singapore thematic report spotlight on m&a - dbs bank singapore thematic report ... owns...

ed: JS / sa: AS, PY

STI : 3,130.44

Analyst

Janice CHUA +65 6682 3692, [email protected]

Ling Lee Keng +65 66823703, [email protected]

Singapore research team

Key Indices

Current % Chng STI Index 3,130.44 -0.6% FS Small Cap Index 396.77 -0.6% USD/SGD Curncy 1.41 -0.1% Daily Volume (m) 2,467 Daily Turnover (S$m) 1,094 Daily Turnover (US$m) 1,214

Source: Bloomberg Finance L.P.

Market Key Data

(%) EPS Gth Div Yield 2016 (5.0) 3.7 2017F 15.0 3.7 2018F 7.4 3.9 (x) PER EV/EBITDA 2016F 17.3 14.0 2017F 15.0 12.5 2018F 14.0 11.6

Source: DBS Bank

DBS Group Research . Equity 8 Mar 2017

Singapore Thematic Report

Spotlight on M&A Refer to important disclosures at the end of this report

Stars align to strike

Riding on wave of privatisation and takeovers

Cash rich, undervalued and illiquid stocks –

Sunningdale Tech, Fu Yu Corp, UMS, Venture

Corp, SIA Engineering, PEC

Asset plays – Bukit Sembawang, Global Logistic

Properties, United Engineers, PACC Offshore,

Mermaid Maritime

Premium in brand equity – Delfi, Courts Asia

Sniffing out good deals. The wave of M&A and privatisation deals has gained momentum since last year. We expect this trend to continue in 2017. Cheap valuations, low liquidity, dominant shareholder control, strong asset backing, and strong brand premiums are some of the factors propelling this trend, as private equity funds scout for undervalued gems while rich shareholders and owners put up offers to privatise companies. Despite STI’s recent outperformance, valuation remains inexpensive vs regional peers. This, coupled with green shoots of recovery, have revived interest in Singapore equities, adding fuel to the M&A momentum. Gems in Technology sector flushed with cash. The sector has been overlooked and has been under-owned in recent years. Several gems show up from our screening exercise – companies trading at undemanding PE multiples or below book value, supported by net cash, fragmented shareholding structure, and thriving in their respective niche segments. Our takeover picks are Sunningdale, UMS, Fu Yu and Venture.

Property – under-owned, under-valued with asset backing. Global Logistics Properties and United Engineers recently created a stir in Singapore property sector with takeover bids currently being negotiated. The spotlight has shifted to Bukit Sembawang, which owns substantial freehold land bank in Singapore. The stock remains undervalued, trading at 38% discount to our estimated RNAV of S$10.35.

F&B – premium in brand value. Companies with strong brand equity are sought after, as seen by the recent takeovers and privatisations of OSIM, Eu Yan Sang, Super and Auric Pacific. We believe QAF, Delfi and Courts stand out in building their brand premiums and may be on the radar screen of acquirers.

Oil & Gas (O&G) – bombed out valuations. The sector’s depressed valuations and moderate recovery in oil prices could catalyse more M&A activity. This presents opportunities for cash-rich upstream players to acquire resource-rich but financially distressed E&P assets / companies. We also expect to see a wider consolidation scale in the O&G industry as players face further financial pain. Privatisation candidates are PACC Offshore Services, Mermaid and PEC. SIA Engineering offers potential dividend upside while awaiting corporate action.

STOCKS

Price Mkt Cap 12-mth

Target Price Performance

(%)

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

Venture Corp 11.22 2,219 11.37 12.4 36.7 BUY Bukit Sembawang 6.40 1,174 7.55 39.1 46.1 NR PEC Ltd 0.69 124 0.73 27.8 70.4 NR Fu Yu Corp Ltd 0.22 115 0.25 14.4 35.2 NR GLP 2.67 8,861 3.00 17.6 40.5 BUY OUE 2.11 1,348 4.00 17.2 28.3 BUY United Engineers 2.93 1,323 2.89 11.4 40.7 NR SIA Engineering 3.65 2,898 3.58 5.8 0.0 HOLD PACC Offshore 0.37 469 0.42 14.1 7.4 BUY Mermaid Maritime 0.22 215 0.25 39.6 102.8 BUY Delfi Ltd 2.28 987 2.26 (3.0) (7.3) HOLD Courts Asia 0.45 162 0.51 0.0 41.3 BUY UMS Holdings 0.73 222 0.73 19.7 31.5 BUY Sunningdale Tech 1.47 195 1.64 35.0 59.2 NR

Source: DBS Bank, Bloomberg Finance L.P. Closing price as of 7 Mar 2017

Thematic Report

Spotlight on M&A

Takeover and privatisation deals on the rise

Sniffing out good deals. M&A / privatisation activities have gained momentum since last year, with more than 20 companies per year taken private or bought out since 2013. We expect this trend to continue in 2017. Cheap valuations, low liquidity, dominant shareholder control, strong asset backing and strong brand names are some of the factors propelling this trend, as private equity funds scout for undervalued gems while rich shareholders and owners put up offers to privatise companies to extract value. Recent privatization deal spices up the M&A playground. Just barely three months into 2017, we have already seen buyout offers for five companies, offering premiums of between 2% to 21% over their last transaction price. Kingboard Chemical group has also announced a voluntary privatisation offer for Kingboard Copper Foil at S$0.40 cash per share, representing a 18% premium to the last closing price prior to the offer...

Number of companies delisted from SGX

Source: Bloomberg Finance L.P.; DBS Bank

Privatisation and takeover deals announced in 2017 (Year-to-date)

Source: DBS Bank

0

5

10

15

20

25

30

2011 2012 2013 2014 2015 2016 2017

based on effective date; include ETFsData for 2017 till end Mar 2017

Compa ny Se c torDa te

a nnounc e d Offe r de ta i l sOffe r pri c e

La st c lose prior to offe r Pre mium

Healthway Medical Corp

Consumer 7-Feb-17 Voluntary cash offer by Lippo-linked group at S$0.042 per share. S$0.042 S$0.040 5%

Auric Pacific Consumer 7-Feb-17 Privatization offer by controlling shareholder, (Riady family) at S$1.65 cash per share.

