subsea to shore jack-up rig segment vulnerable to oversupply 06-08-14!09!48

8/10/2019 Subsea to Shore Jack-up Rig Segment Vulnerable to Oversupply 06-08-14!09!48

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Equity Research lSubsea toShore

6 August 2014 2

Offshore rig marketChallenging combination of slowing demand and rising supply

Figure 1 shows some correlation between global upstream expenditure and rig

orders. We believe orders for offshore drilling rigs may fall 28% YoY to USD 18.6bn

in 2014, as growth in upstream spending slows significantly. We expect up to 230

new offshore drilling rig deliveries during 2013-15, 45% more than in the preceding

three-year period.

Figure 1: Global upstream spending linked to rig orders

2014 rig orders may decline 28% on falling upstream spending

Figure 2: Rig deliveries rising

Rig deliveries in 2013-15 likely to be 45% more than in

201012

Source: Wood Mackenzie, Standard Chartered Research Source: IHS, Standard Chartered Research

Jack-up day rates to face more pressure in 2015 as supply of new rigs rises

Day rates for deepwater rigs have come under pressure since the start of 2014 and

may have fallen up to 20% so far. Jack-up rig day rates, which have risen in the past

three years and held up well YTD, may see increasing downward pressure from 2015

as deliveries of new rigs are expected to rise c.50% YoY. We believe a 10-15%

decline in rates from the recent peak is a realistic scenario. The number of rigs retired

or converted to other uses and higher-than-forecast demand should be mitigating

factors. Our data points to approximately 250 jack-up rigs that are technically

obsolete i.e. 30 years or older. This represents about half the global jack-up rig fleet.

Figure 3: Deepwater day rates (USD 000)

Deepwater rates may have fallen up to 20% this year

Figure 4: Jack-up day rates and jack-up orders

Orders for new jack-ups have risen in the past three years

Source: IHS, Drilling companies and Standard Chartered Research Source: IHS, Drilling companies and Standard Chartered Research

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

0

6

12

18

24

30

36

2008 2009 2010 2011 2012 2013 2014E

USDbn

Rig orders (L) Global upstream spend YoY (R)

0

10

20

30

40

50

60

70

80

2007 2008 2009 2010 2011 2012 2013 2014E 2015E

Rigs

Drillships Semisub Jack-up

200

300

400

500

600

1H13 2014E0

10

20

30

40

50

60

70

50,000

100,000

150,000

200,000

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

USD

Day rate (L) Jack-up orders [R]


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6 August 2014 3

Singapore yards appear more vulnerable to jack-up market slowdown

Jack-up rig orders accounted for 62% and 47% of Keppel Corps and Sembcorp

Marines total orders, respectively, during 2011-1H14. We believe Keppel Corp and

Sembcorp Marine are more vulnerable to a slowdown as they have cumulativelyaccounted for 55% of global jack-up orders by value since 2011.

Figure 5: Average share of jack-up rig construction

Singapore yards still in the lead (2011-1H14)

Figure 6: Share of jack-up rig construction (time series)

Global market share by units

Source: Companies, Standard Chartered Research Source: IHS, Standard Chartered Research

Singapore shipyards have a higher market share by value because of theirfocus on the high-end segment

Singapore shipyards have been responsible for 55% and 45% of global jack-up rig

orders by value and by units, respectively, since 2011. The Singapore shipyards

have a higher proportion of the jack-up market by value compared with the share of

units, given their leading position in high-end rigs. Chinese shipyards have seen their

market share for jack-up rig construction rise to c.40% (by units) in recent years. By

value, Chinese shipyards have accounted for an estimated 36% of total jack-up

orders since 2011.

Figure 7: Keppel Corps 2010-1H14 orders

62% of cumulative orders from jack-up rigs (ex-Sete)

Figure 8: Sembcorp Marines 2010-1H14 orders

47% of cumulative orders from jack-up rigs (ex-Sete)

Source: Company (ex-Sete Brazil orders) Source: Company (ex-Sete Brazil orders)

45%55%

40%

36%

15%9%

0%

10%

20%

30%40%

50%

60%

70%

80%

90%

100%

Units Value

M.East/others

China

Singapore

0%

10%

20%

30%40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 1H14 Average

Others

Middle East

China

Singapore

62%9%

19%

11%

Jackup

Semisubmersible

Production Unit

Others

47%

12%

8%

28%

6%

Jackup

Semisubmersible

Drillship

FPU

Conversion/others


4/11


6 August 2014 4

What is actionable?We believe the challenges facing Singapore rig builders will rise in the next 12

months, as the jack-up rig segment faces a potential excess supply scenario. We

would trim exposure to rig builders in favour of companies such as VARD Holdings

and Ezion Holdingsin niche areas.

