable, but long-term charters secured should help in FY17. OSV owners across the board saw further declines in utilisation and day rates in 2016. Some companies have been reporting 30-40% utilisation rates and AHTS day rates below US$1.00/bhp are the norm now. POSH has seen its OSV utilisation rates fall from 69% as of end-2015 to 62% currently as the OSV oversupply situation has gradually worsened over the past year (vessel-to-rig ratio now close to historic highs of 6.5x). However, with higher oil prices and reports so far pointing to higher oil producer capex spend in 2017, we see a demand-side recovery helping rates and utilisation. Recent long-term charters secured for nine vessels (of which seven are newbuild vessels) in the Middle East should help stem the losses in FY17. Thus, we expect OSV segment gross losses to narrow as we approach end-2017.

Being part of the Kuok Group has its advantages. POSH is a member of the Kuok Group, a respected conglomerate with diversified investments in commodities, hospitality, logistics, real estate and shipping, among others. We believe this brings three key advantages to POSH: i) Ready access to affiliated shipyards of the Kuok Group, which enables POSH to achieve faster turnaround times for newbuilds and better manage maintenance and refurbishment costs; ii) Lower financing costs; and iii) Access to the Kuok Group’s global network and connections to open new markets and expand business.

OSV fleet utilisation (%)

T&I fleet utilisation (%)

Acco fleet utilisation (%)

HSER fleet utilisation (%)



Company Guide


Balance Sheet:

Relatively strong balance sheet should support capex commitments. As a result of new long-term contract wins in the Middle East, and a requirement for specific vessel types, POSH had boosted its newbuild orderbook to 14 vessels as of 4Q16. The group now has about US$86m of remaining committed capex, and all its newbuilds are scheduled for delivery by 2017. Nonetheless, undrawn bank lines of approximately US$282m are more than sufficient to fund this. Net gearing has surged upward to 1.0x in 4Q16, from 0.6x as of 3Q16, primarily due to a lower equity base on impairments taken. However, a lack of near-term refinancing issues (POSH has no outstanding bonds) and a strong parental backing by the Kuok Group is reassuring. We do not see any near-term liquidity issues for the group.


More offshore oil activities as a result of higher oil prices. POSH’s business is essentially a function of offshore activity. Higher oil prices are the key catalyst here, which will spur companies to invest in more capex offshore, resulting in more operational rigs as well as rig installations, increasing demand for POSH’s OSVs across the oilfield lifecycle.

Announcement of more or longer-term contracts for the SSAVs. While the POSH Xanadu has secured a 1-year extension of contract with Petrobras ending in March 2017 and the POSH Arcadia has a 6-month job for Technip Oceania for the Shell Prelude FLNG project beginning in mid-2017 (and with a 3-month extension option), this still leaves some uncertainty over the utilisation of the two heavyweight assets in FY17 and FY18. Securing contract renewals or new long-term contracts for the SSAVs would be a boon to POSH’s share price.

Key Risks:

Lack of contract wins for the two SSAVs. Again, since the SSAVs are key drivers of profitability, if contract wins dry up POSH would see its losses intensify, which would be detrimental to its share price performance.

Company Background

PACC Offshore Services Holdings Ltd. (POSH) is the largest Asia-based international operator of offshore support vessels and one of the top five globally. It operates a combined fleet of about 120 vessels (including JV vessels).


Capital Expenditure

ROE (%)

PB Band (x)



Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016A 2017F 2018F

OSV fleet utilisation (%) 86.6 67.2 59.1 57.5 62.3 T&I fleet utilisation (%) 63.6 49.5 36.0 40.9 47.1 Acco fleet utilisation (%) 60.2 61.9 43.0 28.3 36.4 HSER fleet utilisation (%) 49.9 50.0 50.0 50.0 55.0

Segmental Breakdown

FY Dec 2014A 2015A 2016A 2017F 2018F

Revenues (US$ m)

Offshore Support Vessels 141 136 74 74 96 Transportation & 38 27 16 24 33 Accommodation 31 93 72 69 81 HSER 24 24 21 20 22

Total 234 281 183 188 232 Gross Profit (US$ m)

Offshore Support Vessels 31 13 (12) (8) (2) Transportation & 12 5 (2) 1 3 Accommodation 11 36 15 6 9 HSER 3 4 4 2 3

Total 57 58 5 2 14 Gross Profit Margins (%)

Offshore Support Vessels 21.9 9.6 (16.8) (10.9) (1.6) Transportation & 32.4 16.9 (9.7) 6.0 10.4 Accommodation 35.5 38.6 20.3 9.2 10.5 HSER 12.6 18.0 21.0 10.0 15.0

Total 24.4 20.7 2.7 0.9 6.0

Income Statement (US$ m)

FY Dec 2014A 2015A 2016A 2017F 2018F

Revenue 234 281 183 188 232 Cost of Goods Sold (177) (223) (178) (186) (218) Gross Profit 57 58 5 2 14 Other Opng (Exp)/Inc (23) (23) (37) (17) (17) Operating Profit 34 35 (32) (15) (3) Other Non Opg (Exp)/Inc 46 4 0 2 2 Associates & JV Inc (14) (10) (14) 1 1 Net Interest (Exp)/Inc (11) (10) (14) (16) (16) Exceptional Gain/(Loss) 0 (148) (310) 0 0 Pre-tax Profit 56 (129) (370) (28) (16) Tax (3) (2) (1) 0 0 Minority Interest 0 0 0 0 0 Net Profit 53 (131) (371) (28) (16) Net Profit before Except. 53 17 (61) (28) (16) Preference Dividend 0 0 0 0 0 Net Pft Pre-Ex, Aft Pref Div 53 17 (61) (28) (16) EBITDA 106 90 24 66 86 Growth Revenue Gth (%) (1.4) 20.0 (34.8) 2.6 23.5 EBITDA Gth (%) (1.7) (14.8) (73.6) 174.3 31.6 Opg Profit Gth (%) (43.0) 3.9 nm 52.4 79.0 Net Profit Gth (%) (27.4) nm (183.6) 92.3 42.4 Net Pft Pre-Ex Aft Perf Div Gth (%)

(1.8) (67.2) nm 53.6 42.4

Margins & Ratio Gross Margins (%) 24.4 20.7 2.7 0.9 6.0 Opg Profit Margin (%) 14.4 12.5 (17.6) (8.2) (1.4) Net Profit Margin (%) 22.7 (46.6) (202.9) (15.1) (7.1) ROAE (%) 5.1 (11.5) (42.5) (4.2) (2.5) ROA (%) 2.9 (7.3) (22.9) (1.9) (1.1) ROCE (%) 1.9 2.1 (2.1) (1.1) (0.2) Div Payout Ratio (%) 35.9 N/A N/A N/A N/A Net Interest Cover (x) 3.1 3.4 (2.2) (0.9) (0.2)


Lower utilisation, gaps between SSAV contracts

OSV results improve as long term contracts in Middle East comences


Company Guide


Quarterly / Interim Income Statement (US$ m)

FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016

Revenue 72 59 46 42 37 Cost of Goods Sold (55) (45) (44) (43) (46) Gross Profit 17 14 2 (1) (9) Other Oper. (Exp)/Inc (4) (11) (13) (7) (7) Operating Profit 13 3 (11) (8) (16) Other Non Opg (Exp)/Inc 1 0 0 0 0 Associates & JV Inc (12) 5 (3) 0 (15) Net Interest (Exp)/Inc (3) (3) (3) (4) (4) Exceptional Gain/(Loss) (148) 0 0 0 (310) Pre-tax Profit (149) 5 (17) (13) (346) Tax (1) (1) 0 0 0 Minority Interest 0 0 0 0 0 Net Profit (150) 4 (18) (13) (345) Net profit bef Except. (1) 4 (18) (13) (35) Preference Dividend 0 0 0 0 0 Net Pft (Pre-Ex, Aft Pref Div) (1) 4 (18) (13) (35)

EBITDA 19 24 3 9 (12)

Growth

Revenue Gth (%) (10.7) (18.3) (21.4) (9.7) (11.9) EBITDA Gth (%) (41.3) 28.9 (88.1) 215.3 nm Opg Profit Gth (%) (6.1) (76.0) nm 23.1 (91.9) Net Profit Gth (%) nm nm nm 26.2 nm Margins

Gross Margins (%) 23.9 23.9 4.0 (3.4) (25.8) Opg Profit Margins (%) 18.4 5.4 (23.7) (20.2) (44.0) Net Profit Margins (%) (208.4) 7.6 (38.0) (31.1) (942.1)

Balance Sheet (US$ m)

FY Dec 2014A 2015A 2016A 2017F 2018F

Net Fixed Assets 1,114 1,278 1,185 1,214 1,148 Invts in Associates & JVs 241 100 85 86 87 Other LT Assets 300 180 65 65 65 Cash & ST Invts 12 14 15 12 6 Inventory 2 1 2 2 2 Debtors 77 94 80 82 101 Other Current Assets 126 68 75 75 75 Total Assets 1,871 1,734 1,506 1,534 1,484

ST Debt 261 560 269 329 279 Creditor 70 69 74 74 89 Other Current Liab 27 43 35 32 32 LT Debt 300 0 439 439 439 Other LT Liabilities 0 0 0 0 0 Shareholder’s Equity 1,214 1,061 688 660 644 Minority Interests 0 0 0 0 0 Total Cap. & Liab. 1,871 1,734 1,506 1,534 1,484

Non-Cash Wkg. Capital 108 50 47 52 56 Net Cash/(Debt) (548) (546) (693) (756) (712) Debtors Turn (avg days) 112.7 110.7 172.8 156.7 143.6 Creditors Turn (avg days) 176.0 157.2 240.3 247.6 225.5 Inventory Turn (avg days) 4.9 3.7 4.2 5.6 5.1 Asset Turnover (x) 0.1 0.2 0.1 0.1 0.2 Current Ratio (x) 0.6 0.3 0.5 0.4 0.5 Quick Ratio (x) 0.2 0.2 0.3 0.2 0.3 Net Debt/Equity (X) 0.5 0.5 1.0 1.1 1.1 Net Debt/Equity ex MI (X) 0.5 0.5 1.0 1.1 1.1 Capex to Debt (%) 13.8 45.7 23.8 13.8 2.9 Z-Score (X) 0.9 0.5 0.5 0.5 0.6


Impairments of fixed assets and goodwill

Gearing increases owing to lower equity base


Company Guide


Cash Flow Statement (US$ m)

FY Dec 2014A 2015A 2016A 2017F 2018F

Pre-Tax Profit 56 (129) (370) (28) (16) Dep. & Amort. 39 61 70 78 86 Tax Paid (1) (3) (2) (3) 0 Assoc. & JV Inc/(loss) 14 10 14 (1) (1) Chg in Wkg.Cap. (2) (16) 0 (2) (4) Other Operating CF (46) 147 326 0 0 Net Operating CF 60 70 38 43 65 Capital Exp.(net) (77) (256) (169) (106) (21) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV (11) 206 (5) 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (9) 0 0 0 0 Net Investing CF (97) (50) (173) (106) (21) Div Paid 0 (20) (7) 0 0 Chg in Gross Debt (247) (1) 149 60 (50) Capital Issues 296 (2) 0 0 0 Other Financing CF (11) 5 (6) 0 0 Net Financing CF 39 (18) 136 60 (50) Currency Adjustments 0 0 0 0 0 Chg in Cash 2 2 1 (3) (6) Opg CFPS (S cts) 3.4 4.7 2.1 2.5 3.8 Free CFPS (S cts) (1.0) (10.3) (7.2) (3.5) 2.4



Source: DBS Bank

Analyst: Suvro SARKAR

Singapore Research Team

Last 14 vessels in orderbook to be delivered

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:YM, PY

BUYLast Traded Price ( 1 Mar 2017): S$0.20 (STI : 3,122.77) Price Target 12-mth: S$0.25 (25% upside) (Prev S$0.24)

Potential Catalyst: Contract wins, higher oil prices, privatisation Where we differ: More bearish on earnings

Analyst Suvro SARKAR +65 6682 3720 [email protected] Singapore Research Team [email protected]

What’s New • FY16 earnings slightly above on cost savings

• Balance sheet risks almost completely removed;

operating cash flows remain positive in 4Q16

• Looks well positioned to ride out the cycle better

than most peers

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2015A 2016A 2017F 2018FRevenue 337 185 165 156EBITDA 41.2 40.5 51.5 56.0Pre-tax Profit (231) 14.4 9.91 12.0Net Profit (229) 17.1 7.91 9.57Net Pft (Pre Ex.) 4.99 17.1 7.91 9.57Net Pft Gth (Pre-ex) (%) (90.2) 243.2 (53.8) 21.0EPS (S cts) (22.8) 1.71 0.79 0.95EPS Pre Ex. (S cts) 0.50 1.71 0.79 0.95EPS Gth Pre Ex (%) (90) 243 (54) 21Diluted EPS (S cts) (22.8) 1.71 0.79 0.95Net DPS (S cts) 0.0 0.0 0.0 0.0BV Per Share (S cts) 32.1 33.8 34.6 35.5PE (X) nm 11.8 25.5 21.1PE Pre Ex. (X) 40.4 11.8 25.5 21.1P/Cash Flow (X) 31.9 4.1 nm 2.7EV/EBITDA (X) 6.1 5.0 4.3 2.9Net Div Yield (%) 0.0 0.0 0.0 0.0P/Book Value (X) 0.6 0.6 0.6 0.6Net Debt/Equity (X) 0.2 CASH 0.1 CASHROAE (%) (51.7) 5.2 2.3 2.7

Earnings Rev (%): 355 118Consensus EPS (S cts): 0.9 1.2Other Broker Recs: B: 2 S: 0 H: 0


Safety in balance sheet strength

Maintain BUY as Mermaid looks set to remain profitable through the crisis. Balance sheet risks have mostly dissipated for Mermaid Maritime (Mermaid) following the cancellation late last year of newbuild contracts for three vessels (two tender rigs and one dive support vessel), which would have otherwise entailed US$379m in remaining capex commitments. Balance sheet has moved to net cash position as at end-FY16 as Mermaid generated US$49m positive operating cash flow in FY16. With a healthy operating profit improvement from subsea business in FY16 on the back of cost reductions and renewals of contracts for all three jack-up rigs under associate AOD III coming through in FY16, earnings visibility has improved and the stock continues to offer a more favourable risk-reward profile amid industry peers. Chances of privatisation by parent Thoresen Thai and its associated promoter group provides further upside potential.