S$1.650 S$1.455 13%

Spindex Technology 9-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 Technology 3-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 Technology 3-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.

- - -

International Healthway Corp

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

S$0.106 S$0.104 2%

Kingboard Copper Foil Technology 3-Mar-17 Voluntary offer by the Kingboard Chemical group at S$0.40 cash per share.

S$0.400 S$0.340 18%

Page 2

Thematic Report

Spotlight on M&A

Privatisation and takeover deals announced in 2016 Source: DBS Bank

Compa ny Se c torDa te

a nnounc e d Offe r de ta i l sOffe r pri c e

La st c lose p rior to offe r Pre mium

Biosensors Pharmaceutical 4-Nov-15 CITIC Private Equity Funds Management made an offer following their proposed amalgamation and privatisation of Biosensors International and its substantial shareholder, CB Medical Holdings.

S$0.840 S$0.680 24%

Tiger Airways Transportation 6-Nov-15 SIA's offer for all the issued ordinary shares in the capital of Tiger Airways

S$0.450 S$0.310 45%

Li Heng Chemical Fibre Industrial 22-Dec-15 Founders and directors made voluntary unconditional general offer at S$1.00 per share. Offeror owns 81% stake.

S$1.000 S$0.465 115%

China Dairy Group Consumer 30-Dec-15 Executive chairman made a voluntary delisting at S$0.195 per share. Offeror has 48.32% stake.

S$0.195 S$0.110 77%

NOL Transportation 7-Dec-15 CMA CGM S.A. made a pre-conditional voluntary conditional cash offer. Offeror does not intend to preserve listing status.

S$1.300 S$1.225 6%

Lantrovision Technology 27-Jan-16 MIRAIT Singapore announced the proposed acquisition of Lantrovision by way of a scheme of arrangement.

S$3.250 S$2.200 48%

China Yongsheng Diversified 24-Feb-16 Voluntary conditional cash offer by Chairman and directors. Offeror owns 68.06% stake.

S$0.032 S$0.021 52%

Xinren Aluminum Holdings

Industrial 25-Feb-16 Voluntary conditional cash offer at S$0.60 in cash per share. S$0.600 S$0.360 67%

OSIM Consumer 7-Mar-16 Chairman and CEO made a voluntary unconditional cash offer, with a view to delisting and privatising the company.

S$1.390 S$1.225 13%

Select Group Consumer 23-Mar-16 Voluntary conditional cash offer at S$0.525 in cash per share. 53.57% provided irrevocable undertakings to accept offer.

S$0.525 S$0.425 24%

Pteris Global Industrial 21-Apr-16 Voluntary conditional cash offer at S$0.735 in cash per share. Offeror owns 54.34% stake

S$0.735 S$0.635 16%

China Merchant Industrial 9-May-16 Privatization by parent company China Merchants Group at S$1.02 cash per offer share. Currently, Offeror owns 75.9% of shares.

S$1.020 S$0.830 23%

Eu Yan Sang Consumer 16-May-16 A consortium consisting of Tower Capital, Temasek and certain members of the Eu family has made a voluntary conditional cash offer of S$0.60 per share. Offerer has about 63.2% stake.

S$0.600 S$0.585 3%

Otto Marine Oil & Gas 8-Jun-16 Executive chairman and controlling shareholder Yaw Chee Siew made a voluntary delisting at S$0.32 per share. He has a total interest of 61.2% stake.

S$0.320 S$0.230 39%

SMRT Transportation 20-Jul-16 Privatization offer by majority shareholder Temasek at S$1.68 cash per share.

S$1.680 S$1.545 9%

Sim Lian Group Real Estate 8-Aug-16 Founder made voluntary conditional cash offer at S$1.08 per share.

S$1.080 S$0.940 15%

China Minzhong Food Consumer 6-Sep-16 Voluntary offer by Anthoni Salim at S$1.20 cash or S$0.7665 in cash and S$0.4335 in principal amount of Zero Coupon Mandatorily Exchangeable Bonds per share.

S$1.200 S$0.960 25%

Aztech Technology 20-Sep-16 Voluntary delisting offer by co-founder at S$0.42 per share. S$0.420 S$0.325 29%

Super Group Consumer 3-Nov-16 Global coffee and tea company Jacobs Douwe Egberts B.V. (JDE) made voluntary offerat S$1.30 per share.

S$1.300 S$0.970 34%

ARA Asset Management

Real Estate 8-Nov-16 Controlling shareholders made privatization offer at S$1.78 per share.

S$1.780 S$1.495 19%

Vard Holdings Oil & Gas 13-Nov-16 Majority shareholder Fincantieri made voluntary conditional cash offer at S$0.24 per share.

S$0.240 S$0.230 4%

Sunmart Holdings 30-Nov-16 Founder made voluntary delisting offer at S$0.07 per share. S$0.070 S$0.115 -39%

Page 3

Thematic Report

Spotlight on M&A

Who’s next? Singapore equities have been de-rated over the past ten years, as both GDP and corporate earnings growth slowed in an economy facing both structural and cyclical challenges. Despite STI’s recent outperformance, valuation remains inexpensive vs regional peers. This, coupled with green shoots of recovery, have revived interests in Singapore equities, adding further fuel to the M&A momentum. MSCI Singapore – 12mth Fwd PE

Source: ThomsonReuters, Singapore Market –PB

Source: ThomsonReuters,

Sector Valuation

PE (x) Earnings Growth PB (x)

Div Yld (%)

Sector 2017F 2017F 2016 2016 Large Cap 14.8 13.5 1.3 3.6

Banking 10.0 15.6 1.1 3.4 Consumer Goods 16.0 31.3 1.8 2.2 Consumer Services 22.3 8.8 1.8 3.3 Financials 20.4 -6.6 1.5 6.3 Health Care 47.8 43.8 2.2 0.5 Industrials 19.3 28.5 1.7 3.2 Oil & Gas 16.4 10.2 1.1 2.4 REITS 15.8 4.7 1.0 6.0 Real Estate 17.2 11.4 0.9 3.7 Technology 15.8 9.6 1.6 4.5 Telecommunications 15.7 3.2 2.6 4.8