Figure 9: Valuation table

Prices as of 5 August 2014.

Source: FactSet, Standard Chartered Research

Changes to our valuations for rig buildersLowering our PE target to -0.5 SD

For valuing the offshore and marine (O&M) business, we now use a forward PE

target of 0.5 SD below the five-year mean compared with the average forward PE

previously. We attribute this to our expectation of a decline in new orders for jack-up

rigs beginning in 2H14, as the industry is likely to face an excess supply situation. We

apply this PE target to the average of the three-year forward EPS to arrive at our

price target.

Strong order backlog provides some downside protection

We believe a PE target of -0.5 SD is reasonable, given rising headwinds for the

industry. We factor in some downside protection arising from Keppel Corp and

Sembcorp Marines strong order backlog. Both companies have accumulated close

to record-high orders that will provide a healthy base load of work through 2015.

The following table illustrates our bull-base-bear scenarios.

Figure 10: Fair values and scenarios

Our price target uses -0.5 SD of the five-year mean

Figure 11: Sembcorp Marine forward PE

The five-year average forward PE is 15.3x

Fair value SGD Bear Base BullKeppel Corp 8.8 10.2 11.8

Sembcorp Marine 3.1 3.8 4.5

O&M assumptions Bear Base Bull

Keppel Corp

2014-16 orders (SGD bn/p.a.) 4.6 5.1 5.6

Forward PE target 11.0 13.1 15.3

Sembcorp Marine

2014-16 orders (SGD bn/p.a.) 3.4 3.8 4.1

Forward PE target 11.0 13.1 15.3

Source: Standard Chartered Research Source: FactSet, Standard Chartered Research

Price Up/(Dn)

Ticker (lc) Rec New Chg (%) side (%) FY1E FY2E FY1E FY2E FY1E FY2E

China Oilfield Services 2883 HK 19.24 OP 22.00 - 14.3 10.1 8.5 7.4 6.2 3.0 3.6

Ezion Holdings EZI SP 2.15 OP 2.70 - 25.6 11.0 8.7 10.5 7.5 0.0 0.0

Ezra Holdings EZRA SP 1.15 IL 1.05 - (8.7) 21.4 11.2 13.0 9.2 0.0 0.4

Hilong Holding 1623 HK 4.40 OP 5.80 - 31.8 11.9 9.9 8.1 6.4 2.5 3.0

Keppel Corp KEP SP 10.89 IL 10.20 (6.4) (6.3) 12.7 11.7 10.7 10.6 3.8 4.1

Sembcorp Marine SMM SP 4.03 IL 3.80 (9.5) (5.7) 14.6 14.3 9.4 8.8 3.4 3.5

UMW Oil & Gas UMWOG MK 4.01 IL 3.80 - (5.2) 31.3 18.3 23.3 14.6 0.2 0.3

VARD Holdings VARD SP 1.08 OP 1.15 - 6.5 12.5 9.0 6.3 4.2 2.4 3.3

PER (x) EV/EBITDA (x) Div yield (%)PT (lc)

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0

25.0

Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

PER

+2 SD

+SD

Mean

-1 SD

-2 SD


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6 August 2014 5

New orders and backlog peaked in 2012-13

We model a decline in new orders through 2015 for Keppel Corp and Sembcorp

Marine. New orders peaked in 2012, while the orders backlog hit a high in 2012-13.

Our new orders assumption implies an average 2014-16 book-to-bill ratio of 0.7x forboth Keppel Corp and Sembcorp Marine. This is less than the 2011-13 book-to-bill of

1.6x and 1.5x, respectively.

Figure 12: Order backlog

Backlog was at or near record-highs at end-2013

Figure 13: New orders

Orders peaked in 2012 and are expected to fall through 2015

Source: Companies Source: Companies, Standard Chartered Research

0

2

4

68

10

12

14

16

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

S

GDbn

Keppel Corp Sembcorp Marine

0

2

4

6

8

10

12

05 06 07 08 09 10 11 12 13 14E 15E 16E

SGDbn

Keppel Corp Sembcorp Marine


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6 August 2014 6

Keppel Corp

Positive developments unlikely to offset jack-up weakness

Development of new products and partnerships are unlikely

to offset weaker jack-up rig orders.

Our new PT of SGD 10.20 (from SGD 10.90) is 18% below

the street (PE target of 0.5 SD below the five-year mean).

We cut our 2014E-16E new orders forecast by 5-10%,

implying an average book-to-bill of 0.7 (1.6x in 2011-13).

Assumptions for our bear-bull fair values of SGD 8.8-11.8

are tabled in the main section of this report (Figure 10.)