FY16 profits were slightly above expectations on cost savings. Mermaid’s core net profit of US$17.1m was slightly above our estimates due to better than expected cost savings and higher than expected associate income in 4Q16. Taking this into account, we revised up our net profit forecasts for FY17F/18F to US$7.9m/ US$9.6m from US$1.7m/ US$4.4m earlier. The drop in profit in FY17F compared to FY16 is due to the drop in associate contributions owing to revision of day rates for the rig contract renewals but sustained profitability puts Mermaid in an enviable position compared to peers in the oil services space.

Valuation:

Given the healthy balance sheet situation, we maintain our P/BV peg at 0.7x – slightly below our peg for PACC Offshore, our top pick amongst SGX-listed OSV operators - and adjust our TP to S$0.25, representing a c.25% upside at current prices. Our 2-stage DCF (9.2% WACC; terminal growth 1%) valuation, used as a cross-check measure, also supports this.

Key Risks to Our View:

Failure to refinance the bank debt at associate AOD level in the next few months could lead to some uncertainty.

At A Glance

Issued Capital (m shrs) 1,413Mkt. Cap (S$m/US$m) 283 / 202Major Shareholders (%) Thoresen Thai Agencies PCL 58.2Mahagitsiri Chalermchai 10.7Mahagitsiri Prayudh 8.4

Free Float (%) 22.73m Avg. Daily Val (US$m) 1.0ICB Industry : Oil & Gas / Oil Equipment; Services & Dist



Mermaid Maritime Version 7 | Bloomberg: MMT SP | Reuters: MMPC.SI Refer to important disclosures at the end of this report

24

44

64

84

104

124

144

164

184

204

0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.5

0.5

0.6

0.6

Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Relative IndexS$

Mermaid Maritime (LHS) Relative STI (RHS)


Company Guide

Mermaid Maritime

WHAT’S NEW

4Q16 and FY16 results highlights

Earnings slightly above estimates. 4Q16 revenues came in at US$44.2m – in line with our estimates, and down 15% q-o-q on the usual seasonality. Full-year revenue came in at US$185.2m, down 45% y-o-y amid the cyclical downturn in the oil services space. 4Q16 net profit came in at US$0.6m, and full-year FY16 net profit of US$17.1m was slightly above our estimates owing to better core operating margin and higher than expected associate income in 4Q16.

Vessel utilisation in 4Q16 was 44%, lower than 56% in 3Q16 (as third quarter is usually a seasonally strong quarter), and lower y-o-y vs. 56% in 4Q15 due to the idling of three smaller vessels during FY16. For the full-year, fleet utilisation in FY16 was roughly 47% compared to around 64% in FY15. Mermaid’s core subsea fleet – the Mermaid Commander, Mermaid Endurer, Mermaid Asiana and Mermaid Sapphire – registered decent utilisation of 72% in FY16 but overall utilisation was dragged down by the idling of three smaller vessels, which are stacked at the moment. Mermaid’s fleet currently also includes two chartered-in vessels Resolution and Nusantara, which are serving the Indonesian cabotage waters.

Cost savings lead margin rebound in FY16. Despite lower fleet utilisation, profitability of the subsea business improved in FY16, with operating profit of US$5.9m compared to US$14.0m operating loss in FY15. This was due to i) substantial reduction in vessel running costs (-22% for owned vessels largely from lower marine crew and dive tech expenses) and return of chartered-in vessels, ii) 42% reduction in SG&A expenses y-o-y, and iii) lower depreciation expenses following the asset impairment exercise taken at end-FY15.

Enhanced visibility of associate income. Associate income came in at US$1.8m in 4Q16, down only slightly from 3Q16 levels, despite all the three jack-up rigs under associate AOD having moved to charters with lower day rates. All three rigs have now had their contracts extended for 3 years till mid-end 2019, which provides good visibility in the current environment.

Expect profitability to be sustained in FY17/18. We believe the relatively stable oil price environment going forward should help lift maintenance/repair activity gradually. Mermaid’s orderbook, while covering just over 1x revenues, has

increased from US$155m as at 3Q16 to US$171m as at end-4Q16. Management also indicated higher level of enquiries, in line with our belief that the higher and more stable oil prices post-OPEC deal should have a trickle-down effect on maintenance work, especially in 2H17 (due to a lag effect). Taking into account 4Q16 numbers, we revised up our net profit forecasts for FY17/18 to US$7.9m/ US$9.6m from US$1.7m/ US$4.4m earlier. The drop in profit compared to FY16 is due to the drop in associate contributions owing to revision of day rates for contract renewals.

Balance sheet risks have mostly dissipated for Mermaid following the cancellation late last year of newbuild contracts for three vessels (two tender rigs and one dive support vessel), which would have otherwise entailed US$379m in remaining capex commitments. Impairments related to these newbuild contracts had already been taken in FY15. Operating cash flows (OCF) remained healthy in 4Q16 as well, and the group registered US$49m positive OCF in FY16 overall, which is a good sign, and helped move the balance sheet into net cash position. Majority of bank loans on Mermaid’s book have been re-classified as non-current in 4Q16 and most of it is due 4 years on, thus reducing liquidity risks significantly.

The only key risk at this point is refinancing of debt at the associate AOD level. Mermaid’s 34%-owned associate AOD (which owns and operates 3 drilling rigs in the Middle East) has US$237m outstanding secured debt on its balance sheet, of which US$36m is classified as current liabilities and should be met by operating cash flows. However, the credit facility matures in April 2018 with a balloon payment of US$180m, and majority shareholder Seadrill is currently working on a refinancing program for this and its other facilities. The credit facility is guaranteed by Seadrill and cross default clauses exist between this facility and Seadrill's other credit facilities. Thus, Seadrill, which is not exempt from the current industry downturn, will need to solve its liquidity issues and ensure refinancing of group level facilities, failing which AOD could potentially face going concern issues. Given that the assets are on long term contracts and generating positive cash flows though, a bear case scenario could be transfer of the majority stake to a new owner, which may or may not affect Mermaid’s position, but could result in impairments.


Company Guide

Mermaid Maritime



Revenue 71.7 51.9 44.2 (38.5) (14.8)

Cost of Goods Sold (68.4) (39.2) (36.8) (46.2) (6.1)

Gross Profit 3.39 12.7 7.36 117.5 (41.9)

Other Oper. (Exp)/Inc (14.8) (6.4) (9.8) (34.2) 53.4

Operating Profit (11.5) 6.31 (2.4) 79.0 nm


Associates & JV Inc (1.8) 2.04 1.75 nm (14.3)

Net Interest (Exp)/Inc (0.8) (0.7) (0.7) 11.3 1.5

Exceptional Gain/(Loss) (234) 0.0 0.0 - nm

Pre-tax Profit (248) 7.62 (1.4) 99.4 nm

Tax 0.84 (0.1) 2.08 148.7 (2,047.7)

Minority Interest 1.96 0.0 (0.1) nm 265.4

Net Profit (245) 7.49 0.61 nm (91.9)

Net profit bef Except. (11.3) 7.49 0.62 nm (91.8)

EBITDA (4.4) 14.2 3.06 nm (78.4)

Margins (%)


Opg Profit Margins (16.0) 12.2 (5.4)

Net Profit Margins (342.0) 14.4 1.4



Company Guide

Mermaid Maritime


Earnings Drivers:

Subsea fleet utilisation is critical. While subsea contracts involving diving and other services usually result in good margins, the contract durations tend to be short (around 3-6 months) and hence, gaps between contracts need to be continuously filled up. In the past, Mermaid had built up a fleet ahead of demand in some cases, resulting in underutilisation of fleet and losses. With orderbook levels declining, Mermaid had negotiated a penalty-free return earlier this year for its three long-term chartered-in vessels post-completion of their jobs (one has already been returned; two have been re-chartered – so there is some flexibility to this arrangement). Three of the smaller vessels on its owned fleet have also been idled, which is dragging down overall fleet utilisation, but the four major vessels – Commander, Endurer, Asiana and Sapphire – have maintained utilisation levels of around 72% in FY16, thus ensuring a return to operating profits for the subsea division.

Older tender rigs have seen a dearth of potential buyers; will depress profits unless sold. Mermaid has a long track record in the niche tender rig business in SE Asia but its older rigs are more than 30 years' old and are currently being marketed for sale. We estimate that these rigs incur expenses of c.US$1m per quarter, which is not unsubstantial given Mermaid’s low earnings ability amid the downturn. A successful sale of these old assets would help alleviate some of this downside pressure, though a one-off loss on sale would not be unexpected given depressed asset prices.

Drilling segment contribution will reduce after rate revisions as part of contract extensions. In 3Q15, contributions from Mermaid’s 34%-owned drilling rig associate AOD was ~US$7.3m. However, with the recent renegotiation of day rates lower to ~US$100k/day for the three rigs over the course of FY16, profitability has declined, with profits from associates in 4Q16 reduced to about US$1.8m. Thus, overall contributions in FY17F/18F will be much lower at around US$6m, compared to US$11.5m contribution in FY16.

New cable-laying business may lose its sheen. Mermaid established a new cable-laying business in the Middle East in late 2014 and seemed to have conquered the learning curve in FY15, with the business having generated positive contribution margin in FY15. However, securing additional projects had been a challenge in FY16, and this trend may spill into FY17.

Acquisitions could provide earnings uplift. Having established a US$500m multi-currency Medium Term Note (MTN) programme in May 2015, and with zero gearing currently, Mermaid is well positioned to look at possible acquisitions, given the depressed valuations in the sector.

Utilisation rate - subsea fleet (%)

Avg day rate - subsea fleet (US$)

Utilisation rate - tender rigs (%)

Avg day rate - tender rigs (US$)


65.963.4

50.8

40.938.6

0.0

9.5

19.0

28.5

38.0

47.5

57.1

66.6

2014A 2015A 2016F 2017F 2018F

144980

129113

117180 116501 116848

0.0

29575.9

59151.9

88727.8

118303.8

147879.7

2014A 2015A 2016F 2017F 2018F

48.9

10.1

0 0 00.00

9.98

19.95

29.93

39.90

49.88

2014A 2015A 2016F 2017F 2018F

88784

0.0

17934.3

35868.6

53802.8

71737.1

89671.4

2014A


Company Guide

Mermaid Maritime

Balance Sheet:

Balance sheet stress removed with cancellation of newbuild orders. Mermaid’s balance sheet went into net cash position by end-FY16, with no bonds and no capex outstanding, quite a feat compared to peers. While we were cautious earlier on balance sheet outlook owing to the significant capex overhang, this has now been resolved after the orders for two tender rigs and one DSV were cancelled in December 2016. Mermaid also has in place a US$500m multi-currency debt issuance programme, but this may not be put to much use in the current market environment unless some M&A opportunities arise.


Signs of higher oil major spending on stable and/or higher oil prices. The rebound in oil prices needs to result in decisions by oil majors to increase spending again; this likely comes with a time lag as they await more clarity on stability of prices and supply-side issues such as OPEC members' compliance to the deal. News of stable or higher oil prices would thus be positive for Mermaid’s share price.

Privatisation cannot be ruled out. With O&G sector valuations near multi-year lows, share price upside could stem from possible privatisation by parent Thoresen Thai and its associated promoter group (the Mahagitsiri family), which hold at least 77% stake in Mermaid. Thoresen Thai has a gross cash balance of about S$250m and net gearing is quite low as well; thus we believe there is enough financial muscle to buy out Mermaid’s remaining free float at current prices.