Small Mid Cap 18.1 34.6 1.2 4.5 Consumer Goods 12.1 21.3 1.7 1.0 Consumer Services 17.3 19.5 3.6 2.8 Financials 21.3 4.4 3.1 2.9 Health Care 23.7 0.2 2.5 2.8 Industrials 30.1 -196.1 1.3 3.9 Oil & Gas nm 35.5 0.4 0.0 REITS 14.7 2.6 0.9 6.7 Technology 11.7 13.9 1.0 3.5 Telecommunications 14.2 -8.2 4.8 6.1

Grand Total 15.1 15.0 1.3 3.7

We attempt to sift potential candidates by sector, as each sector offers different criteria and value that vulture funds or PE funds are seeking in order to unlock value in these companies. Based on our screen, our M&A picks are: Technology – Venture Corp, UMS Holdings, Fu Yu Corp, Sunningdale Tech F&B, consumer – Delfi, Courts Asia Property – Bukit Sembawang, Global Logistics Properties, United Engineers Oil and Gas – POSH, Mermaid, PEC Industrial – SIA Engineering Gems in technology sector– Flushed with cash The Technology sector has seen numerous M&A / privatisation activities, especially post dot.com fever. In the last six months, at least two SGX-listed technology stocks, Aztech and Spindex, were privatised or announced privatization plan by their founders at a premium to the last traded price of 29% and 21% respectively. Liquidity for both stocks was also low. Other potential M&A / privatisation targets in this segment that we cover include UMS Holdings, Fu Yu Corp, Venture Corp and Sunningdale Tech.

8.0

10.0

12.0

14.0

16.0

18.0

20.0

06 07 08 08 09 10 11 12 13 14 15 16 17

MSCI SINGAPORE - 12MTH FWD P/E RTIO

-2sd: 10.5x

-1sd: 12x

Avg: 13.5x

+1sd: 15x

+2sd: 16.6x

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

06 07 08 08 09 10 11 12 13 14 15 16 17

SINGAPORE-DS Market - PRICE/BOOK RATIO

-2sd: 0.9x

-1sd: 1.2x

Avg: 1.4x

+1sd: 1.7x

+2sd: 2x

Page 4

Market Focus

UMS Holdings has only one large shareholder with a 20% stake. With the renewal of the key Endura contract providing good earnings visibility, strong cash flow and net cash of S$42.4m (c.15% of market cap), UMS is an attractive takeover target. For Fu Yu Corp, while current valuations of 0.9x P/BV and 10.3x PE seem fair, 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 privatisation or takeover offer. With net cash accounting for 65% of its market cap, a privatisation offer representing 20% premium would require only 82% of its net cash, while a takeover offer at premium of 20% would present an ex-cash acquisition PE of just 5.8x. Venture Corp 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 a stake of about 7% in Venture. Sunningdale Tech has gone through several rounds of M&A in the past to become one of the biggest one-stop turnkey plastic solutions provider. Sunningdale‘s competitive advantages lie in its tooling capabilities, expertise in high cosmetic parts, credibility in the healthcare and automotive business and the scalable robust system and processes that have been built over the years. At 0.7x P/BV and 9x FY17F PE, attractive valuations could lead to takeover potential – especially from PE funds or larger top-tier players in the precision plastic field seeking Asian exposure. Sunright is flushed with cash, with net cash of about S$51.5m as at 31 July 2016, which is more than its market cap of S$38.1m! Others like Cheung Woh Tech, Ellipsiz, PCI and Sinostar are in net cash position, trading at below book value and their major shareholders own >50% stake in the company.

Tech stocks - Potential privatisation and takeover

candidates

Price as of 6 March 2017 Source: DBS Bank; Bloomberg Finance L.P. Seeking brand value in the F&B sector In the Food & Beverage space, companies that were acquired/privatised in 2016 included OSIM, Select Group, Eu Yan Sang and Super Group (general offer in process). Just last month, Auric Pacific (Auric) announced the privatisation offer by controlling shareholder, the Riady family via Silver Creek Capital, at S$1.65 cash per share. The controlling shareholder and concerted parties own about 80% in Auric Pacific. Trading volume for Auric’s share had also been low prior to the privatisation offer, with average daily volume of <100,000 shares in the past one year. More deals could be expected from this segment. One of the key factors for the F&B sector is strong brand names, rather than cheap valuations. For e.g., Super Group was privatised at 30x FY17F PE while the offer price of S$1.65 values Auric at about 28x FY16 PE (consensus). Delfi could be an attractive takeover target. The owner had previously spun off its upstream cocoa processing business. In 2013, Delfi sold the division to Barry Callebaut AG for US$950m. Delfi is now left with a strong branded consumer business in Indonesia. It is a market leader with share of c.50% in branded chocolates market in Indonesia. Its competitive advantage lies in its extensive network across Indonesia. It has a first-mover advantage and considerable reach in the country. Global players have already been competing in the market but market share remains relatively low. We believe Delfi’s strong brand and network will be attractive to investors who are keen to dominate the chocolate space in Indonesia. However, Delfi’s valuation is

Na me Mkt Ca p

($m) Pr ic e

($ )

Fa i r va lue

($ ) Ups ide to fa i r va lue P/BV

Ne t Ca sh (S$m)

UMS HOLDINGS LTD 315.4 0.735 0.73 -1% 1.63 (38.9) VENTURE CORP LTD 3,014.4 10.8 11.37 5% 1.54 (407.1) FU YU CORP LTD 161.9 0.215 0.25 16% 0.96 (103.6) SUNNINGDALE TECH 265.2 1.425 1.64 15% 0.80 (1.1)

Na me Mkt Ca p

($m) Pr ic e

($ ) P/BV

(x) Ne t Ca sh

(S$m)