IN-LINE (unchanged)

Development of new products and partnerships unlikely to

offset weaker jack-up rig orders.We appreciate Keppel Corps

expansion into new product areas such as FLNG conversion, a

drillship focused on development drilling and its proposed shipyard

oint venture with PEMEX. However, these developments are

unlikely to offset a slowdown in jack-up rig orders, which typically

account for c.60% of total orders. We cut our 2014E-16E new

orders forecast by 5-10%, translating to an average book-to-bill

ratio of 0.7x (1.6x in the preceding three-year period).

Revised SOTP valuation driven by reduced new orders

forecast and lower target PE. Our revised SOTP price target of

SGD 10.20 (from SGD 10.90) is based on 0.5 SD below the five-

year average forward PE for the O&M business. We previously

pegged it to the five-year average forward PE. Assumptions for

our bear-bull fair values of SGD 8.8-11.8 are tabled in the main

section of this report (Figure 10).

O&M business accounts for 69% of SOTP valuation.The O&M

business accounts for the majority of SOTP valuation at 69%,

followed by real estate (Keppel Land, KPLD SP, IL, PT SGD 3.72)

at 15%. Infrastructure (valued at 5x EV/EBITDA) and other

businesses (listed entities at market value) account for 9%, while

net adjustments to working capital items make up the remainder.

O&M business still in the drivers seat. We model the O&M

business as the main earnings driver behind the 14% rise in the

companys operating profit during 2013-16E. We forecast O&M

revenue of SGD 7.1-10.1bn during 2013-16 with O&M operating

margin remaining relatively stable at 14.3%. 1H14 backlog of SGD

14.1bn is just shy of the record high SGD 14.4bn in 1Q14.

Source: Company, Standard Chartered Research estimates

Share price performance

Source: Company, FactSet

PRICE as of 5 Aug 2014

SGD 10.89

PRICE TARGET

SGD 10.20

Bloomberg code Reuters code

KEP SP KPLM.SI

Market cap 12-month range

SGD 19,417mn (USD 15,550mn) SGD 10.01 - 11.38

EPS adj. est. change 2014E -2.5% 2015E -1.9%

Year-end: December 2013 2014E 2015E 2016E

Sales (SGD mn) 12,380 12,608 14,723 15,655

EBITDA (SGD mn) 2,399 2,034 1,975 2,092

EBIT (SGD mn) 2,134 1,737 1,975 2,094

Pre-tax profit (SGD mn) 2,794 2,279 2,397 2,503

Net profit adj. (SGD mn) 1,349 1,537 1,679 1,729

FCF (SGD mn) (309) 827 1,486 1,108

EPS adj. (SGD) 0.75 0.86 0.93 0.96

DPS (SGD) 0.50 0.41 0.45 0.46

Book value/share (SGD) 5.37 5.88 6.28 6.75

EPS growth adj. (%) -31.1 13.6 8.9 2.7

DPS growth (%) -31.6 -16.9 8.9 2.7

EBITDA margin (%) 19.4 16.1 13.4 13.4

EBIT margin (%) 17.2 13.8 13.4 13.4

Net margin adj. (%) 10.9 12.2 11.4 11.0

Div. payout (%) 49.3 49.2 49.1 48.9

Net gearing (%) 11.2 11.2 5.8 2.9

ROE (%) 19.5 15.1 15.2 14.6ROCE (%) 10.5 8.1 8.8 9.1

EV/sales (x) 1.8 1.7 1.4 1.3

EV/EBITDA (x) 9.2 10.7 10.6 9.8

PBR (x) 2.1 1.9 1.7 1.6

PER adj. (x) 14.3 12.7 11.7 11.4

Dividend yield (%) 4.6 3.8 4.1 4.2

9.4

10.5

11.6

Aug-13 Nov-13 Feb-14 May-14 Aug-14

Keppel Corp STRAITS TIMES INDEX (rebased)

Share price (%) -1 mth -3 mth -12 mth

Ordinary shares 1 3 6

Relative to index -1 1 3

Relative to sector - - -

Major shareholder Temasek Holdings (21.0%)

Free float 79%

Average turnover (USD) 25,087,794

Wai Mun Leong, CFA

+65 6596 8509

Equity Research

Standard Chartered Bank, Singapore Branch

Akash Gupta

+65 6596 8513

Equity Research


GD 0.