Key Risks:

Subsea engineering operations are sensitive to delays in the award of offshore projects. The short-term nature of shallow-water subsea projects makes Mermaid's subsea engineering revenue sensitive to delays in the award of projects, which oil majors have recently tended towards.

Failure to refinance bank debt at the associate AOD level could lead to unwanted instability. AOD has a credit facility with a balloon payment of US$180m maturing in April 2018, and majority shareholder Seadrill is currently working on a refinancing program for this and its other facilities. Failure to refinance the bank debt at associate AOD level could trigger impairments and/or change of majority shareholder.

Company Background

Mermaid Maritime PCL (Mermaid) is a provider of drilling and subsea engineering services for the offshore oil & gas industry, serving a diverse client base globally.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.3

0.4

0.4

0.5

0.5

0.6

0.6

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

2014A 2015A 2016F 2017F 2018F


0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

2014A 2015A 2016F 2017F 2018F


US$m

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2014A 2015A 2016F 2017F 2018F

Avg: 17.4x

+1sd: 29x

+2sd: 40.7x

-1sd: 5.7x

-5.3

4.7

14.7

24.7

34.7

44.7

54.7

64.7


(x)

Avg: 0.6x

+1sd: 0.82x

+2sd: 1.03x

-1sd: 0.39x

-2sd: 0.17x0.1

0.3

0.5

0.7

0.9

1.1

1.3


(x)


Company Guide

Mermaid Maritime

Segmental Breakdown

FY Dec 2014A 2015A 2016A 2017F 2018F

Revenues (US$m)

Subsea services 389 337 185 165 156 Drilling services 32.4 0.05 0.0 0.0 0.0 Others/ Elimination (9.2) 0.0 0.0 0.0 0.0

Total 412 337 185 165 156Operating Profit (US$m)

Subsea services 27.3 (68.9) 7.06 8.72 10.4 Drilling services 4.84 (92.1) (0.5) (1.2) (1.2) Others/ Elimination (7.4) 147 (0.6) 0.0 0.0

Total 24.8 (14.0) 5.88 7.52 9.25Operating Profit Margins

Subsea services 7.0 (20.5) 3.8 5.3 6.7 Drilling services 14.9 N/A N/A N/A N/A Others/ Elimination 80.7 N/A N/A N/A N/A

Total 6.0 (4.1) 3.2 4.5 5.9

Income Statement (US$m)

FY Dec 2014A 2015A 2016A 2017F 2018F

Revenue 412 337 185 165 156Cost of Goods Sold (340) (304) (152) (133) (122)Gross Profit 71.4 33.1 33.0 32.7 34.5Other Opng (Exp)/Inc (46.6) (47.0) (27.1) (25.2) (25.2)Operating Profit 24.8 (14.0) 5.89 7.52 9.25Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0Associates & JV Inc 38.3 20.5 11.5 6.23 6.23Net Interest (Exp)/Inc (4.1) (3.2) (3.0) (3.8) (3.5)Exceptional Gain/(Loss) (1.5) (234) 0.0 0.0 0.0Pre-tax Profit 57.5 (231) 14.4 9.91 12.0Tax (7.9) (0.5) 2.83 (2.0) (2.4)Minority Interest (0.1) 2.23 (0.1) 0.0 0.0Preference Dividend 0.0 0.0 0.0 0.0 0.0Net Profit 49.5 (229) 17.1 7.91 9.57Net Profit before Except. 51.0 4.99 17.1 7.91 9.57EBITDA 103 41.2 40.5 51.5 56.0Growth

Revenue Gth (%) 52.8 (18.3) (45.0) (10.7) (5.5)EBITDA Gth (%) 77.5 (59.9) (1.6) 27.0 8.9Opg Profit Gth (%) 6.0 nm nm 27.5 23.0Net Profit Gth (Pre-ex) (%) 218.8 (90.2) 243.2 (53.8) 21.0Margins & Ratio

Gross Margins (%) 17.3 9.8 17.8 19.8 22.1Opg Profit Margin (%) 6.0 (4.1) 3.2 4.5 5.9Net Profit Margin (%) 12.0 (68.1) 9.2 4.8 6.1ROAE (%) 9.2 (51.7) 5.2 2.3 2.7ROA (%) 6.7 (36.3) 3.5 1.7 2.0ROCE (%) 3.2 (2.5) 1.4 1.4 1.7Div Payout Ratio (%) 24.9 N/A 0.0 0.0 0.0Net Interest Cover (x) 6.0 (4.3) 2.0 2.0 2.6


One of the older DSVs is likely to be stacked towards end-FY17


Company Guide

Mermaid Maritime


FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016

Revenue 71.7 39.6 49.6 51.9 44.2Cost of Goods Sold (68.4) (38.0) (38.2) (39.2) (36.8)Gross Profit 3.39 1.59 11.4 12.7 7.36Other Oper. (Exp)/Inc (14.8) (4.7) (6.3) (6.4) (9.8)Operating Profit (11.5) (3.1) 5.07 6.31 (2.4)Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0Associates & JV Inc (1.8) 4.25 3.48 2.04 1.75Net Interest (Exp)/Inc (0.8) (0.8) (0.8) (0.7) (0.7)Exceptional Gain/(Loss) (234) 0.0 0.0 0.0 0.0Pre-tax Profit (248) 0.39 7.78 7.62 (1.4)Tax 0.84 0.85 0.0 (0.1) 2.08Minority Interest 1.96 0.03 0.0 0.0 (0.1)Net Profit (245) 1.27 7.74 7.49 0.61Net profit bef Except. (11.3) 1.27 7.74 7.49 0.62EBITDA (4.4) 6.82 14.3 14.2 3.06

Growth

Revenue Gth (%) (25.7) (44.8) 25.3 4.5 (14.8)EBITDA Gth (%) nm nm 109.0 (0.4) (78.4)Opg Profit Gth (%) nm 73.0 nm 24.5 nmNet Profit Gth (Pre-ex) (%) nm nm 511.2 (3.3) (91.8)Margins

Gross Margins (%) 4.7 4.0 22.9 24.4 16.7Opg Profit Margins (%) (16.0) (7.8) 10.2 12.2 (5.4)Net Profit Margins (%) (342.0) 3.2 15.6 14.4 1.4

Balance Sheet (US$m) FY Dec 2014A 2015A 2016A 2017F 2018F

Net Fixed Assets 378 214 198 176 152Invts in Associates & JVs 139 74.8 86.3 92.6 98.8Other LT Assets 17.6 11.7 13.5 13.5 13.5Cash & ST Invts 89.4 57.4 89.8 67.2 126Inventory 5.58 2.52 1.88 1.88 1.88Debtors 111 115 65.3 110 78.1Other Current Assets 23.1 24.3 17.2 17.2 17.2Total Assets 763 500 472 479 488

ST Debt 8.93 107 9.90 9.90 9.90Creditor 29.1 12.1 5.76 4.75 4.06Other Current Liab 49.4 53.5 35.9 35.9 35.9LT Debt 104 0.0 79.6 79.6 79.6Other LT Liabilities 6.20 5.84 2.69 2.69 2.69Shareholder’s Equity 564 322 339 347 356Minority Interests 1.77 (0.5) (0.4) (0.4) (0.4)Total Cap. & Liab. 763 500 472 479 488

Non-Cash Wkg. Capital 60.9 76.1 42.7 88.7 57.3Net Cash/(Debt) (23.3) (50.0) 0.25 (22.3) 37.0Debtors Turn (avg days) 88.9 122.3 177.4 193.7 220.0Creditors Turn (avg days) 27.7 27.9 25.2 20.2 19.8Inventory Turn (avg days) 6.6 5.5 6.2 7.2 8.4Asset Turnover (x) 0.6 0.5 0.4 0.3 0.3Current Ratio (x) 2.6 1.2 3.4 3.9 4.5Quick Ratio (x) 2.3 1.0 3.0 3.5 4.1Net Debt/Equity (X) 0.0 0.2 CASH 0.1 CASHNet Debt/Equity ex MI (X) 0.0 0.2 CASH 0.1 CASHCapex to Debt (%) 77.7 23.4 6.0 17.9 17.9Z-Score (X) 5.1 5.9 5.7 5.7 5.7


Associate/JV profits down on lower charter rates for associate AOD jackup rigs

Balance sheet in enviable net cash position


Company Guide

Mermaid Maritime

Cash Flow Statement (US$m)

FY Dec 2014A 2015A 2016A 2017F 2018F

Pre-Tax Profit 57.5 (231) 14.4 9.91 12.0Dep. & Amort. 39.6 34.7 23.1 37.7 40.5Tax Paid (10.9) (6.6) (3.7) (2.0) (2.4)Assoc. & JV Inc/(loss) (38.3) (20.5) (11.5) (6.2) (6.2)Chg in Wkg.Cap. (1.7) (18.0) 19.1 (46.0) 31.4Other Operating CF 5.51 247 7.68 0.0 0.0Net Operating CF 51.7 6.31 49.0 (6.6) 75.3Capital Exp.(net) (87.6) (25.1) (5.4) (16.0) (16.0)Other Invts.(net) 0.0 0.0 0.0 0.0 0.0Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0Div from Assoc & JV 0.0 6.75 6.75 0.0 0.0Other Investing CF (0.6) (1.3) (27.6) 0.0 0.0Net Investing CF (88.2) (19.6) (26.2) (16.0) (16.0)Div Paid (12.2) (12.3) 0.0 0.0 0.0Chg in Gross Debt (24.2) (5.4) (18.0) 0.0 0.0Capital Issues 12.8 0.0 0.0 0.0 0.0Other Financing CF 0.03 0.0 0.0 0.0 0.0Net Financing CF (23.5) (17.7) (18.0) 0.0 0.0Currency Adjustments 0.63 (1.0) (0.4) 0.0 0.0Chg in Cash (59.4) (32.0) 4.41 (22.6) 59.3Opg CFPS (S cts) 5.33 2.42 2.99 3.93 4.38Free CFPS (S cts) (3.6) (1.9) 4.35 (2.3) 5.91



Source: DBS Bank

Analyst: Suvro SARKAR

Singapore Research Team

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 01 Mar 16 0.11 0.09 FULLY VALUED

2: 15 Mar 16 0.10 0.09 FULLY VALUED

3: 03 May 16 0.11 0.09 FULLY VALUED



6: 15 Aug 16 0.09 0.09 HOLD

7: 16 Nov 16 0.13 0.12 HOLD

8: 21 Nov 16 0.13 0.12 HOLD

9: 01 Dec 16 0.14 0.14 HOLD

10: 12 Dec 16 0.16 0.14 HOLD

11: 09 Jan 17 0.19 0.24 BUY


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S$

Healthy operating cash flows inspire confidence

*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.

ed: JS / sa: YM, PY

NOT RATED S$4.85 STI : 3,122.77 Closing price as of 1 Mar 2017 Return *: 2 Risk: Moderate Potential Target 12-mth* : S$ 7.55 (56% upside) Analyst Rachel TAN +65 6682 3713 [email protected] Derek TAN +65 6682 3716 [email protected]

Price Relative

Forecasts and Valuation FY Mar (S$m) 2015A 2016A 2017F 2018FRevenue 383 282 139 97.6EBITDA 121 103 79.6 39.2Pre-tax Profit 109 107 82.3 41.9Net Profit 92.7 92.0 68.3 34.8Net Pft (Pre Ex.) 106 92.0 68.3 34.8EPS (S cts) 35.8 35.5 26.4 13.4EPS Pre Ex. (S cts) 41.0 35.5 26.4 13.4EPS Gth (%) (17) (1) (26) (49)EPS Gth Pre Ex (%) (18) (13) (26) (49)Diluted EPS (S cts) 35.8 35.5 26.4 13.4Net DPS (S cts) 33.0 33.0 33.0 33.0BV Per Share (S cts) 496 498 492 472PE (X) 13.5 13.7 18.4 36.1PE Pre Ex. (X) 11.8 13.7 18.4 36.1P/Cash Flow (X) 7.6 7.5 nm 22.0EV/EBITDA (X) 7.7 8.2 13.2 27.6Net Div Yield (%) 6.8 6.8 6.8 6.8P/Book Value (X) 1.0 1.0 1.0 1.0Net Debt/Equity (X) CASH CASH CASH CASHROAE (%) 7.4 7.1 5.3 2.8 ICB Industry : Real Estate ICB Sector: Real Estate Investment & Services Principal Business: The Group is one of the pioneer property developers in Singapore and has established a reputation as a property developer of fine quality homes.


Landlord King of Singapore • One of the few with substantial freehold/999-year

lease landbank in Singapore

• Flushed with cash; high dividend yield

• Potential takeover target for investors looking to gain access to land in Singapore

The Business

Largest owner of land in Singapore. Bukit Sembawang is a property developer that owns more than 2.8m square feet of substantially freehold / 999-year leasehold land in Singapore, of which c.75% is undeveloped raw land. In addition, the group’s completed / close to completion high-end residential projects (85-unit Paterson Collection and 250-unit project at St Thomas Walk) in the core central region should do well if launched for sale given the positive sentiment in the luxury residential market currently.