Ne t c a sh a s

% of mkt c a p

%Ma jori ty

Owne d SINOSTAR PEC HOL 122.9 0.192 1.00 (94.6) 77% 60.2 PCI LTD 95.6 0.48 0.81 (27.9) 29% 76.7 ELLIPSIZ LTD 87.7 0.525 0.67 (36.2) 41% 67.0 CHEUNG WOH TECH 62.0 0.205 0.56 (3.5) 6% 62.7 SUNRIGHT LTD 38.1 0.31 0.54 (51.5) 135% 54.9

Page 5

Market Focus

pricey which can be a stumbling block for any deal to be done. The main shareholder owns 50.5% of Delfi. Market capitalisation of the stock is approximately US$1bn currently. Based on our analysis of successful takeovers on the SGX, it normally takes a 30% premium to succeed in buyouts. The cost would potentially be at least US$1.3bn from the current market cap, which also implies a valuation that is a whopping 31x FY17F PE or more. Other potential targets with strong brand names include QAF, which owns the Gardenia brand bread. The owner of Auric Pacific, which owns the Sunshine brand bread, announced a privatisation offer recently. Both Metro and Isetan are well-known in the retail market. Khong Guan is also another widely known brand. Its peer, Prima Group, was delisted few years ago. There were a few watch retailers that had been privatised / taken over in recent years, including Sincere Watch and Cortina. We would not rule out the possibility of The Hour Glass as the next target. The major shareholder owns about a 64% stake. The market cap for companies like Nobel Design, Nippecraft and Informatics are below their net cash position. Genting Hong Kong is also flushed with cash and 69% of the shares, are tightly held by major shareholder. Shares of Courts Asia, on the other hand, are mainly held by PE funds. Consumer stocks - Potential privatisation and takeover

targets

Price as of 6 March 2017 Source: DBS Bank; Bloomberg Finance L.P.

Property stocks – undervalued, under owned and strong asset backing Bukit Sembawang is one of the few developers in Singapore that still have substantial undeveloped landbank in Singapore and could be an interesting target for investors looking to landbank. 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 landbank in Singapore. The stock is trading at ~1x P/NAV but is at a substantial discount to its market value as a majority of its assets are marked to historical cost. The share price of Global Logistics Properties has gone up about 50% in the last four months due to ongoing rumours of a possible offer for the company. So far, at least three bidders have been shortlisted for due diligence. According to Bloomberg, the three bidders are i) Chinese parties comprising management-backed Hillhouse and Hopu, ii) Blackstone, and iii) Warburg Pincus consortium (teaming up with its related company e-Shang Redwood, said to be the second largest logistics developer after GLP). The attractiveness in GLP is its leading position in the warehouse logistics space in key markets of China, USA, Japan. In China, through its joint venture companies and key shareholders, the group has access to valuable land resources to grow its operational footprint. Through its various development and income funds, the group’s fund management business has also been a regular source of income and has also built up substantial amount of accrued interest upon exit of the funds in the medium term. Plans to also realise value from its China warehouses through an income fund/REIT will enable the group to close the NAV/RNAV gap. Major shareholders, OCBC, Great Eastern and affiliates, have announced a potential sale of their combined stake of c.32% of United Engineers (UE), which will trigger a general offer, based on SGX listing rules. We believe UE will be of interest to prospective acquirers given the group’s strong recurring income base and well-positioned assets – UE Bizhub City (UE Square), One North mixed development, as well as UE Bizhub West which are strategically located at the fringe of the Central Business District (CBD) or in key suburban commercial districts.

Name Mkt Cap

($m) Price

(S$) P/BV

(x)

Ne t (Ca sh)/De bt

(S$m) Fre e

floa t (%)

DELFI LTD 1,417.9 2.32 4.99 (14.0) 48.5

GENTING HONG KONG 2,629.6 0.31 0.53 (2,735.8) 24.4

METRO HOLDINGS 897.5 1.08 0.66 (527.5) 52.5

QAF LTD 786.6 1.4 1.66 (19.9) 29.6

HOUR GLASS LTD 465.3 0.66 1.01 (30.5) 37.5

ISETAN SINGAPORE 152.6 3.7 0.90 (63.3) 38.9

NOBEL DESIGN HLD 91.1 0.42 0.57 (98.3) 23.8

KHONG GUAN LTD 52.1 2.02 0.83 (24.8) 22.6

NIPPECRAFT LTD 12.3 0.035 0.29 (21.9) 36.3

INFORMATICS EDU 11.6 0.16 1.44 (15.3) 51.6

COURTS ASIA LTD 226.0 0.44 0.78 229.4 15.8

Page 6

Market Focus

Oil & Gas – bottoming out on bombed out valuations In the Oil & Gas (O&G) space, depressed oil prices have led to rising impairment charges and loan defaults. The sector’s depressed valuations and moderate recovery in oil prices could catalyse more M&A activity. This presents opportunities for cash-rich upstream players to acquire resource-rich but financially distressed E&P assets / companies. We also expect to see a wider consolidation scale in the O&G industry as players face further financial pain. Vard has recently announced a privatisation offer by majority shareholder Fincantieri. Other possible privatisation candidates are Mermaid Maritime, Pacc Offshore (POSH) and PEC Ltd. Mermaid is c.87.3% held by the Thoresen group and its related management, leaving only S$36.6m in free-float market capitalisation on the table. With c.S$250m in cash on hand, the Thoresen group has the necessary ammunition to take Mermaid private. Additionally, Mermaid is net cash as of end December 2016, and this adds to its attractiveness as a privatisation candidate. POSH is 81.89%-owned by the Kuok group, and is a more stable long-term bet versus peers with no immediate debt concerns (as committed undrawn bank lines cover capex requirements) and positive operating cash flows as at end December 2016. The company has also demonstrated an ability to secure work for its vessels amid an anaemic market (e.g. long term contracts recently inked for work in the Middle-East for 13 vessels). 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. CSE Global has a net cash position of S$54m (20% of market cap) which is used to support its ongoing projects. This would support the company's plans to maintain its dividend at 2.75 Scts as well as for potential M&A activities during this period. Ownership is fragmented with founder and CEO holding only a 12% stake. Baker Tech has net cash amounting to its current market cap, while the major shareholder of both Hai Leck and CH Offshore own close to 90%.