G D 0.0
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


7/11


6 August 2014 7


Income statement (SGD mn) Cash flow statement (SGD mn)

Year-end: Dec 2012 2013 2014E 2015E 2016E Year-end: Dec 2012 2013 2014E 2015E 2016E

Sales 13,965 12,380 12,608 14,723 15,655 EBIT 2,621 2,134 1,737 1,975 2,094

Gross profit 0 0 0 0 0 Depreciation & amortisation 240 265 297 0 (2)

SG&A 12 268 0 0 0 Net interest - - - - -

Other income 0 0 0 0 0 Tax paid (225) (585) (464) (477) (469)

Other expenses 0 0 0 0 0 Changes in working capital (1,449) (754) 97 843 344

EBIT 2,621 2,134 1,737 1,975 2,094 Others (152) (434) 0 0 0

Net interest 33 33 (13) (39) (53) Cash flow from operations 1,036 627 1,667 2,341 1,967

Associates 603 626 555 462 462

Other non-operational 0 0 0 0 0 Capex (836) (936) (840) (855) (859)

Exceptional items 0 0 0 0 0 Acquisitions & Investments (426) (543) (543) (543) (543)

Pre-tax profit 3,256 2,794 2,279 2,397 2,503 Disposals 35 534 50 50 50

Taxation (501) (397) (408) (402) (426) Others 157 267 267 267 267

Minority interests (518) (551) (334) (317) (348) Cash flow from investing (1,070) (678) (1,066) (1,081) (1,085)

Exceptional items after tax 0 0 0 0 0

Net profit 2,237 1,846 1,537 1,679 1,729 Dividends (1,001) (843) (752) (845) (815)

Issue of shares (52) 241 0 0 0

Net profit adj. 1,950 1,349 1,537 1,679 1,729 Change in debt 2,331 2,130 (83) (500) (500)

EBITDA 2,861 2,399 2,034 1,975 2,092 Other financing cash flow 0 0 0 0 0

Cash flow from financing 1,277 1,528 (835) (1,345) (1,315)EPS (SGD) 1.25 1.00 0.84 0.91 0.94

EPS adj. (SGD) 1.09 0.75 0.86 0.93 0.96 Change in cash 1,244 1,477 (233) (85) (433)

DPS (SGD) 0.72 0.50 0.41 0.45 0.46 Exchange rate effect 0 0 0 0 0

Avg fully diluted shares (mn) 1,783 1,788 1,794 1,799 1,804 Free cash flow 200 (309) 827 1,486 1,108

Balance sheet (SGD mn) Financial ratios and other Year-end: Dec 2012 2013 2014E 2015E 2016E Year-end: Dec 2012 2013 2014E 2015E 2016E

Cash 4,055 5,565 5,331 5,574 5,501 Operating ratios

Short-term investments 417 445 445 445 445 Gross margin (%) 0.0 0.0 0.0 0.0 0.0

Accounts receivable 1,995 1,916 1,969 2,340 2,531 EBITDA margin (%) 20.5 19.4 16.1 13.4 13.4

Inventory 7,443 8,995 8,995 8,995 8,995 EBIT margin (%) 18.8 17.2 13.8 13.4 13.4

Other current assets 697 1,037 1,036 1,210 1,287 Net margin adj. (%) 14.0 10.9 12.2 11.4 11.0

Total current assets 14,607 17,957 17,776 18,564 18,758 Effective tax rate (%) 15.4 14.2 17.9 16.7 17.0

Sales growth (%) 38.5 -11.3 1.8 16.8 6.3

PP&E 3,337 3,798 4,592 5,111 5,604 Net income growth (%) 15.0 -17.5 -16.7 9.2 3.0Intangible assets 0 0 0 0 0 EPS growth (%) 4.4 -20.0 -16.7 9.2 3.0

Associates and JVs 5,267 5,482 6,313 7,051 7,789 EPS growth adj. (%) 22.2 -31.1 13.6 8.9 2.7

Other long-term assets 5,960 2,818 2,818 2,818 2,818 DPS growth (%) 68.4 -31.6 -16.9 8.9 2.7

Total long-term assets 14,564 12,098 13,723 14,980 16,211

Efficiency ratios

Total assets 29,170 30,056 31,499 33,543 34,969 ROE (%) 26.9 19.5 15.1 15.2 14.6

ROCE (%) 14.6 10.5 8.1 8.8 9.1

Short-term debt 1,006 517 517 517 517 Asset turnover (x) 0.5 0.4 0.4 0.5 0.5

Accounts payable 5,536 5,409 5,509 6,433 6,840 Op. cash/EBIT (x) 0.4 0.3 1.0 1.2 0.9

Other current liabilities 2,523 3,416 3,466 3,930 4,134 Depreciation/capex (x) 0.3 0.3 0.4 0.0 0.0

Total current liabilities 9,064 9,342 9,492 10,879 11,491 Inventory days nm nm nm nm nm