Flushed with cash; high dividend yield. As at Dec16, the group has a net cash position S$383m (S$1.48/share), implying that close to one-third of its market cap is backed by cash. In the past two years, it has declared an annual dividend of 33 Scents (29 Scents special dividend), if sustained, implies a dividend yield of 7%.

Potential takeover target. Its major shareholder, Lee family of Lee Rubber / OCBC, owns a 44% stake which could be for sale given the family has been in a ‘divestment’ mode in the past few years (OCBC’s non-core assets such as F&N & potentially United Engineers and Outram Rd shop houses). Given ample liquidity and recent M&A deals in Singapore, we believe that Bukit Sembawang is an attractive prospect for any investor/developer who wants access to land-bank in Singapore.

The Stock

Trades at significant discount to market price. Despite trading at 1.0x P/NAV, we estimate that the group’s landbank comes free at Bukit Sembawang’s current share price. Assuming the price of undeveloped land is marked to market prices, we estimate Bukit Sembawang is worth S$7.55/share. If we factor in its full development potential from its undeveloped landbank (excluding any potential uplift in plot ratio), RNAV could rise to S$10.35/share.

Low liquidity, execution risks in the absence of potential takeover. The absence of a potential takeover and long gestation period to realise its full value of its land-bank.

At A Glance

Issued Capital (m shrs) 259Mkt. Cap (S$m/US$m) 1,256 / 891Major Shareholders (%) Singapore Investments 13.4Selat Pte Ltd 11.4Aberdeen 10.0

Free Float (%) 51.53m Avg. Daily Val (US$m) 0.28

.


Singapore Equity Explorer

Bukit Sembawang Estates Bloomberg: BS SP | Reuters: BSES.SI Refer to important disclosures at the end of this report

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Relative IndexS$

Bukit Sembawang Estates (LHS) Relative STI (RHS)

SMC Research

Equity Explorer

Bukit Sembawang Estates

Page 2

REVENUE DRIVERS

Largest listed freehold / 999-year lease landowner in

Singapore. Bukit Sembawang is a property developer that owns

more than 2.8m square feet (sqft) of landbank in Singapore, of

which 75% is still undeveloped landbank zoned for landed

properties. Its landbank is largely located in Ang Mo Kio, Seletar

,and Sembawang. In addition, building restrictions on 44% of its

landbank could potentially be lifted if the land is re-issued as 99-year

leasehold land.

10% of landbank comprises freehold high-rise developments

in Orchard. Bukit Sembawang has 10% of its landbank as freehold

high-rise developments in the vicinity of Orchard (Orchard, Telok

Blangah and River Valley areas). There are currently more than 335

units that yet to be launched despite having obtained TOP

(Temporary Occupation Permit) .

Flushed with cash; high dividend yield. As at Dec16, Bukit

Sembawang’s cash position stood at S$383m with no debt. In the

past two years, it has declared an annual dividend of 33 Scents (29

Scents special dividend) representing a dividend yield of 7%.

Attractive takeover target in the midst of limited land supply.

Apart from the key attributes above (which already makes it an

attractive takeover target in the midst of limited land supply in

Singapore), its major shareholder, Lee family of Lee Rubber / OCBC,

own a 44% stake, which could be for sale given the family’s

‘divestment’ mode in the past few years (divestment of OCBC’s non-

core assets including Fraser and Neave (F&N), Asia Pacific Breweries

(APB) and potentially United Engineers (UE), and in 2016, four

freehold shophouses along Outram Rd).

KEY OPERATING ASSETS

More than 2.8m sqft of freehold / 999-year leasehold land in

Singapore. The company’s prized jewel lies in its freehold / 999-

year leasehold landbank in Singapore. Bukit Sembawang owns more

than 2.8mn sqft of freehold / 999-year leasehold land, of which

75% is still undeveloped landbank, mostly zoned for landed

properties, located in Ang Mo Kio, Seletar, and Sembawang.

10% of landbank comprises three freehold high-rise

developments in the vicinity of Orchard. Bukit Sembawang

currently has three high-rise freehold residential developments in the

vicinity of Orchard (Skyline, Paterson Collection and St Thomas Walk

located in Telok Blangah, Orchard and River Valley respectively).

While Skyline Residences is close to 90% sold, Paterson Collection

obtained TOP Oct 15 and St Thomas Walk is 51% completed as at

FY16 have yet to be launched. While QC charges could be levied on

the projects if they are still unsold in 3Q17 and 3Q19 respectively,

we believe a bulk sale of the projects could mitigate that risk.

Chart 1 : Revenue Breakdown by segment (FY16)

Chart 2: Cash balance (S$m) vs Dividend yield (%)

Table 1: RNAV breakdown

S$'m per share (S$)

Landbank at current price 647 2.50 Value of ongoing projects 1,254 4.84 Investment properties 4 0.02 Development cost (334) (1.29) Add: net cash 383 1.48 RNAV 1,954 no. of shares (m) 259 RNAV / share (S$) 7.55

Table 2: Estimated RNAV based on full development potential

S$m per share (S$)

Develop landbank at current price 2,179 8.41 Value of ongoing projects 1,254 4.84 Investment properties 4 0.02 Development cost (1,141) (4.41) Add: net cash 383 1.48 RNAV 2,679 no. of shares (m) 259 RNAV / share (S$) 10.35


Development properties

99.8%

Investment holding0.2%

3.7%

3.1% 3.3%

6.8%6.8%

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Cash balance (as at end FY) Dividend yield (%)

Equity Explorer


Page 3

GROWTH PROSPECTS

More than 2.8m sqft of undeveloped landbank. Bukit

Sembawang owns more than 2.8m sqft of undeveloped 999-year

leasehold land (75% of total landbank) that could be progressively

realised for future development. The landbank is largely located in

Ang Mo Kio , Seletar, and Sembawang zoned for landed residential

properties. Given the limited land for landed properties in Singapore

and the bottoming of the luxury residential market, we believe Bukit

Sembawang holds valuable landbank in the midst of limited land

supply.

Potential uplift of building restrictions and increase in GFA.

Among the undeveloped landbank, 0.6m sqft (21% of undeveloped

landbank) is still held under an agricultural land title. The company

has applied to lift the building restrictions and Singapore Land

Authority (SLA) requires the company to surrender the land site to

be re-issued as fresh 99-year leasehold plots without building

restrictions, thus increasing its saleable gross floor area (GFA).

Differential premium will be payable to intensify the land use prior

to the issuance of a Written Permission.

More than 335 unsold high-rise units (453k sqft GFA) on

freehold land in the vicinity of Orchard. While Skyline

Residences is close to 90% sold, Paterson Collection (85 units;

obtained TOP in 2015) and St Thomas Walk (250 units; 51%

completed in FY16) but have yet to be launched. The two properties

comprise 12% of total GFA. If fully sold, the sales value of these

properties is estimated to be close to S$1bn.

MANAGEMENT & STRATEGY

Lee family of Lee Rubber owns 44% stake. The Lee family

from Lee Rubber has a 44% stake in Bukit Sembawang via

various subsidiary companies. The other major shareholders are

Aberdeen (11%) and Asia Foundation (Guoco Group) (5.3%).

Lee family in ‘divestment’ mode? Given the family’s ‘divestment’

mode in the past few years (divestment of OCBC’s non-core assets

including Fraser and Neave (F&N), Asia Pacific Breweries (APB) and

potentially United Engineers (UE), and in 2016 four freehold

shophouses along Outram Rd), this could potentially be one of the

assets the family may be open to selling.

Chart 3: 75% undeveloped landbank (as at Dec16)

Chart 4: GFA by location (as at Dec16)

Chart 5: Current shareholding structure


Undeveloped landbank

75%

Developed / developing landbank

25%

Orchard (high-rise)4%

T elok Blangah (HR)10%

River Valley (HR)8%

A ng Mo Kio (Landed)

26%

Seletar (L)46%

Sembawang (L)6%

Lee Family44%

A berdeen11%

A sia Fountain Investment (Guoco

Group)5%

Others40%

Equity Explorer


Page 4


FY Mar 2013A 2014A 2015A 2016A 2017F 2018F Revenue 355 408 383 282 139 97.6 Cost of Goods Sold (207) (249) (254) (170) (53.6) (52.4) Gross Profit 147 160 129 112 85.5 45.1 Other Opng (Exp)/Inc (4.8) (5.7) (5.4) (6.2) (6.2) (6.2) Operating Profit 139 150 120 102 79.3 38.9 Other Non Opg (Exp)/Inc 1.33 0.48 1.01 0.83 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 2.20 0.24 1.82 3.73 3.00 3.00 Exceptional Gain/(Loss) 0.0 (17.5) (13.3) 0.0 0.0 0.0 Pre-tax Profit 143 133 109 107 82.3 41.9 Tax (28.3) (22.1) (16.3) (14.9) (14.0) (7.1) Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 115 111 92.7 92.0 68.3 34.8 Net Profit before Except. 115 129 106 92.0 68.3 34.8 EBITDA 141 151 121 103 79.6 39.2 Growth Revenue Gth (%) (9.2) 15.1 (6.3) (26.3) (50.7) (29.9) EBITDA Gth (%) (9.4) 6.9 (19.9) (14.4) (23.1) (50.8) Opg Profit Gth (%) (9.4) 7.7 (20.3) (14.4) (22.5) (50.9) Net Profit Gth (Pre-ex) (%) (10.8) 12.3 (17.6) (13.3) (25.7) (49.1) Margins & Ratio Gross Margins (%) 41.5 39.1 33.6 39.7 61.5 46.3 Opg Profit Margin (%) 39.3 36.8 31.2 36.3 57.0 39.9 Net Profit Margin (%) 32.3 27.2 24.2 32.6 49.1 35.7 ROAE (%) 10.2 9.3 7.4 7.1 5.3 2.8 ROA (%) 8.5 8.6 6.8 6.5 4.9 2.6 ROCE (%) 8.8 10.4 8.0 6.8 5.1 2.6 Div Payout Ratio (%) 33.9 37.2 92.1 92.9 125.0 245.5 Net Interest Cover (x) NM NM NM NM NM NM


Margins Trend

23.0%

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2014A 2015A 2016A 2017F 2018F

Operating Margin % Net Income Margin %

Progressive payments for residential projects

Equity Explorer


Page 5


FY Mar 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue 109 42.6 12.2 44.9 72.9 10.4 Cost of Goods Sold (75.3) (11.0) (2.7) (19.9) (26.4) (2.8) Gross Profit 33.5 31.6 9.58 25.1 46.5 7.56 Other Oper. (Exp)/Inc (1.3) (1.1) (2.1) (1.5) (1.4) (1.9) Operating Profit 31.4 29.6 6.58 22.7 44.0 4.73 Other Non Opg (Exp)/Inc 0.0 0.59 0.05 0.03 0.04 0.05 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.67 1.15 1.18 1.41 1.24 1.28 Exceptional Gain/(Loss) 0.0 0.0 (0.5) 0.0 0.0 0.0 Pre-tax Profit 32.0 31.4 7.31 24.1 45.3 6.05 Tax (1.7) (7.0) (0.4) 3.40 (8.0) (0.7) Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 30.4 24.3 6.90 27.5 37.3 5.35 Net profit bef Except. 30.4 24.3 7.41 27.5 37.3 5.35 EBITDA 0.06 0.06 0.05 0.06 0.08 0.08 Growth Revenue Gth (%) (8.1) (60.8) (71.3) 267.1 62.2 (85.8) EBITDA Gth (%) (3.2) 5.0 (20.6) 16.0 29.3 10.7 Opg Profit Gth (%) (11.0) (5.6) (77.8) 244.4 94.3 (89.3) Net Profit Gth (%) 0.0 (19.9) (71.6) 298.3 35.8 (85.7) Margins Gross Margins (%) 30.8 74.3 78.2 55.8 63.8 72.9 Opg Profit Margins (%) 28.8 69.6 53.8 50.4 60.4 45.6 Net Profit Margins (%) 27.9 57.1 56.4 61.2 51.2 51.6


Balance Sheet (S$m)

FY Mar 2013A 2014A 2015A 2016A 2017F 2018F Net Fixed Assets 0.27 0.20 0.13 0.08 99.8 99.7 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 0.0 Other LT Assets 4.77 4.61 7.59 11.5 11.5 11.5 Cash & ST Invts 142 205 329 412 202 174 Inventory 0.0 0.0 0.0 0.0 0.0 0.0 Debtors 17.0 5.61 15.3 92.4 102 71.2 Other Current Assets 1,083 1,118 1,041 942 942 942 Total Assets 1,247 1,334 1,393 1,458 1,357 1,298 ST Debt 0.0 0.0 0.0 0.0 0.0 0.0 Creditor 57.0 65.8 74.8 141 64.2 62.8 Other Current Liab 17.8 25.6 29.4 20.9 14.0 7.13 LT Debt 0.0 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 13.0 10.4 5.75 5.91 5.91 5.91 Shareholder’s Equity 1,160 1,232 1,283 1,290 1,273 1,222 Minority Interests 0.0 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 1,247 1,334 1,393 1,458 1,357 1,298 Non-Cash Wkg. Capital 1,025 1,033 952 872 965 943 Net Cash/(Debt) 142 205 329 412 202 174 Debtors Turn (avg days) 16.9 10.1 10.0 69.7 254.4 323.2 Creditors Turn (avg days) 100.4 96.6 107.6 303.3 439.3 439.3 Inventory Turn (avg days) N/A N/A N/A N/A N/A N/A Asset Turnover (x) 0.3 0.3 0.3 0.2 0.1 0.1 Current Ratio (x) 16.6 14.5 13.3 8.9 15.9 17.0 Quick Ratio (x) 2.1 2.3 3.3 3.1 3.9 3.5 Net Debt/Equity (X) CASH CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/A N/A