Oil & Gas stocks - Potential privatisation and takeover

targets

Price as of 6 March 2017 Source: DBS Bank Bloomberg Finance L.P. SIA Engineering – potential dividend upside while awaiting corporate action Other potential candidates that could unlock value include SIA Engineering (SIE). In our view, SIE is a potential privatization by parent SIA, who has a cash balance of about S$3bn as of end-December 2016, and would effectively have to fork out only c.S$390m cash to take SIE private. We think the possibility of a special dividend at financial year-end (due to the current large cash balance of c.S$560m, boosted by the receipts from disposal of the HAESL stake in 1Q-FY17) as well as prospects of privatisation by parent SIA should continue to provide a sentiment boost to SIE’s share price.

NameMkt Cap

($m) Price

(S$) P/BV

(x)

Ne t (Ca sh)/De bt

(S$m) Fre e

floa t (%)

MERMAID MARITIME 289.7 0.205 0.61 1,804.9 22.7

PACC OFFSHORE SE 662.0 0.365 0.46 546.0 17.0

PEC LTD 171.9 0.675 0.78 (132.4) 41.0

SEMB MARINE 4,304.0 2.06 1.68 2,938.0 38.7

CSE GLOBAL LTD 260.6 0.505 1.11 (54.1) 77.4

CH OFFSHORE LTD 211.5 0.3 0.93 (2.3) 13.3

BAKER TECHNOLOGY 141.0 0.695 0.64 (141.4) 46.2

HAI LECK HLDS 110.5 0.54 0.88 (51.2) 16.3

Page 7

Thematic Report

Spotlight on M&A

Our Picks

Source: DBS Bank

Mk t Cap 07-Mar Target Target P/BV Yld (%)

Company (S$m) Price (S$) Price ($) Return Rec'n F Y17F F Y18F F Y17F F Y18F F Y16A F Y16A

Technology

Venture 3,132 11.22 11.37 1% BUY 9.6 5.8 15.8 14.9 1.6 4.5

UMS Hldgs 313 0.73 0.73 0% BUY 21.8 5.7 11.4 10.8 1.7 8.2

Fu Yu Corp 162 0.215 0.25 16% NR 18.0 14.0 13.0 11.4 0.9 7.0 Sunningdale 276 1.470 1.64 12% NR (22.0) 16.0 8.9 7.7 0.8 4.1

F &B, Retail

Delfi 1,393 2.28 2.26 -1% HOLD 22.8 16.5 28.7 24.6 4.9 1.4

Courts Asia 229 0.45 0.51 14% BUY 4.2 3.1 8.6 8.3 0.7 3.7

Property

Bukit Sembawang 1,657 6.40 7.55 18% NR (26.0) (49.0) 24.3 47.6 1.3 5.2

GLP 12,514 2.67 3.00 12% BUY 354.9 10.4 28.1 25.4 1.0 6.3

United Engineers 1,867 2.93 2.89 -1% NR n.a. n.a. n.a. n.a. 1.0 4.8

Oil & Gas

Pacc Offshore 662 0.37 0.42 14% BUY nm nm nm nm 0.7 -

Mermaid 304 0.22 0.25 16% BUY (53.8) 21.0 27.3 22.5 0.6 - PEC 175 0.69 0.73 6% NR (56.0) 44.0 18.0 12.5 0.7 4.3

Indust rial

SIA Engineering 4,090 3.65 3.58 -2% HOLD (7.4) 3.2 26.3 25.5 2.5 3.4

EPS Growth (%) PE (x )

Page 8

Market Focus

Equity Explorer / Company Guides

Page 9

*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.

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

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

64

84

104

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204

3.7

4.2

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5.2

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

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

Source: Company, DBS Bank

Development properties

99.8%

Investment holding0.2%

3.7%

3.1% 3.3%

6.8%6.8%

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FY12 FY13 FY14 FY15 FY16

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$'m

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

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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


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Income Statement (S$m)

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%

28.0%

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43.0%

48.0%

53.0%

58.0%

2014A 2015A 2016A 2017F 2018F

Operating Margin % Net Income Margin %

Progressive payments for residential projects

Equity Explorer


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Quarterly / Interim Income Statement (S$m)

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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Revenue Revenue Growth % (QoQ)

Equity Explorer


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Cash Flow Statement (S$m)

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

0.0

20.0

40.0

60.0

80.0

100.0

120.0

2014A 2015A 2016A 2017F 2018F

Capital Expenditure (-)

S$m

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2010 2011 2012 2013 2014 2015 2016 2017

(X)

P/BV Mean -1 SD +1 SD

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

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

BUY Last Traded Price ( 7 Feb 2017): S$0.435 (STI : 3,071.64) Price Target 12-mth: S$0.51 (17% upside) (Prev S$0.50) Potential Catalyst: Earnings recovery, M&A Where we differ: Higher on better cost management and margins Analyst Alfie YEO +65 6682 3717 [email protected] Andy SIM CFA +65 6682 3718 [email protected]