Accounts receivable days 52.6 57.6 56.2 53.4 56.8

Long-term debt 6,202 6,583 6,500 6,000 5,500 Accounts payable days nm nm nm nm nm

Convertible bonds 0 0 0 0 0

Deferred tax 0 0 0 0 0 Leverage ratios

Other long-term liabilities 326 442 442 442 442 Net gearing (%) 23.2 11.2 11.2 5.8 2.9Total long-term liabilities 6,528 7,025 6,942 6,442 5,942 Debt/capital (%) 35.8 34.3 31.9 28.8 25.6

Interest cover (x) nm nm nm nm nm

Total liabilities 15,592 16,367 16,433 17,321 17,433 Debt/EBITDA (x) 2.1 3.0 3.5 3.4 3.0

Current ratio (x) 1.6 1.9 1.9 1.7 1.6

Shareholders funds 9,246 9,701 10,669 11,424 12,312

Minority interests 4,332 3,988 4,396 4,798 5,224 Valuation

EV/sales (x) 1.5 1.8 1.7 1.4 1.3

Total equity 13,578 13,689 15,065 16,222 17,536 EV/EBITDA (x) 7.4 9.2 10.7 10.6 9.8

EV/EBIT (x) 8.0 10.4 12.5 10.6 9.8

Total liabilities and equity 29,171 30,056 31,499 33,543 34,969 PER (x) 8.3 10.7 13.0 11.9 11.6

PER adj. (x) 9.5 14.3 12.7 11.7 11.4

Net debt (cash) 3,153 1,535 1,686 943 516 PBR (x) 2.0 2.1 1.9 1.7 1.6

Year-end shares (mn) 1,783 1,808 1,813 1,819 1,824 Dividend yield (%) 6.9 4.6 3.8 4.1 4.2


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6 August 2014 8

Sembcorp Marine

Good execution, but jack-up market faces wall of supply

We expect challenges for the jack-up market as deliveries

see a sharp rise through 2015; Sembcorp Marines orders

may slow, as jack-ups have accounted for 47% of new

business since 2011.

Our new PT of SGD 3.80 (from SGD 4.20) is driven by our

reduced new orders forecast, a lower target PE and a

2.2%/6.7% cut in 2014/15E EPS. Our PT is 12% below the

street.

Management recently alluded to on-track progress for both

the new yard in Brazil and the first drillship for Sete Brazil.

Management was most optimistic on the outlook for

production-related platforms and vessels.

IN-LINE (unchanged)

Jack-up market headwinds loom. We welcome Sembcorp

Marines capacity expansion in repair and conversion activities,

which are higher margin, through the new yard in Tuas

(Singapore). We also favour its product expansion into drillships.

However, we believe the company will face industry headwinds in

slower jack-up rig orders over the next 12-24 months. Jack-up rigs

have accounted for 47% of total orders (ex-Sete) since 2011.

More conservative assumptions. We cut our 2014-16 neworders forecast by 10-15%, which translates to an average book-

to-bill ratio of 0.7x (1.5x in 2011-13). Our 2014E/15E EPS is

1.8%/7.5% below the street. Our revised SOTP price target of

SGD 3.80 (from SGD 4.20) is based on 0.5 SD below the five-year

average forward PE (previously used the mean). Our new price

target translates to a 2015 EV/EBITDA and PBR of 8.4x and 2.2x,

respectively. Assumptions for our bear-bull fair values of SGD 3.0-

4.5 are tabled in the main section of this report (Figure 10).

Optimistic on production-related platforms and vessels. We

model a 19% rise in revenue during 2013-16E, driven by asignificant backlog of SGD 12.6bn. We expect operating margin to

remain stable at c.11% during this period. 1H14 earnings met our

and street expectations with operating margin of 11.3% and net

profit accounting for 44% of our full-year forecast (similar to last

year). Headline net profit grew 4%, while adjusted profit rose 16%

YoY. Management alluded to on-track progress for the new yard in

Brazil and the first drillship for Sete Brazil, in its 1H14 briefing. For

new orders, management appears to be more optimistic on fixed

production platforms and FPSO conversions.