Revenue Trend

Asset Breakdown (2016)

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Equity Explorer


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FY Mar 2013A 2014A 2015A 2016A 2017F 2018F Pre-Tax Profit 143 133 109 107 82.3 41.9 Dep. & Amort. 0.26 0.24 0.26 0.24 0.24 0.24 Tax Paid (23.4) (16.9) (20.4) (27.1) (20.9) (14.0) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 55.6 (32.5) 64.2 87.3 (86.0) 28.9 Other Operating CF (1.9) 17.5 12.9 0.73 0.0 0.0 Net Operating CF 173 102 166 168 (24.4) 57.1 Capital Exp.(net) (0.3) 0.0 0.0 (0.1) (100.0) (0.1) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.0 0.0 0.0 0.0 0.0 0.0 Net Investing CF (0.3) 0.0 0.0 (0.1) (100.0) (0.1) Div Paid (46.6) (38.8) (41.4) (85.4) (85.4) (85.4) Chg in Gross Debt (277) 0.0 0.0 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 0.0 Other Financing CF (6.0) 0.0 0.0 0.0 0.0 0.0 Net Financing CF (330) (38.8) (41.4) (85.4) (85.4) (85.4) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 0.0 Chg in Cash (156) 62.8 125 82.5 (210) (28.5) Opg CFPS (S cts) 45.5 51.8 39.3 31.2 23.8 10.9 Free CFPS (S cts) 66.9 39.3 64.1 64.9 (48.0) 22.0


Capital Expenditure

VALUATIONS

Trades at 36% discount to RNAV and 1x P/NAV. Our RNAV

estimates the valuation of its existing projects and marking to

market its land-bank to current prices. This implies a potential RNAV

of S$7.55/share. If we factor in its full development potential from

its undeveloped land-bank (ex-any potential uplift in plot ratio), we

estimate that RNAV could increase to S$10.35/share.

Risk Assessment: Moderate Category Risk Rating Wgt Wgtd Score

1 (Low) - 3 (High) Earnings 2 40% 0.8 Financials 1 20% 0.2 Shareholdings 1 40% 0.4 Overall 1.4

Low liquidity in the absence of potential takeover. The

absence of a potential takeover may result in a lack of activity due

to low liquidity for the stock.

Execution risks. Timeline to fully realise the value of the group’s

landbank will take time.

Chart 6: Historical 12 month forward PBV (x)

Table 3: Peers’ Comparisons

Source: DBS Bank, Bloomberg Finance L.P

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Mk t Price

Company Cap 1-Mar-17 RNA V P/RNA V Latest Qt r

(S$m) (S$) (S$) (x ) P/NBV

Capitaland 15,255 3.60 4.80 0.75 0.94

UOL 5,270 6.55 10.23 0.64 0.77

*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverageuniverse. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.

ed: TH / sa: JC, PY

NOT RATED S$0.205 STI : 3,136.48Closing price as of 2 Mar 2017 Return *: 2 Risk: Moderate Potential Target 12-mth* : S$0.25 (22% upside) Analyst Paul YONG CFA +65 6682 3712 [email protected]

Singapore Research Team [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$m) 2015A 2016A 2017F 2018F Revenue 222 199 210 219 EBITDA 30.4 22.8 24.7 26.3 Pre-tax Profit 18.4 14.9 17.6 20.1 Net Profit 14.1 10.5 12.5 14.2 Net Pft (Pre Ex.) 14.1 10.5 12.5 14.2 EPS (S cts) 1.87 1.40 1.66 1.89 EPS Pre Ex. (S cts) 1.87 1.40 1.66 1.89 EPS Gth (%) 38 (25) 18 14 EPS Gth Pre Ex (%) 38 (25) 18 14 Diluted EPS (S cts) 1.87 1.40 1.66 1.89 Net DPS (S cts) 0.50 1.50 1.50 1.50 BV Per Share (S cts) 23.6 23.0 23.2 23.6 PE (X) 11.0 14.6 12.4 10.9 PE Pre Ex. (X) 11.0 14.6 12.4 10.9 P/Cash Flow (X) 4.5 7.4 6.1 6.5 EV/EBITDA (X) 2.2 2.9 2.4 2.2 Net Div Yield (%) 2.4 7.3 7.3 7.3 P/Book Value (X) 0.9 0.9 0.9 0.9 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 8.0 6.0 7.1 8.1 Consensus EPS (S cts): 2.0 2.0 Other Broker Recs: B: 1 S: 0 H: 0 ICB Industry : Industrials ICB Sector: Industrial Engineering Principal Business: The Group's operations make a complete range from design to fabrication to assembly, and include fi nishing activities such as silk screening, pad printing, ultrasonic welding, heatstaking and spray painting.


Cash in on potential upside Challenging industry outlook but company-led initiatives could

aid margin expansion and deliver growth

Sustainable dividend of 1.5 Scts offers yield of 7.2%

Currently trading at just 3.3x FY17F ex-cash P/E, Fu Yu appearsattractive as a potential privatisation or takeover target

The Business

Employing a variety of strategies to deliver sustainable growth. With competition among existing players in the precision manufacturing space set to intensify and excess capacity in the region putting further pressure on prices, ongoing efficiency initiatives and targeted sales strategies employed by the group could grow top line by a modest 4-6% p.a. and aid operating margin expansion from 5.5% in FY16 to 7.2% in FY18.

Still at the early stage of its recovery and off a relatively low base, Fu Yu can deliver earnings growth of 18%/14% to S$12.5m/S$14.2m in FY17F/18F.

Dividend play offering prospective 7.2% yield. Meanwhile, we believe that strong cash flow generation capability, coupled with substantial net cash of S$105.6m (or 14 Scts per share), provides security of a 1.5-Sct dividend to be paid ahead.

The Stock

Fair value of S$0.25 based on 6x FY17F ex-cash PE. With reference to local peers who are trading at c.8.4x ex-cash PE, we opine that Fu Yu should at least trade at 6x FY17F ex-cash P/E (vs 3.3x consensus EPS currently) given ongoing initiatives to expand margins and deliver robust growth, and value the counter at S$0.25. At current prices, Fu Yu also offers an above-average prospective yield of 7.2%.

Attractive from a privatisation/takeover angle. While current valuations of 0.9x P/BV and 10.3x PE seem fair, Fu Yu looks attractive for its 7.2% yield and ex-cash PE of only 3.3x for FY17F (which is the lowest among its peer group), leading to potential for a privatisation or takeover offer.

A privatisation offer representing 20% premium would require only 82% of its net cash, while a takeout offer at premium of 20% would present an ex-cash acquisition PE of just 5.8x.

At A Glance

Issued Capital (m shrs) 753 Mkt. Cap (S$m/US$m) 154 / 110 Major Shareholders (%) Hock Ching Ng 14.3 Wai Tam 12.9 Nee Kit Ho 12.9

Free Float (%) 48.1 3m Avg. Daily Val (US$m) 0.24

DBS Group Research. Equity 3 Mar 2017


Fu Yu Corp Bloomberg: FUYU SP | Reuters: FUYU.SI Refer to important disclosures at the end of this report

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Fu Yu Corp (LHS) Relative STI (RHS)

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REVENUE DRIVERS

Long-standing precision plastics solutions provider. Incorporated in 1978, Fu Yu Corporation (“Fu Yu”) – a one-stop precision plastics solutions provider of tool fabrication, injection moulding, secondary processes (such as silk screening, ultrasonic welding, and spray painting) and sub-assembly services, has come a long way and is today one of the largest manufacturers and suppliers of high-precision injection moulds and plastic components in Asia.

The group mainly serves the printing and imaging, networking and communications, consumer, medical and automotive sectors. Of which, computer peripherals and consumer electronics are key markets, representing nearly 50% of the group’s revenue, on average. The bulk of Fu Yu’s sales (61% in FY16, or S$121.9m) are derived from China, where five of its ten manufacturing facilities are based. Remaining facilities are spread across Singapore (3) and Malaysia (2).

Separately, we note that Fu Yu has maintained its SGX Mainboard listing since 1995 and also holds a 70.64% share in Malaysia-based subsidiary, LCTH Corp, which has been listed on the Main Market of Bursa Malaysia since 2004.

Strategies to grow customer base and revenue share amidst challenging market conditions. With competition among existing players in the precision manufacturing space set to intensify and excess capacity in the region putting further pressure on prices, Fu Yu hopes to leverage on a variety of strategies to deliver sustainable growth:

(i) Strengthening technological capabilities and competencies,

(ii) Providing value-add through customised tooling design services, with the aim of ultimately converting some of these (often) lower-margin businesses into recurring income streams, i.e. sub-assembly, and

(iii) Divert more resources toward high-growth areas such as security-related, medical and green products.

BALANCE SHEET & COST STRUCTURE

Net beneficiary of a stronger USD. Fu Yu generates a surplus in USD as it receives c.80% of its revenues in USD, while approximately half of its costs are denominated in USD as well. The majority of the group’s remaining expense items are in RM, RMB and SGD.

Healthy balance sheet. Supported by stable operating cashflows, Fu Yu’s net cash position has more than doubled over a five-year period, from c.S$50m in FY11 to S$105.6m in FY16. Notably, c.61% of the group’s NAV as at end-2016 and c.67% of its current market cap are backed by net cash.

Bulk of revenue from China (FY16)

Estimated revenue breakdown by sector

*includes automotive and water filtration segments

Manufacturing footprint in Singapore, Malaysia and China

*through LCTH Corporation Berhad

Growing cash hoard bodes well for dividends


Singapore Malaysia* China

Fu Yu Corporation (HQ)

Nanotechnology Manufacturing

Solidmicron Technologies

Fu Hao Manufacturing

(Penang)

Classic Advantage

(Johor)

Fu Yu (Dongguan)

Fu Yu (Zhuhai)

Fu Yu (Shanghai)

Fu Yu (Suzhou)

Fu Yu (Chongqing)

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GROWTH PROSPECTS

Higher-margin products and efficiency initiatives to aid margin expansion ahead. To mitigate challenges in the broader global manufacturing sector, ongoing efforts towards lean automation and right-sizing of operations at various plants have helped lift operating margins from 3.3% in FY13 to 7.5% in FY16.

Ahead, as Fu Yu positions itself for opportunities in the higher-growth security, medical and green product segments, and continues to push through on its efficiency initiatives to further optimise operations, we expect operating margins to gradually strengthen. The turnaround of two of its manufacturing pads in China, which are still in the red, could provide further upside.

Dry powder for acquisitions. Backed by net cash of S$105.6m as at end-2016, we believe that Fu Yu has sufficient firepower to accelerate growth through M&A if viable investment opportunities arise. Acquisitive opportunities that might be of interest for the group include companies which (1) have good growth prospects, (2) provide access to a different customer base, or (3) own more advanced, but related technologies.

A takeover or privatisation could help unlock value for shareholders. Looking at small-mid cap privatisations (deal size under S$2bn) that have gone through successfully over the last 12 months, we found that companies trading below book were more likely to receive privatisation offers. Prior to the offer, these companies were also at least 50% majority owned. While offerors in our sample year did not appear to show bias for net cash companies, we opine that in a rising rate environment, companies with net cash could potentially be more attractive targets, particularly for third-party buyers.

Currently c.53% majority owned, and trading below historical book value with substantial net cash of nearly S$106m as at end-2016, Fu Yu checks all the right boxes and could be a prime candidate for a privatisation or takeover.


Managed by founding members. Nearly four decades after Fu Yu’s incorporation, co-founders - Mr Ching, Mr Tam and Mr Ho, together with pioneer member and current CEO Mr Hiew, remain actively involved in the operations, processes and business strategies of the group.

Collectively owning a substantial 38.7% share of Fu Yu’s outstanding shares, key executives’ interest are aligned with shareholders, in our view.

Dividend policy. Fu Yu started paying dividends again in FY15, after recovering from a dismal FY06-FY12 and posting three consecutive years of profits. The group has since instituted a formal dividend policy, which commits to paying at least 50% of PATMI in dividends. Citing lower investment needs, the group maintained a 1.5-Sct dividend for FY16 (which was slightly above 100% of its PATMI) despite the dip in earnings y-o-y. This represents a current yield of c.7.1%, and is the highest among local peers.