What’s New • 3Q17 results in line, weak revenue offset by

higher margins

• Outlook driven by store expansion and better

gross margins

• Maintain BUY, TP S$0.51 on 10x FY17/18F earnings

Price Relative

Forecasts and Valuation FY Mar (S$ m) 2016A 2017F 2018F 2019FRevenue 770 750 783 812EBITDA 68.7 69.0 69.3 71.7Pre-tax Profit 29.4 34.0 34.7 35.8Net Profit 20.3 25.7 26.8 27.6Net Pft (Pre Ex.) 20.4 25.7 26.8 27.6Net Pft Gth (Pre-ex) (%) 17.3 26.2 4.2 3.1EPS (S cts) 3.82 4.97 5.18 5.34EPS Pre Ex. (S cts) 3.84 4.97 5.18 5.34EPS Gth Pre Ex (%) 22 30 4 3Diluted EPS (S cts) 3.79 4.95 5.16 5.32Net DPS (S cts) 1.29 1.65 1.72 1.77BV Per Share (S cts) 55.8 59.8 63.3 66.8PE (X) 11.4 8.8 8.4 8.2PE Pre Ex. (X) 11.3 8.8 8.4 8.2P/Cash Flow (X) 7.3 10.2 9.6 8.4EV/EBITDA (X) 6.6 6.5 6.5 6.2Net Div Yield (%) 3.0 3.8 4.0 4.1P/Book Value (X) 0.8 0.7 0.7 0.7Net Debt/Equity (X) 0.8 0.7 0.7 0.6ROAE (%) 6.9 8.5 8.4 8.2

Earnings Rev (%): 1 3 (1)Consensus EPS (S cts): 4.50 5.00 5.20Other Broker Recs: B: 2 S: 0 H: 0


Tracking expectations Maintain BUY on attractive valuations. We maintain BUY on Courts Asia (Courts) with TP of S$0.51. The company is on track to post core earnings growth of 30% y-o-y on the back of better cost controls, stronger gross margins and lower interest costs. Courts’ store network expansion plans in Indonesia and Malaysia are progressing well, and will benefit from the expected acceleration in GDP growth, and consumer sentiment recovery regionally in 2017. Valuation is compelling at 8x FY18F PE (near -0.5SD of its historical forward PE valuation) and 0.7x P/B. The stock also offers dividend yield of 3.8% for FY17F. Earnings recovery supported by more stores, product margins. Earnings recovery would be led by revenue growth from more new stores, effective cost controls and sustainable improvement in margins. Indonesia’s planned expansion to nine stores by end of FY17F is on track, having opened its Bogor Trade Mall store in December 2017. Malaysia is also moving towards its target of 70 stores by the end of FY17F after opening its Semenyih Store in December. Courts is increasing its bundled services offerings (currently at 6-7% of sales), a bolt on value added service for installation, setup, delivery, extended warranty for electrical, furnishing and IT products sales. This helped gross margins to expand in FY17F. The success of this service should help to support higher gross margins going forward. Valuation:

We maintain BUY as we continue to see value in the stock’s current valuations. Our target price is S$0.51, based on 10x blended FY17/18F PE, pegged to -1SD of its historical average valuation. Key Risks to Our View:

Interest rate increase and regional consumer sentiment. Courts’ credit business is sensitive to changes in interest rates. Interest rate increases would raise working capital financing costs, leading to lower credit yield spreads. As a regional retailer of consumer products, Courts is sensitive to wealth and domestic consumer sentiment changes in the markets where it operates. At A Glance

Issued Capital (m shrs) 514Mkt. Cap (S$m/US$m) 224 / 158Major Shareholders (%) Singapore Retail Group Ltd (%) 74.3Teng Lian Ngiek (%) 5.7

Free Float (%) 20.03m Avg. Daily Val (US$m) 0.03ICB Industry : Consumer Services / General Retailers

DBS Group Research . Equity 8 Feb 2017

Singapore Company Guide

Courts Asia Version 5 | Bloomberg: COURTS SP | Reuters: COUR.SI Refer to important disclosures at the end of this report

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

Relative IndexS$

Courts Asia (LHS) Relative STI (RHS)

ASIAN INSIGHTS VICKERS SECURITIES Page 2

Company Guide

Courts Asia

WHAT’S NEW

Results review 3Q17 results in line: Earnings were S$5m (+24% y-o-y) on revenue of S$187m (-8.6%), in line with our estimates. There were no surprises as revenue, margins, operating and net profit all fell within our forecasts.

Revenue declined on lower corporate sales in Singapore. Headline revenue declined 9% y-o-y largely dragged by Singapore’s performance, which fell by 12.5%. This was due to a fall in corporate sales for digital products. Same-store-sales-growth (SSSG) for Singapore was weak as well, dropping by 15%. Sales in Indonesia and Malaysia collectively remained flat. Malaysia’s SSSG was -10%. The decline in revenue from Malaysia was offset by an increase in sales in Indonesia.

Gross margins improved. Gross margin was at 33.1%, improving from 3Q16 on better sales mix. Sales mix of the lower margin electrical category and bulk sales products improved from last year contributing to higher gross margins. There was also higher service charge income this quarter and the continued emphasis on bundled services had helped to support higher margins.

Operating expenses increased. Operating margins were flat despite an improvement in gross margins as both distribution

and admin expenses increased. While distribution and marketing expenses were kept relatively flat on an absolute basis, admin expenses increased as a result of higher impairment allowances in Malaysia and Indonesia, and higher rentals in Indonesia.

Lower interest costs. Net interest expense were lower y-o-y at S$4.7m from S$5.5m in 2Q17 largely due to reduced interest expenses in Singapore.

Earnings driven by store expansion and gross margin improvement. The GDPs of Malaysia, Indonesia and Singapore are forecast by our economics desk to accelerate to 4.5%, 5.3% and 1.3% in 2017 respectively. Courts is on track to expand its store count both in Malaysia and Indonesia. This should drive revenue growth going forward. We also see sustained gross margin improvements from 33% in FY16 and 3Q17. We believe the push to increase service revenue through bundled services will lead to sustained gross margin improvement.

Maintain Buy, TP S$0.51. Our estimates remain largely unchanged. We maintain BUY on Courts with a TP of S$0.51. Our TP is based on 10x blended FY17/18F PE, pegged to -1SD of its historical average valuation.