Share price performance

Source: Company, FactSet

PRICE as of 5 Aug 2014

SGD 4.03

PRICE TARGET

SGD 3.80

Bloomberg code Reuters code

SMM SP SCMN.SI

Market cap 12-month range

SGD 8,434mn (USD 6,754mn) SGD 3.90 - 4.63

EPS adj. est. change 2014E -2.2% 2015E -6.7%

Year-end: December 2013 2014E 2015E 2016E

Sales (SGD mn) 5,526 6,246 6,392 6,585

EBITDA (SGD mn) 745 819 866 933

EBIT (SGD mn) 644 681 697 736

Pre-tax profit (SGD mn) 665 707 729 779

Net profit adj. (SGD mn) 493 576 590 623

FCF (SGD mn) 945 913 1,174 1,297

EPS adj. (SGD) 0.24 0.28 0.28 0.30

DPS (SGD) 0.13 0.14 0.14 0.15

Book value/share (SGD) 1.34 1.51 1.68 1.86

EPS growth adj. (%) 0.9 16.7 2.3 5.4

DPS growth (%) 0.0 6.0 2.3 5.4

EBITDA margin (%) 13.5 13.1 13.6 14.2

EBIT margin (%) 11.7 10.9 10.9 11.2Net margin adj. (%) 8.9 9.2 9.2 9.5

Div. payout (%) 55.1 50.0 50.0 50.0

Net gearing (%) -33.1 -23.7 -22.0 -21.6

ROE (%) 21.7 20.3 18.7 17.9

ROCE (%) 19.0 17.4 16.6 16.6

EV/sales (x) 1.5 1.2 1.2 1.2

EV/EBITDA (x) 11.1 9.4 8.8 8.2

PBR (x) 3.3 2.7 2.4 2.2

PER adj. (x) 18.9 14.6 14.3 13.6

Dividend yield (%) 2.9 3.4 3.5 3.7

3.9

4.3

4.7

Aug-13 Nov-13 Feb-14 May-14 Aug-14

Sembcorp Marine STRAITS TIMES INDEX (rebased)

Share price (%) -1 mth -3 mth -12 mth

Ordinary shares 0 2 -9

Relative to index -1 -1 -11

Relative to sector - - -

Major shareholder Sembcorp industries (63.0%)

Free float 39%

Average turnover (USD) 7,816,406

Wai Mun Leong, CFA

+65 6596 8509

Equity Research


Akash Gupta

+65 6596 8513

Equity Research


GD .0

G D . 0
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


9/11


6 August 2014 9


Income statement (SGD mn) Cash flow statement (SGD mn)

Year-end: Dec 2012 2013 2014E 2015E 2016E Year-end: Dec 2012 2013 2014E 2015E 2016E

Sales 4,430 5,526 6,246 6,392 6,585 EBIT 554 644 681 697 736

Gross profit 695 708 792 809 852 Depreciation & amortisation 94 101 138 170 198

SG&A (149) (148) (147) (147) (151) Net interest 23 (0) (7) (13) (9)

Other income 34 87 40 40 40 Tax paid (90) (54) (77) (92) (98)

Other expenses (25) (2) (5) (5) (5) Changes in working capital 275 991 913 938 946

EBIT 554 644 681 697 736 Others 13 60 5 5 5

Net interest 18 0 (7) (13) (9) Cash flow from operations 868 1,742 1,653 1,704 1,777

Associates 56 16 29 40 47

Other non-operational 1 5 5 5 5 Capex (516) (797) (740) (530) (480)

Exceptional items 0 0 0 0 0 Acquisitions & Investments (12) (7) 0 0 0

Pre-tax profit 630 665 707 729 779 Disposals 1 6 0 0 0

Taxation 0 0 0 0 0 Others 1 1 1 1 1

Minority interests 0 0 0 0 0 Cash flow from investing (527) (797) (739) (529) (479)

Exceptional items after tax 50 63 0 0 0

Net profit 538 556 576 590 623 Dividends (529) (283) (272) (288) (295)

Issue of shares (3) (19) 1 1 1

Net profit adj. 488 493 576 590 623 Change in debt 300 438 0 (100) (200)

EBITDA 648 745 819 866 933 Other financing cash flow 0 0 0 0 0

Cash flow from financing (232) 136 (271) (388) (495)EPS (SGD) 0.23 0.24 0.28 0.28 0.30

EPS adj. (SGD) 0.23 0.24 0.28 0.28 0.30 Change in cash 110 1,080 643 788 804

DPS (SGD) 0.13 0.13 0.14 0.14 0.15 Exchange rate effect 0 0 0 0 0

Avg fully diluted shares (mn) 2,088 2,090 2,093 2,096 2,099 Free cash flow 352 945 913 1,174 1,297

Balance sheet (SGD mn) Financial ratios and other Year-end: Dec 2012 2013 2014E 2015E 2016E Year-end: Dec 2012 2013 2014E 2015E 2016E

Cash 1,409 1,695 1,519 1,440 1,310 Operating ratios

Short-term investments 0 0 0 0 0 Gross margin (%) 15.7 12.8 12.7 12.7 12.9

Accounts receivable 468 442 500 512 527 EBITDA margin (%) 14.6 13.5 13.1 13.6 14.2