Longer-term Track Record of Dividends

Source: Companies

Ahead, if investment opportunities remain subdued, we believe that management will likely continue to pursue a similar strategy of returning some cash to shareholders in the form of higher dividends.

Key Local Competitors

Source: Companies

Key Executives Ching Heng Yang Vice Chairman, Co-Founder

Carrying over 40 years of experience in the mould fabrication and plastic injection moulding field, Mr Ching is primarily responsible for the plastic injection moulding, finishing and sub-assembly operations of the group.

Ho Nee Kit Executive Director, Co-Founder

Mr. Ho jointly oversees the mould fabrication, plastic injection moulding, finishing and sub-assembly functions.

Tam Wai Executive Director, Co-Founder

Mr Tam has nearly 50 years of experience in the plastic injection moulding industry and currently oversees the mould design and fabrication operations of the group.

Hiew Lien Lee Chief Executive Officer & Chief Operating Officer

Mr Hiew was promoted to CEO in 2016 and also serves as the Managing Director of subsidiary, LCTH. He is mainly responsible for the overall strategic direction and management of the group.


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Key Assumptions

FY Dec 2013A 2014A 2015A 2016A 2017F 2018F Revenue Growth (9.5) (10.2) (12.6) (10.7) 6.00 4.00 Gross Margin (%) 7.22 12.2 15.9 16.3 17.3 17.8 Operating Margin (%) (4.1) 1.46 3.77 3.10 4.26 5.13 Effective Tax Rate (%) 10.3 16.2 9.52 20.4 20.4 20.4 Capex (S$ m) 6.70 12.7 5.78 6.39 7.00 7.00


FY Dec 2013A 2014A 2015A 2016A 2017F 2018F Revenue 283 254 222 199 210 219 Cost of Goods Sold (263) (223) (187) (166) (174) (180) Gross Profit 20.5 31.1 35.5 32.4 36.4 39.0 Other Opng (Exp)/Inc (32.0) (27.4) (27.1) (26.3) (27.4) (27.7) Operating Profit (11.6) 3.71 8.39 6.15 8.97 11.2 Other Non Opg (Exp)/Inc 20.3 8.92 7.82 6.78 6.78 6.78 Associates & JV Inc 0.37 (0.4) 0.43 0.09 0.0 0.0 Net Interest (Exp)/Inc 0.67 1.20 1.79 1.88 1.86 2.04 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 9.75 13.4 18.4 14.9 17.6 20.1 Tax (1.0) (2.2) (1.8) (3.0) (3.6) (4.1) Minority Interest (2.1) (1.3) (2.6) (1.3) (1.5) (1.8) Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 6.64 9.95 14.1 10.5 12.5 14.2 Net Profit before Except. 6.64 9.95 14.1 10.5 12.5 14.2 EBITDA 22.6 30.1 30.4 22.8 24.7 26.3 Growth Revenue Gth (%) (9.5) (10.2) (12.6) (10.7) 6.0 4.0 EBITDA Gth (%) 147.3 33.4 0.9 (25.0) 8.2 6.3 Opg Profit Gth (%) 11.9 nm 126.3 (26.7) 45.8 25.2 Net Profit Gth (Pre-ex) (%) nm 49.8 41.4 (25.1) 18.3 13.9 Margins & Ratio Gross Margins (%) 7.2 12.2 15.9 16.3 17.3 17.8 Opg Profit Margin (%) (4.1) 1.5 3.8 3.1 4.3 5.1 Net Profit Margin (%) 2.3 3.9 6.3 5.3 5.9 6.5 ROAE (%) 4.2 5.9 8.0 6.0 7.1 8.1 ROA (%) 2.7 3.8 5.5 4.3 5.0 5.6 ROCE (%) 4.0 5.8 8.0 6.3 7.2 8.2 Div Payout Ratio (%) 0.0 0.0 26.8 107.2 90.6 79.6 Net Interest Cover (x) NM NM NM NM NM NM


Margins Trend

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FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 Revenue 55.6 50.3 52.0 50.0 48.1 48.5 Cost of Goods Sold (46.9) (40.4) (43.2) (41.8) (41.0) (40.1) Gross Profit 8.73 9.89 8.80 8.20 7.02 8.42 Other Oper. (Exp)/Inc (3.0) (5.4) (7.3) (4.7) (4.2) (1.5) Operating Profit 5.76 4.52 1.54 3.52 2.85 6.90 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.21 (0.2) 0.05 0.05 0.03 0.0 Net Interest (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 5.97 4.35 1.60 3.57 2.88 6.86 Tax (0.5) 0.46 (0.5) (1.1) (0.7) (0.7) Minority Interest (0.8) (0.9) (0.1) (0.3) (0.3) (0.6) Net Profit 4.73 3.87 0.99 2.13 1.84 5.59 Net profit bef Except. 4.73 3.87 0.99 2.13 1.84 5.59 EBITDA 9.36 7.56 4.36 6.07 5.16 9.11 Growth Revenue Gth (%) (4.8) (9.7) 3.5 (4.0) (3.8) 0.9 EBITDA Gth (%) 43.8 (19.2) (42.3) 39.3 (15.1) 76.6 Opg Profit Gth (%) 103.5 (21.5) (65.9) 128.5 (19.1) 142.1 Net Profit Gth (%) 231.5 (18.3) (74.4) 115.0 (13.5) 203.9 Margins Gross Margins (%) 15.7 19.7 16.9 16.4 14.6 17.3 Opg Profit Margins (%) 10.4 9.0 3.0 7.1 5.9 14.2 Net Profit Margins (%) 8.5 7.7 1.9 4.3 3.8 11.5


Balance Sheet (S$m)

FY Dec 2013A 2014A 2015A 2016A 2017F 2018F Net Fixed Assets 66.0 61.4 52.4 47.7 45.8 44.5 Invts in Associates & JVs 4.06 3.11 2.48 2.16 2.16 2.16 Other LT Assets 12.7 11.4 11.0 10.3 10.3 10.3 Cash & ST Invts 77.1 89.4 107 108 115 121 Inventory 18.6 17.1 15.0 16.0 16.4 17.0 Debtors 71.2 68.6 54.3 57.0 59.0 61.3 Other Current Assets 7.14 11.1 7.11 0.08 0.08 0.08 Total Assets 257 262 249 242 249 256 ST Debt 3.24 1.37 0.0 0.0 0.0 0.0 Creditor 68.2 62.4 47.3 45.4 48.9 50.9 Other Current Liab 1.14 2.00 2.81 2.38 3.60 4.10 LT Debt 0.09 0.01 0.0 0.0 0.0 0.0 Other LT Liabilities 1.68 1.16 1.02 0.61 0.61 0.61 Shareholder’s Equity 163 175 178 174 175 178 Minority Interests 19.4 20.2 19.7 19.6 21.2 22.9 Total Cap. & Liab. 257 262 249 242 249 256 Non-Cash Wkg. Capital 27.6 32.4 26.3 25.3 22.9 23.4 Net Cash/(Debt) 73.7 88.0 107 108 115 121 Debtors Turn (avg days) 94.4 100.3 100.8 102.3 98.2 100.3 Creditors Turn (avg days) 98.7 116.0 115.6 108.2 106.4 106.1 Inventory Turn (avg days) 31.8 31.7 33.9 36.2 34.7 35.5 Asset Turnover (x) 1.1 1.0 0.9 0.8 0.8 0.9 Current Ratio (x) 2.4 2.8 3.7 3.8 3.6 3.6 Quick Ratio (x) 2.0 2.4 3.2 3.5 3.3 3.3 Net Debt/Equity (X) CASH CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH CASH Capex to Debt (%) 201.4 919.8 N/A N/A N/A N/A


Revenue Trend


Net cash of 14 Scts per share

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FY Dec 2013A 2014A 2015A 2016A 2017F 2018F

Pre-Tax Profit 9.75 13.4 18.4 14.9 17.6 20.1 Dep. & Amort. 13.5 17.9 13.8 9.79 8.95 8.24 Tax Paid (0.7) (1.1) (3.0) (3.4) (2.4) (3.6) Assoc. & JV Inc/(loss) (0.4) 0.41 (0.4) (0.1) 0.0 0.0 Chg in Wkg.Cap. 14.9 (5.3) 6.22 0.68 1.22 (1.1) Other Operating CF (16.9) (2.0) (0.8) (0.9) 0.0 0.0 Net Operating CF 20.3 23.4 34.2 21.0 25.4 23.6 Capital Exp.(net) (6.7) (12.7) (5.8) (6.4) (7.0) (7.0) Other Invts.(net) (3.9) (2.3) 1.74 0.92 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.48 0.50 0.67 0.37 0.0 0.0 Other Investing CF 11.8 1.35 1.81 1.88 0.0 0.0 Net Investing CF 1.70 (13.1) (1.6) (3.2) (7.0) (7.0) Div Paid 0.0 0.0 (3.8) (11.3) (11.3) (11.3) Chg in Gross Debt 2.00 (2.2) (1.4) 0.0 0.0 0.0 Capital Issues 0.09 1.81 0.0 0.0 0.0 0.0 Other Financing CF 0.02 0.25 (7.8) (3.8) 0.0 0.0 Net Financing CF 2.11 (0.1) (13.0) (15.1) (11.3) (11.3) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 0.0 Chg in Cash 24.1 10.1 19.6 2.69 7.11 5.34 Opg CFPS (S cts) 0.74 3.91 3.71 2.70 3.21 3.28 Free CFPS (S cts) 1.86 1.46 3.77 1.94 2.44 2.21


Capital Expenditure

VALUATIONS

P/B and P/E looks fair. While current valuations of 0.9x P/BV and 10.3x PE seem fair, Fu Yu currently trades at just 3.3x FY17F ex-cash PE against local peers’ average of 8.4x.

With reference peers, we opine that Fu Yu should at least trade at 6x FY17F ex-cash P/E, especially given ongoing initiatives to expand margins and deliver robust and value the counter at S$0.25. At current prices, Fu Yu also offers an above-average prospective yield of 7.2%.

But looks attractive as a potential takeover or privatisation target. We think that current valuations at only 3.3x FY17F ex-cash PE (which is the lowest among its peer group) and attractive yield of 7.2%, leads to potential for a privatisation or takeover offer.

As majority owners hold a combined 53% stake, a privatisation offer representing 20% premium would require S$87.1m, which is less than its net cash of S$105.6m.

A takeout offer at premium of 20% would represent an ex-cash acquisition PE of just 5.8x.



Peer Comparison (Consensus Earnings)

Mkt Cap ––- PER ––- Price-to-Book ROE Crnt % Net Cash

(Debt)*

% Majority Owned

Ex Cash FY17F P/E*

Company Last Px US$m Crnt Forw Hist Crnt Crnt Yield

SUNNINGDALE SGD 1.285 172.8 8.6 8.0 n.a. 0.7 7.9% 4.7% 6.4% 34.5% 8.0

MEMTECH SGD 0.62 63.8 7.8 7.0 0.5 0.5 6.9% 4.0% 38.9% 55.8% 6.8

FISCHER TECH SGD 1.93 77.0 8.4 n.a. 1.1 1.0 n.a. 4.1% 27.8% 75.8% n.a.

VALUETRONICS SGD 0.68 186.9 10.3 9.5 1.7 1.6 15.1% 5.3% 47.0% 36.4% 5.6

VENTURE SGD 10.75 2,148.0 14.9 13.6 1.6 1.5 10.0% 4.7% 13.6% 47.6% 13.1

Average 10.0 9.5 1.2 1.1 10.0% 4.6% 8.4

FU YU SGD 0.205 110.4 10.3 10.3 n.a. 0.9 8.7% 7.3% 68.4% 53.0% 3.3

*based on cash position as at latest financial reporting period

Source: Company filings, ThomsonReuters, DBS Bank

*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.

ed: TH / sa: JC, PY

NOT RATED S$0.62 STI : 3,136.48 Closing price as of 2 Mar 2017 Return *: 2 Risk: Moderate Potential Target 12-mth* : S$ 0.73 (18% upside) Analyst Pei Hwa HO +65 6682 3714 [email protected] Singapore Research Team [email protected]

Price Relative

Forecasts and Valuation FY Jun (S$m) 2015A 2016A 2017F 2018F Revenue 500 575 381 433 EBITDA 25.3 37.9 21.9 31.7 Pre-tax Profit (7.2) 28.1 12.3 17.7 Net Profit (5.3) 22.4 9.80 14.1 Net Pft (Pre Ex.) 11.3 15.6 3.73 14.1 EPS (S cts) (2.1) 8.77 3.84 5.54 EPS Pre Ex. (S cts) 4.43 6.10 1.46 5.54 EPS Gth (%) nm nm (56) 44 EPS Gth Pre Ex (%) (7) 38 (76) 280 Diluted EPS (S cts) (2.1) 8.77 3.84 5.54 Net DPS (S cts) 1.00 3.00 2.00 2.00 BV Per Share (S cts) 80.4 86.0 84.9 91.2 PE (X) nm 7.1 16.1 11.2 PE Pre Ex. (X) 14.0 10.2 42.5 11.2 P/Cash Flow (X) 4.9 2.9 8.2 5.0 EV/EBITDA (X) 3.4 1.0 1.5 0.5 Net Div Yield (%) 1.6 4.8 3.2 3.2 P/Book Value (X) 0.8 0.7 0.7 0.7 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) (2.5) 10.5 4.5 6.3 ICB Industry : Industrials ICB Sector: Construction & Materials Principal Business: PEC Ltd is a specialist engineering group servicing the oil and gas, petrochemical, oil and chemical terminal, and pharmaceutical industries. Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

Cash is king A proven EPCm specialist for the growing

downstream O&G in Middle East and Asia

Turning around with the oil price rebound and uptick in O&G activities

Sitting on cash hoard near market cap at 58 Scts/share, representing 68% of NTA

Fair value of S$0.73 implies 18% upside potential

The Business An established EPCm player in Singapore with strong overseas track record. Established since 1982, PEC Ltd (PEC) has more than 30 years of expertise in the provision of engineering, procurement and construction, as well as maintenance (EPCm) services. PEC services four main sectors, the oil and gas (O&G), petro-chemical, pharmaceutical and oil and chemical terminal industries, in Singapore, China, India, Indonesia, Malaysia, Myanmar, Thailand, Vietnam and Middle East, supported by its fabrication facilities in Singapore, Myanmar and Middle East. A privatisation candidate? PEC is deemed an appealing privatisation candidate, sitting on a cash hoard of S$148m with minimal debt of S$13m as of end-December 2016, close to its current market cap. In addition, it is tightly held by the founder – Ko family, which collectively owns c.65% of PEC, based on our estimate. Though, we understand that the listing status is beneficial in corporate profiling when it comes to tendering for jobs in the global market.