FY Mar 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq

Revenue 205 181 187 (8.6) 3.7

Cost of Goods Sold (144) (119) (125) (12.9) 5.1

Gross Profit 60.8 61.3 61.9 1.7 1.0

Other Oper. (Exp)/Inc (48.8) (47.9) (50.6) 3.6 5.8

Operating Profit 12.0 13.4 11.3 (6.0) (15.9)

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

Associates & JV Inc 0.0 0.0 0.0 - -

Net Interest (Exp)/Inc (5.5) (4.7) (4.7) 14.7 0.5

Exceptional Gain/(Loss) 0.0 0.0 0.0 - -

Pre-tax Profit 6.53 8.72 6.61 1.2 (24.2)

Tax (2.5) (2.0) (1.6) (36.2) (21.2)

Minority Interest 0.0 0.0 0.0 - -

Net Profit 4.03 6.70 5.02 24.4 (25.1)

Net profit bef Except. 4.03 6.70 5.02 24.4 (25.1)

EBITDA 14.8 15.9 13.7 (7.0) (13.4)

Margins (%)

Gross Margins 29.7 33.9 33.1

Opg Profit Margins 5.9 7.4 6.0

Net Profit Margins 2.0 3.7 2.7

Source of all data: Company, DBS Bank


Company Guide

Courts Asia

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Expect growth to be driven by more stores… We see store count building up in FY17F to 99 stores, driving sales and earnings growth going forward. Impairments are at a two-year low and Courts has scope to increase its credit business. More efficient operations are also expected with more favourable rent negotiations in Singapore, Indonesia gaining more scale towards a breakeven level in operating profit, and the sharing of store space with third party retailers. …and regional consumer sentiment is holding up. Consumer sentiment in Indonesia has bottomed out from a reading of 97.5 in September 2015 and is holding up at 115.3 in January 2017. The reading has been robust at above 115 since October 2016. Malaysia’s consumer sentiment has also bottomed out, from 4Q15 to 69.8 in 4Q16. Singapore’s retail sales for furniture and household equipment remains weak. Nonetheless, expansion of its digital and mobile offering, launch of new handset models, increase in bundled services should help to mitigate the declining trend in furniture sales. We therefore expect a slightly stronger outlook on regional spending, backed by an acceleration of GDP growth outlook in these markets. Singapore's housing completions to support sales and earnings. With c.67% of total sales (by geography) contributed by the Singapore market and c.65% of total sales (by product mix) contributed by Furniture and Electrical Appliances, new home completion in Singapore is an important sales driver. According to URA, there will be 16,673/15,196 private residential and Executive Condominiums expected to be completed in 2017/18. There will also be approximately c.30,000 HDB flats completing in 2017 based on our estimates. These will support store sales and earnings in Singapore. Furniture yields the highest gross margins at above 40%, followed by Electrical products (at above 20%). Better cost environment. We expect a more favourable cost environment going forward in particular advertising, rents, marketing and miscellaneous expenses. The lackluster Singapore economy and retail environment has led to falling rents, while advertisers are giving customers like Courts more value. We expect a more efficient cost structure going forward given that management is focused on operational cost controls in a favourable operating cost environment. Indonesia to expand. Indonesia’s contribution is small at 2.0% of total sales, but nonetheless is a market with growth potential. Growth in Indonesia currently hinges on scaling up its business to breakeven and profitability, and ramping up the store network around Jakarta.

Sales psf SG

Sales psf MY

Store area SG '000 psf

Store area MY '000 psf

Store count


10461000

910 921 937

0.0

151.0

302.0

452.9

603.9

754.9

905.9

1056.8

2015A 2016A 2017F 2018F 2019F

334346

299

348366

0.0

74.6

149.1

223.7

298.3

372.8

2015A 2016A 2017F 2018F 2019F

443463

483 483 483

0.00

98.62

197.24

295.85

394.47

493.09

2015A 2016A 2017F 2018F 2019F

11081054

1126 1126 1126

0.0

227.5

454.9

682.4

909.9

1137.3

2015A 2016A 2017F 2018F 2019F

8790

99 99 99

0.0

20.0

40.0

60.0

80.0

100.0

2015A 2016A 2017F 2018F 2019F


Company Guide

Courts Asia

Balance Sheet:

In-house credit offered to customers results in negative working capital cash flows. Changes in working capital cash flows are typically negative since Courts extends in-house credit to its consumers. Approximately 20% of annual store sales are credit or non-cash purchases, and repayment periods can range from 6 to 72 months. Courts’ average receivable period is approximately four months. Trade receivables as a result are S$540m and 1.9x net assets as at FY16. With suppliers’ credit lasting on average three months and inventory days at two months, working capital cash flow is in deficit. Courts makes up for it by financing its working capital via bank borrowings and through securitisation of receivables. Net gearing of 0.8x. Courts has a net gearing of 0.8x as at 3Q17 vs net cash positions of most regional listed specialty retailers. Due to stocking up for trade shows, inventory had increased to S$85m in 3Q17 resulting in higher net gearing from 0.7x in 2Q17. Net debt is S$244m with bank financing amounting to S$309m. Courts' loans denominated in S$, RM and rupiah are financed through various loan structures (medium-term notes, asset securitisation programme, syndicated and term loans). Slightly more than half of its outstanding loans are on fixed rates, while the rest are on floating interest rates. Share Price Drivers:

Sustained recovery in earnings. We noted that FY16 recorded positive y-o-y earnings growth on the back of better SSSG and credit sales in Malaysia. Regional outlook for consumer confidence appears to be recovering as well. Our positive stance is also based partly on valuation and a sustained earnings recovery would underpin our positive stance with more conviction. Key Risks:

Interest rate increase. Courts’ credit business is sensitive to changes in interest rates. Increases in interest rates would increase working capital financing costs, leading to lower credit yield spread on its balance sheet. Regional consumer sentiment. Courts retails consumer products regionally. The business is therefore sensitive to wealth and domestic consumer sentiment changes in the markets where it operates. Company Background

Courts Asia is a retailer of furniture, IT products and electrical products in Singapore, Malaysia and Indonesia. Courts provides in-house credit that allows consumers to purchase products through monthly installments.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.9

1.0

1.0

1.1

1.1

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2015A 2016A 2017F 2018F 2019F

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

10.0

10.5

11.0

11.5

12.0

12.5

2015A 2016A 2017F 2018F 2019F


S$m

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2015A 2016A 2017F 2018F 2019F