Inventory 1,731 2,084 2,344 2,329 2,399 EBIT margin (%) 12.5 11.7 10.9 10.9 11.2

Other current assets 33 0 0 0 0 Net margin adj. (%) 11.0 8.9 9.2 9.2 9.5

Total current assets 3,641 4,221 4,363 4,281 4,236 Effective tax rate (%) 0.0 0.0 0.0 0.0 0.0

Sales growth (%) 11.9 24.7 13.0 2.3 3.0

PP&E 1,476 2,394 3,002 3,362 3,645 Net income growth (%) -28.4 3.2 3.7 2.4 5.6Intangible assets 0 0 0 0 0 EPS growth (%) -30.7 0.9 16.7 2.3 5.4

Associates and JVs 417 446 473 512 558 EPS growth adj. (%) -30.7 0.9 16.7 2.3 5.4

Other long-term assets 252 189 189 189 189 DPS growth (%) -48.0 0.0 6.0 2.3 5.4

Total long-term assets 2,145 3,029 3,664 4,064 4,392

Efficiency ratios

Total assets 5,786 7,250 8,028 8,344 8,628 ROE (%) 22.2 21.7 20.3 18.7 17.9

ROCE (%) 19.4 19.0 17.4 16.6 16.6

Short-term debt 33 166 166 166 166 Asset turnover (x) 0.8 0.8 0.8 0.8 0.8

Accounts payable 1,687 1,781 2,013 2,060 2,122 Op. cash/EBIT (x) 1.6 2.7 2.4 2.4 2.4

Other current liabilities 998 1,583 1,764 1,785 1,821 Depreciation/capex (x) 0.2 0.1 0.2 0.3 0.4

Total current liabilities 2,718 3,530 3,943 4,011 4,109 Inventory days nm nm nm nm nm

Accounts receivable days 39.1 30.1 27.5 28.9 28.8

Long-term debt 300 600 600 500 300 Accounts payable days nm nm nm nm nm

Convertible bonds 0 0 0 0 0

Deferred tax 221 311 311 311 311 Leverage ratios

Other long-term liabilities 0 0 0 0 0 Net gearing (%) -42.3 -33.1 -23.7 -22.0 -21.6Total long-term liabilities 521 911 911 811 611 Debt/capital (%) 10.9 20.6 18.8 15.4 10.3

Interest cover (x) 168.0 79.8 44.4 32.4 43.3

Total liabilities 3,239 4,441 4,853 4,821 4,720 Debt/EBITDA (x) 0.3 0.8 0.9 0.8 0.6

Current ratio (x) 1.3 1.2 1.1 1.1 1.0

Shareholders funds 2,438 2,677 3,003 3,311 3,654

Minority interests 109 133 172 212 255 Valuation

EV/sales (x) 1.9 1.5 1.2 1.2 1.2

Total equity 2,546 2,809 3,174 3,523 3,909 EV/EBITDA (x) 13.2 11.1 9.4 8.8 8.2

EV/EBIT (x) 15.5 12.9 11.3 11.0 10.3

Total liabilities and equity 5,786 7,250 8,028 8,344 8,628 PER (x) 20.7 18.9 14.6 14.3 13.6

PER adj. (x) 20.7 18.9 14.6 14.3 13.6

Net debt (cash) (1,076) (929) (753) (774) (844) PBR (x) 3.8 3.3 2.7 2.4 2.2

Year-end shares (mn) 2,088 2,090 2,093 2,096 2,099 Dividend yield (%) 2.7 2.9 3.4 3.5 3.7


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Disclosures appendixThe information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, StandardChartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or more of its affiliates (together with its group of companies, SCB)and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES.

Analyst Certification Disclosure:The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed andattributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or othersubject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or viewscontained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.

Where disclosure date appears below, this means the day prior to the report date. All share prices quoted are the closing p rice for the business day prior to thedate of the report, unless otherwise stated.

Recommendation Distribution and Investment Banking Relationships

% of covered companiescurrently assigned this rating

% of companies assigned this rating with which SCB has providedinvestment banking services over the past 12 months

OUTPERFORM 55.8% 10.4%

IN-LINE 33.0% 10.1%

UNDERPERFORM 11.2% 8.1%

As of 30 June 2014

Research Recommendation

Terminology Definitions

OUTPERFORM (OP) The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months

IN-LINE (IL)The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more over the next12 months

UNDERPERFORM (UP) The total return on the security is expected to underperform the relevant market index by 5% or more over the next 12 months

SCB uses an investment horizon of 12 months for its price targets.