The Stock Trading close to net cash level. PEC had a good run, from 42 Scts to the current 60-Sct level, post the report of a fabulous FY16 (FYE June) at end-August 2016. Despite this, valuation remains undemanding at 30% discount to book, close to net cash level of 58 Sct/share. Based on a blended 10x PE and 1x P/BV, we derive a fair value of S$0.73 for PEC. Catalyst for re-rating could stem from the uptick in contract flow. The tide is turning. PEC’s orderbook is running low at S$107m as of end Dec-2016 as it has not been securing major EPC contracts since May-2015 due to oil crisis. We expect project volumes to start picking up in 1HFY18 (FYE June) alongside the oil price rebound, driving the earnings recovery of PEC from FY18.

Key Risks Lumpy project-based business; inherent execution risks. Contracts for project works are typically awarded on a project-based basis and are lumpy in nature. Contracts are usually priced as a mark-up over costs, hence unforeseen circumstances during execution may lead to cost overruns. PEC may perform additional works, other than those specified in the original contract specifications. It may face uncertainty over the recoverability of variation/alteration works.

At A Glance Issued Capital (m shrs) 253 Mkt. Cap (S$m/US$m) 157 / 111 Major Shareholders (%)

Tian San Singapore 33.7 Poh Thiam Ko 18.8 Ko Teong Hoon Mark 9.3

Free Float (%) 43.3 3m Avg. Daily Val (US$m) 0.14



PEC Ltd Bloomberg: PEC SP | Reuters: PECL.SI Refer to important disclosures at the end of this report

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REVENUE DRIVERS

Two main segments, project works and maintenance services. PEC’s two main business segments are project works and maintenance services. Revenue from other operations includes services provided through PEC’s subsidiaries such as heat treatment, information technology services/products, construction equipment leasing services, among others. Project works is the main revenue contributor. PEC’s provision of engineering, procurement and construction (EPC) services for certain aspects of plant projects, such as tankage and/or piping work, procurement to the four main industries it serves has seen robust contract wins in prior years before oil prices took a turn. A large part of PEC’s EPC projects are for downstream activities in O&G industries. A project typically takes 1-2 years to complete, subject to the nature, scale and complexity involved. Overseas EPC project works have gained traction over the years since PEC’s first contract in Qatar in 2007 as PEC builds up its fabrication facilities outside Singapore (see “Key Operating Assets”). It is noteworthy that S$408m of S$607m of contract wins between FY2014-15 were from Middle East project works. Plant maintenance and related services provide stable revenue base. PEC’s traditional core business was the provision of maintenance services, where it has an established track record of more than 30 years. PEC provides a full discipline of maintenance services, such as maintenance for tankage, static equipment, rotating equipment, and electrical equipment, among others. PEC also provides turnaround, de-bottlenecking and upgrading services for plants. Maintenance revenues tend to be relatively stable, clients’ plants need regular servicing and maintenance, with major turnarounds every 3-5 years. We observe that major global players tend to keep their maintenance bill low by outsourcing the works to third-party providers. PEC bills its clients according to work orders placed, which are based on the rates and terms set out in the contract.

COST STRUCTURE

Labour and material costs are main components of cost of sales. PEC engages subcontractors for part of the construction works, and also undertakes procurement services for raw material components like steel plates, piping, electrical and instrumentation, and equipment.

Higher gross margins from maintenance services. Maintenance services’ gross margins have grew steadily over the years to 22% in FY2016 (FY2011: 17%), while gross margins from project works continue to decline due to the challenging oil and gas environment, reaching 16% in FY2016 from its peak of c. 30% in FY2011.

KEY OPERATING ASSETS

Three major fabrication facilities. PEC has three major fabrication facilities for piping, steel structures, metering skids, pressure vessels and storage tanks, among others, namely: 1) Singapore’s Benoi Lane facility which includes a five-storey office building, workers’ dormitory and a purpose-built fabrication workshop equipped with overhead cranes; 2) a fabrication yard in Fujairah, United Arab Emirates (UAE) with over 30,000 sqm land area; and 3) a fabrication facility located within the Thilawa Special Economic Zone, Myanmar. The three facilities have a total capacity of up to 21,800 tonnes per annum (tpa).

Fig 1: FY2016 Revenue Breakdown

Fig 2: Orderbook (Project Works)

Source: Company, DBS Bank Fig 3: Contract Wins (Project Works)


Fig 4: PEC’s Major Fabrication Facilities

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Purpose-built fabrication workshop, Fabrication yard in Fujairah, UAE Benoi Lane, Singapore Source: Company, DBS Bank


Project works74%

Plant maintenance & related svcs

25%

Other ops1%

Singapore43%

Middle East8%

Asia Pacific Region (ex.

Sg)40%

Europe9%

Equity Explorer

PEC Ltd

Page 3

GROWTH PROSPECTS

Challenging O&G environment. The O&G industry has been challenging, as oil companies around the world continued to defer or cancel projects in 2016. However, we are of the opinion that promises from OPEC and non-OPEC producers of supply reductions will accelerate oil rebalancing (achieving equilibrium in 1Q2017) and price recovery. Confidence has also been boosted by OPEC’s record output cut compliance in the first two months of 2017. Middle East and Asia remain the bright spots. Over the years, PEC has put forth much resources to grow its presence in Middle East and Asia, having established itself in Middle East through the acquisition of a site in FY2011 to develop a new fabrication yard. In FY2015, PEC invested in a fabrication yard in Myanmar and has more recently increased its presence in India through the acquisition of a local engineering consultancy firm in FY2016. More recently, in February 2017, PEC successfully broke into the Vietnamese market, securing a major maintenance contract win where it will be the sole service provider for the entire US$9bn Nghi Son Refinery Petrochemical Complex over the next seven years. While project work volumes are likely to be lower in FY2017 due to the lagged oil price effect, we estimate that the volumes will start picking up in 1HFY18, especially in the Middle East and Asian region. Growing recurring maintenance revenues and margins. Maintenance revenues typically account for one-third of PEC’s revenues. Maintenance revenues has grown at a CAGR of 5.1% over the last six years while gross margins have too expanded, from 19.3% in FY2011 to 33.5% in FY2016. Unlike project works revenues which are dependent on continual contract wins and may be lumpy in nature, maintenance revenues are typically recurring over a number of years. We are positive on PEC’s growth in maintenance revenues and margins. Exploring adjacent industries. While PEC continues to ride out the challenging O&G environment, it continues to explore adjacent industries such as the energy-related and upstream O&G sectors, leveraging on its prior experience in liquefied natural gas and liquefied petroleum gas project works in Singapore and Malaysia.


Experienced management team. PEC’s management team is led by an experienced group of people - the Executive Directors, Ms Edna Ko, Mr Robert Dompeling, and Mr Wong Peng, have each accumulated over 20 years of experience in the oil and gas and/or oil and chemical terminal sectors. An experienced team of Executive Officers, project managers and engineers, many of whom have been with the group for over 15 years, supports them. Diversify earnings into key new overseas markets. PEC has achieved reasonable success in diversifying out of Singapore. In FY2016, overseas revenue accounted for more than half of PEC’s revenue, in stark contrast with FY2011 where Singapore accounted for approximately 75% of revenue. PEC will continue to work towards strengthening its presence in the Middle East, Europe and targeted markets in Asia. No fixed dividend policy. PEC has no formal dividend policy. For FY2016, a total of 3 Scts of dividend per share was declared, including a 1-Sct special dividend. Excluding the special dividend, this translates into a 3.3% dividend yield at current market price.

Fig 5: PEC’s Geographic Presence

Source: Annual reports, DBS Bank Fig 6: Key Management Team

Historical Dividend Payout

FY2013 FY2014 FY2015 FY2016

DPS (S cents) 2.5 2 1 2 + 1*

Dividends declared ($m) 6.4 5.1 2.5 7.6

Dividend payout ratio 49% 51% -48% 34% * represents special dividend Source: Company, DBS Bank

Management Role/ Prior Experience Edna Ko Poh Thim/ Executive Chairman

Responsible for overall business strategy and development of the group. Ms Ko has been with the group for over 20 years, having first joined as an executive director in 1984. She served as managing director from 1991-2007, overseeing the successful expansion of the group in local and overseas markets, before being appointed as the group's Executive Chairman in July 2007. She has also been the managing director of Tian San Singapore and Tian San Shipping since 1991. Ms Ko holds a Bachelor's degree in Business Administration from the University of Hawaii, and is the spouse of Mr Dompeling, Group CEO.

Robert Dompeling/ Group Chief Executive Officer

Responsible for the operational, commercial and financial management of the group, as well as the group's business development and expansion. Mr Dompeling joined the group as CEO in July 2007. Between 1988 and 2007, he held various management positions at the Royal Vopak group of companies, a world operator of independent tank storage terminals, where he oversaw the growth and development of the group's Singapore business. He was previously working with the Royal Dutch Shell Group in the Netherlands between 1984 and 1988. Mr Dompeling holds both Bachelor's and Master's degrees in Naval Architecture from the University of Technology of Delft.

Wong Peng/ Managing DIrector

Responsible for day-to-day operations of the group. Mr Wong has been with the group for more than 25 years, having first joined the group in 1982 as the material and equipment controller in charge of securing and procuring material for projects. In 1988, he was appointed as an executive director and general manager, before being appointed as the group's MD in July 2007. He holds a Bachelor's degree in Mechanical Engineering from University of Singapore, and has been a member of The Institution of Engineers, Singapore, since 1991.