Additional information, including disclosures, with respect to any securities referred to herein will be available upon request. Requests should be sent [email protected].

Global Disclaimer: Standard Chartered Bank and/or its affiliates ("SCB) makes no representation or warranty of any kind, express, implied or statutory regardingthis document or any information contained or referred to in the document. The information in this document is provided for information purposes only. It does notconstitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does itconstitute any prediction of likely future movements in rates or prices or represent that any such future movements will not exceed those shown in any illustration.

The stated price of the securities mentioned herein, if any, is as of the date indicated and is not any representation that any transaction can be effected at this price.While reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. Thecontents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation ofany particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding theappropriateness of investing in any securities, financial instruments or investment strategies referred to in this document and should understand that statementsregarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations, projections, and price target(s), if any, contained inthis document are as of the date indicated and are subject to change at any time without prior notice. Our recommendations are under constant review. The valueand income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested.Future returns are not guaranteed, and a loss of original capital may be incurred. Foreign-currency denominated securities and financial instruments are subject tofluctuation in exchange rates that could have a positive or adverse effect on the value, price or income of such securities and financial instruments. Pastperformance is not indicative of comparable future results and no representation or warranty is made regarding future performance. While we endeavour to updateon a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so.

Accordingly, information may be available to us which is not reflected in this material, and we may have acted upon or used the information prior to or immediatelyfollowing its publication. SCB is not a legal or tax adviser, and is not purporting to provide legal or tax advice. Independent legal and/or tax advice should be soughtfor any queries relating to the legal or tax implications of any investment. SCB and/or its affiliates may have a position in any of the securities, instruments orcurrencies mentioned in this document. SCB and/or its affiliates or its respective officers, directors, employee benefit programmes or employees, including personsinvolved in the preparation or issuance of this document may at any time, to the extent permitted by applicable law and/or regulation, be long or short any securitiesor financial instruments referred to in this document and on the SCB Research website or have a material interest in any such securities or related investments, ormay be the only market maker in relation to such investments, or provide, or have provided advice, investment banking or other services, to issuers of suchinvestments. SCB has in place policies and procedures and physical information walls between its Research Department and differing public and private businessfunctions to help ensure confidential information, including inside information is not disclosed unless in line with its po licies and procedures and the rules of itsregulators. Data, opinions and other information appearing herein may have been obtained from public sources. SCB makes no representation or warranty as to theaccuracy or completeness of such information obtained from public sources. SCB also makes no representation or warranty as to the accuracy nor responsible forany information or data contains on any third partys website. You are advised to make your own independent judgment (with the advice of your professional advisersas necessary) with respect to any matter contained herein and not rely on this document as the basis for making any trading, hedging or investment decision. SCBaccepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental, consequential, punitive or exemplarydamages) from the use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error,imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof orany contents or associated services. This material is for the use of intended recipients only and in any jurisdiction in which distribution to private/retail customerswould require registration or licensing of the distributor which the distributor does not currently have, this document is intended solely for distribution to professionaland institutional investors.

Country-Specific Disclosures - If you are receiving this document in any of the countries listed below, please note the following:United Kingdom and European Economic Area:SCB is authorised in the United Kingdom by the Prudential Regulation Authority and regulated by the FinancialConduct Authority and the Prudential Regulation Authority. This communication is not directed at Retail Clients in the European Economic Area as defined byDirective 2004/39/EC. Nothing in this document constitutes a personal recommendation or investment advice as defined by Directive 2004/39/EC. Australia:The

Australian Financial Services Licence for Standard Chartered Bank is Licence No: 246833 with the following Australian Registered Business Number (ARBN:

097571778). Australian investors should note that this communication was prepared for wholesale clients only and is not directed at persons who are retail clientsas those terms are defined in sections 761G and 761GA of the Corporations Act 2001 (Cth). Bangladesh:This research has not been produced in Bangladesh. Thereport has been prepared by the research analyst(s) in an autonomous and independent way, including in relation to SCB. THE SECURITIES MENTIONED IN THISREPORT HAVE NOT BEEN AND WILL NOT BE REGISTERED IN BANGLADESH AND MAY NOT BE OFFERED OR SOLD IN BANGLADESH WITHOUT PRIOR

APPROVAL OF THE REGULATORY AUTHORITIES IN BANGLADESH.Botswana: This document is being distributed in Botswana by, and is attributable to,Standard Chartered Bank Botswana Limited which is a financial institution licensed under the Section 6 of the Banking Act CAP 46.04 and is listed in the BotswanaStock Exchange. Brazil:SCB disclosures pursuant to the Securities and Exchange Commission of Brazil (CVM) Instruction 483/10: This research has no t been


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