Equity Explorer

PEC Ltd

Page 4

Segmental Breakdown

FY Jun 2013A 2014A 2015A 2016A 2017F 2018F Revenues (S$m) Project works 424 338 363 448 253 304 Plant maintenance and 151 141 165 151 152 153 Other operations 3.99 4.12 3.12 3.04 4.04 5.04 Eliminations (33.9) (33.6) (31.4) (26.5) (27.8) (29.2) Others 0.0 0.0 0.0 0.0 0.0 0.0 Total 545 449 500 575 381 433 Gross profit (S$m) Project works 56.8 68.8 56.5 72.3 38.0 51.7 Plant maintenance and 30.1 29.2 36.3 33.6 33.4 35.1 Other operations 0.12 0.10 0.17 0.23 0.32 0.40 Eliminations 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 0.0 Total 87.0 98.1 93.0 106 71.7 87.2 Gross profit Margins (%) Project works 13.4 20.4 15.6 16.2 15.0 17.0 Plant maintenance and 19.9 20.7 22.0 22.3 22.0 23.0 Other operations 3.1 2.5 5.5 7.6 8.0 8.0 Eliminations 0.0 0.0 0.0 0.0 0.0 0.0 Others N/A N/A N/A N/A N/A N/A Total 16.0 21.8 18.6 18.5 18.8 20.2


FY Jun 2013A 2014A 2015A 2016A 2017F 2018F Revenue 545 449 500 575 381 433 Cost of Goods Sold (458) (351) (407) (469) (310) (345) Gross Profit 87.0 98.1 93.0 106 71.7 87.2 Other Opng (Exp)/Inc (81.1) (83.3) (83.6) (84.3) (63.9) (68.4) Operating Profit 5.89 14.7 9.37 21.9 7.80 18.8 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.12 1.19 1.30 0.41 0.0 0.0 Net Interest (Exp)/Inc (0.4) (0.6) (1.3) (1.1) (1.6) (1.1) Exceptional Gain/(Loss) 8.14 (2.1) (16.7) 6.82 6.07 0.0 Pre-tax Profit 13.8 13.3 (7.2) 28.1 12.3 17.7 Tax (0.8) (3.2) 1.90 (5.7) (2.5) (3.6) Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 13.0 10.1 (5.3) 22.4 9.80 14.1 Net Profit before Except. 4.89 12.1 11.3 15.6 3.73 14.1 EBITDA 17.3 30.7 25.3 37.9 21.9 31.7 Growth Revenue Gth (%) 11.8 (17.6) 11.3 15.1 (33.7) 13.4 EBITDA Gth (%) (60.4) 77.2 (17.6) 49.6 (42.1) 44.7 Opg Profit Gth (%) (78.1) 150.2 (36.4) 133.7 (64.3) 141.3 Net Profit Gth (Pre-ex) (%) (83.4) 147.9 (6.7) 37.5 (76.0) 279.5 Margins & Ratio Gross Margins (%) 16.0 21.8 18.6 18.5 18.8 20.2 Opg Profit Margin (%) 1.1 3.3 1.9 3.8 2.0 4.4 Net Profit Margin (%) 2.4 2.2 (1.1) 3.9 2.6 3.3 ROAE (%) 6.2 4.7 (2.5) 10.5 4.5 6.3 ROA (%) 3.8 2.9 (1.4) 5.6 2.5 3.7 ROCE (%) 2.0 4.9 4.1 5.8 0.9 5.1 Div Payout Ratio (%) 49.0 50.7 N/A 34.2 52.1 36.1 Net Interest Cover (x) 16.5 26.8 7.5 20.8 4.9 17.3


Margins Trend

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Equity Explorer

PEC Ltd

Page 5


FY Jun 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 Revenue 162 152 118 143 82.8 119 Cost of Goods Sold (137) (131) (91.4) (110) (65.9) (97.9) Gross Profit 25.5 21.1 26.4 33.2 16.9 20.7 Other Oper. (Exp)/Inc (21.6) (22.2) (18.3) (21.9) (18.4) (19.6) Operating Profit 3.97 (1.1) 8.06 11.3 (1.5) 1.11 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.02 0.02 0.14 0.23 0.14 0.09 Net Interest (Exp)/Inc (0.1) 0.18 0.05 0.0 0.19 0.27 Exceptional Gain/(Loss) 0.44 9.40 (3.6) (0.8) 1.87 4.20 Pre-tax Profit 4.29 8.54 4.61 10.6 0.67 5.67 Tax (0.8) (1.3) (1.7) (1.9) (0.1) (0.6) Minority Interest (0.4) (2.8) 0.17 (0.6) (0.8) (0.8) Net Profit 3.04 4.51 3.10 8.15 (0.3) 4.24 Net profit bef Except. 2.61 (4.9) 6.73 8.96 (2.1) 0.04 EBITDA 3.99 (1.0) 8.20 11.5 (1.4) 1.20 Growth Revenue Gth (%) 2.4 (6.1) (22.8) 21.2 (42.0) 43.3 EBITDA Gth (%) (55.5) nm nm 39.9 nm nm Opg Profit Gth (%) (56.7) nm nm 39.5 nm nm Net Profit Gth (%) (51.2) 48.0 (31.2) 163.0 nm nm Margins Gross Margins (%) 15.7 13.8 22.4 23.2 20.4 17.5 Opg Profit Margins (%) 2.4 (0.7) 6.8 7.9 (1.8) 0.9 Net Profit Margins (%) 1.9 3.0 2.6 5.7 (0.3) 3.6


Balance Sheet (S$m)

FY Jun 2013A 2014A 2015A 2016A 2017F 2018F Net Fixed Assets 109 99.0 98.0 94.2 86.0 81.1 Invts in Associates & JVs 3.12 3.59 4.64 4.81 4.81 4.81 Other LT Assets 2.48 12.9 14.5 11.7 11.7 11.7 Cash & ST Invts 80.2 82.3 114 150 156 175 Inventory 0.49 0.58 0.73 0.62 0.46 0.51 Debtors 94.0 69.3 97.3 87.4 61.3 69.5 Other Current Assets 66.5 70.8 76.6 51.0 51.7 55.3 Total Assets 356 339 406 400 372 398 ST Debt 3.20 4.29 16.8 8.86 8.86 8.86 Creditor 42.8 29.1 39.6 31.1 24.2 26.9 Other Current Liab 78.8 68.9 116 116 98.1 105 LT Debt 3.25 5.56 12.0 9.28 9.28 9.28 Other LT Liabilities 4.56 4.50 2.63 2.12 2.12 2.12 Shareholder’s Equity 212 215 205 219 217 233 Minority Interests 11.6 11.4 13.3 13.0 13.0 13.0 Total Cap. & Liab. 356 339 406 400 372 398 Non-Cash Wkg. Capital 39.3 42.7 18.8 (8.4) (8.8) (6.4) Net Cash/(Debt) 73.7 72.5 85.0 132 138 157 Debtors Turn (avg days) 49.2 66.4 60.9 58.6 71.2 55.2 Creditors Turn (avg days) 35.0 39.1 32.0 28.5 34.1 28.0 Inventory Turn (avg days) 0.3 0.6 0.6 0.5 0.7 0.5 Asset Turnover (x) 1.6 1.3 1.3 1.4 1.0 1.1 Current Ratio (x) 1.9 2.2 1.7 1.9 2.1 2.1 Quick Ratio (x) 1.4 1.5 1.2 1.5 1.7 1.7 Net Debt/Equity (X) CASH CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH CASH Capex to Debt (%) 496.2 127.3 54.4 32.3 33.1 44.1


Revenue Trend


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Equity Explorer

PEC Ltd

Page 6


FY Jun 2013A 2014A 2015A 2016A 2017F 2018F Pre-Tax Profit 13.8 13.3 (7.2) 28.1 12.3 17.7 Dep. & Amort. 11.3 14.8 14.7 15.6 14.1 12.9 Tax Paid (4.3) (2.1) (1.1) (0.1) (5.7) (2.5) Assoc. & JV Inc/(loss) (0.1) (1.2) (1.3) (0.4) 0.0 0.0 Chg in Wkg.Cap. (16.5) (5.0) (5.0) (5.0) (1.4) 3.47 Other Operating CF (4.4) 2.42 32.5 17.3 0.0 0.0 Net Operating CF (0.2) 22.2 32.6 55.4 19.3 31.6 Capital Exp.(net) (32.0) (12.5) (15.7) (5.9) (6.0) (8.0) Other Invts.(net) 0.0 0.0 0.47 8.10 0.0 0.0 Invts in Assoc. & JV 0.0 (0.2) 0.0 (0.1) 0.0 0.0 Div from Assoc & JV 0.25 0.68 0.25 0.25 0.0 0.0 Other Investing CF 0.0 (0.6) 0.0 0.02 0.0 0.0 Net Investing CF (31.8) (12.6) (15.0) 2.38 (6.0) (8.0) Div Paid (6.4) (6.4) (5.1) (2.5) (7.7) (5.1) Chg in Gross Debt 4.10 0.36 17.7 (12.8) 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 0.0 Other Financing CF 0.07 (1.1) (0.2) (3.9) 0.0 0.0 Net Financing CF (2.2) (7.1) 12.4 (19.2) (7.7) (5.1) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 0.0 Chg in Cash (34.1) 2.61 30.0 38.6 5.67 18.5 Opg CFPS (S cts) 6.41 10.7 14.7 23.7 8.12 11.0 Free CFPS (S cts) (12.6) 3.81 6.62 19.4 5.22 9.26


Capital Expenditure

VALUATIONS

Trading close to net cash level…. PEC had a good run, from 42

Scts to the current 60-Sct level, post the report of a fabulous FY16

(FYE June) at end-August 2016. Despite this, valuation remains

undemanding at 30% discount to book, close to net cash level of

58 Scts/share. Based on a blended 10x PE and 1x P/BV, we derive a

fair value of S$0.73 for PEC.



Cash is king amidst challenging operating environment. PEC

sits on high cash balances of S$161m against S$13m of debt,

i.e. net cash of ~S$148m as of end-December 2016. We like

the company’s strong cash holdings and positive cash from

operations despite the challenging operating environment.

Low free float, key stakeholders control more than half of

the company. Shares in PEC are tightly held, with a free float of

35%. The Ko family accumulatively owns 65% of PEC.

Chart 2: Historical 12-month forward PE ratio (x)

Table 6: Peer Comparison

Company Price (S$)

Mkt Cap

(S$m)

PE T12

M (x)

P/B T12

M (x) ROE (%)

Net D/E (x))

Rotary 0.39 218 18.9 0.8 10.7 CASH Baker Tech 0.67 136 NM 0.6 -1.7 CASH Mencast 0.17 72 NM 0.5 -5.9 1.33 MTQ 0.41 63 NM 0.6 -22.8 0.17 Kim Heng 0.08 53 NM 0.6 -7.3 CASH Hiap Seng 0.16 49 7.8 0.7 9.6 CASH PEC 0.62 158 9.4 0.7 7.9 CASH

Source: DBS Bank, Bloomberg Finance L.P

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Mar-13 Mar-14 Mar-15 Mar-16

(x)

Market Focus

Page 11

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 6 Mar 2017 10:30:05 (SGT) Dissemination Date: 6 Mar 2017 14:24:36 (SGT)

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd,

its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated

in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS

Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,

the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to

change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard

to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of

addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal

or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of

profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This

document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or

persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have

positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and

other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can

be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.

The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it

may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no

obligation to update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned

schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and

assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on

which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual

results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED

UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and

(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)

mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the

commodity referred to in this report.

Market Focus

Page 12

DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research

department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction

in the past twelve months and does not engage in market-making.

ANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the

companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her

compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has

procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of

research reports. As of 6 Mar 2017, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold

interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s)

responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and

procedures are in place to ensure that confidential information held by either the research or investment banking function is handled

appropriately.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position in

UOB, OCBC, First Resources, Wilmar International, RHT Health Trust, Ascendas REIT, Suntec REIT, Mapletree Commercial Trust, Mapletree

Logistics Trust, CapitaLand Commercial Trust, Sembcorp Industries, Sembcorp Marine, Ezion Holdings, Venture Corporation, Singapore Post,

Keppel Corporation, Singapore Airlines Limited, Ezra Holdings, Cambridge Industrial Trust, Hutchison Port Holdings Trust, Ascott Residence

Trust, Cache Logistics Trust, SPH REIT, Indofood Agri Resources recommended in this report as of 31 Jan 2017.

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a net long position

exceeding 0.5% of the total issued share capital in RHT Health Trust, Ascendas REIT, Mapletree Commercial Trust, Mapletree Logistics Trust,

Hutchison Port Holdings Trust, Ascott Residence Trust, Cache Logistics Trust recommended in this report as of 31 Jan 2017.

4. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity

securities of Ascott Residence Trust as of 31 Jan 2017.

Compensation for investment banking services:

5. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for

investment banking services from RHT Health Trust, Ascendas REIT, Mapletree Commercial Trust, Mapletree Logistics Trust, CapitaLand

Commercial Trust, Ezion Holdings, Singapore Post, Singapore Airlines Limited, Ezra Holdings, Ascott Residence Trust, OUE Commercial REIT,

Procurri Corporation as of 31 Jan 2017.

6. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for

RHT Health Trust, Ascendas REIT, Mapletree Commercial Trust, Mapletree Logistics Trust, CapitaLand Commercial Trust, Ezion Holdings,

Singapore Post, Singapore Airlines Limited, Ezra Holdings, Ascott Residence Trust, Procurri Corporation in the past 12 months, as of 31 Jan

2017.

7. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a

manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further

information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document

should contact DBSVUSA exclusively.

Disclosure of previous investment recommendation produced:

8. Danny Teoh Leong Kay, a member of DBS Group Holdings Board of Directors, is a Director of Keppel Corporation as of 1 Jan 2017.

Peter Seah Lim Huat, Chairman & Director of DBS Group Holdings, is a Director / Chairman of Singapore Airlines as of 1 Jan 2017.

Disclosure of previous investment recommendation produced:

9. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other

investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12

months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by

DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

Market Focus

Page 13

RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by or on behalf of, and is attributable to DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission and/or by DBS Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission. Where this publication relates to a research report, unless otherwise stated in the research report(s), DBS Bank (Hong Kong) Limited is not the issuer of the research report(s). This publication including any research report(s) is/are distributed on the express understanding that, whilst the information contained within is believed to be reliable, the information has not been independently verified by DBS Bank (Hong Kong) Limited. This report is intended for distribution in Hong Kong only to professional investors (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules promulgated thereunder.)

For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

United Kingdom This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Market Focus

Page 14

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3

rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC),

Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd

12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888

e-mail: [email protected] Company Regn. No. 196800306E

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