Avg: 12.8x

+1sd: 17.5x

+2sd: 22.2x

-1sd: 8x

-2sd: 3.3x2.9

7.9

12.9

17.9

22.9


(x)

Avg: 0.99x

+1sd: 1.39x

+2sd: 1.8x

-1sd: 0.58x

-2sd: 0.18x0.1

0.6

1.1

1.6

2.1


(x)


Company Guide

Courts Asia

Key Assumptions

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

Sales psf SG 1,046 1,000 910 921 937 Sales psf MY 334 346 299 348 366 Store area SG '000 psf 443 463 483 483 483 Store area MY '000 psf 1,108 1,054 1,126 1,126 1,126 Store count 87.0 90.0 99.0 99.0 99.0

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

Revenues (S$m)

Singapore 505 506 488 491 499 Malaysia 248 249 239 264 272 Indonesia 6.53 15.9 23.6 28.0 41.0Total 759 770 750 783 812Operating profit (S$m)

Singapore 25.0 20.8 19.8 20.0 20.4 Malaysia 23.7 39.0 31.7 36.8 38.6 Indonesia (7.6) (8.3) 1.48 (3.6) (3.9)Total 41.0 51.5 52.9 53.2 55.1Operating profit Margins Singapore 4.9 4.1 4.1 4.1 4.1 Malaysia 9.6 15.7 13.3 13.9 14.2 Indonesia (116.5) (52.4) 6.3 (12.8) (9.5)Total 5.4 6.7 7.1 6.8 6.8


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

Revenue 759 770 750 783 812Cost of Goods Sold (510) (517) (495) (521) (540)Gross Profit 249 253 255 262 272Other Opng (Exp)/Inc (208) (202) (202) (209) (217)Operating Profit 41.0 51.5 52.9 53.2 55.1Other Non Opg (Exp)/Inc 2.75 1.18 0.0 0.0 0.0Associates & JV Inc 0.0 0.0 0.0 0.0 0.0Net Interest (Exp)/Inc (21.9) (23.2) (18.9) (18.5) (19.3)Exceptional Gain/(Loss) 0.0 (0.1) 0.0 0.0 0.0Pre-tax Profit 21.9 29.4 34.0 34.7 35.8Tax (4.6) (9.1) (8.4) (8.0) (8.2)Minority Interest 0.0 0.0 0.0 0.0 0.0Preference Dividend 0.0 0.0 0.0 0.0 0.0Net Profit 17.3 20.3 25.7 26.8 27.6Net Profit before Except. 17.3 20.4 25.7 26.8 27.6EBITDA 61.0 68.7 69.0 69.3 71.7Growth Revenue Gth (%) (8.6) 1.6 (2.6) 4.4 3.7EBITDA Gth (%) (18.9) 12.7 0.4 0.4 3.5Opg Profit Gth (%) (26.8) 25.5 2.8 0.6 3.6Net Profit Gth (Pre-ex) (%) (38.7) 17.3 26.2 4.2 3.1Margins & Ratio Gross Margins (%) 32.8 32.9 34.0 33.5 33.5Opg Profit Margin (%) 5.4 6.7 7.1 6.8 6.8Net Profit Margin (%) 2.3 2.6 3.4 3.4 3.4ROAE (%) 5.8 6.9 8.5 8.4 8.2ROA (%) 2.3 2.6 3.2 3.3 3.2ROCE (%) 5.2 5.4 6.1 6.2 6.0Div Payout Ratio (%) 40.0 33.3 33.3 33.3 33.3Net Interest Cover (x) 1.9 2.2 2.8 2.9 2.9


Gross margins ranged from 33-34% in FY17F with the exception of 1Q17 where sales mix of lower margin IT products declined, while higher margin electrical products improved.

Anticipate sustained gross margin improvement from previous years driven by value added services and service charge income.


Company Guide

Courts Asia


FY Mar 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Revenue 205 181 196 181 187Cost of Goods Sold (144) (123) (125) (119) (125)Gross Profit 60.8 58.3 70.9 61.3 61.9Other Oper. (Exp)/Inc (48.8) (48.0) (53.1) (47.9) (50.6)Operating Profit 12.0 10.3 17.7 13.4 11.3Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0Associates & JV Inc 0.0 0.0 0.0 0.0 0.0Net Interest (Exp)/Inc (5.5) (4.9) (4.9) (4.7) (4.7)Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0Pre-tax Profit 6.53 5.40 12.8 8.72 6.61Tax (2.5) (1.2) (3.4) (2.0) (1.6)Minority Interest 0.0 0.0 0.0 0.0 0.0Net Profit 4.03 4.18 9.42 6.70 5.02Net profit bef Except. 4.03 4.18 9.46 6.70 5.02EBITDA 14.8 12.9 20.5 15.9 13.7 Growth Revenue Gth (%) 10.0 (11.4) 8.3 (8.0) 3.7EBITDA Gth (%) (18.1) (12.6) 58.4 (22.5) (13.4)Opg Profit Gth (%) (21.8) (14.3) 72.8 (24.5) (15.9)Net Profit Gth (Pre-ex) (%) (33.0) 3.7 126.1 (29.2) (25.1)Margins Gross Margins (%) 29.7 32.1 36.1 33.9 33.1Opg Profit Margins (%) 5.9 5.7 9.0 7.4 6.0Net Profit Margins (%) 2.0 2.3 4.8 3.7 2.7

Balance Sheet (S$m) FY Mar 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 26.8 24.8 22.6 21.0 19.4Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0Other LT Assets 274 320 312 322 330Cash & ST Invts 114 148 88.4 130 138Inventory 83.6 77.8 85.3 89.9 93.2Debtors 260 249 267 279 289Other Current Assets 3.04 0.43 0.43 0.43 0.43Total Assets 762 819 776 842 870 ST Debt 4.01 131 20.0 20.0 20.0Creditor 122 139 138 145 151Other Current Liab 4.02 6.13 6.13 6.13 6.13LT Debt 328 240 292 333 338Other LT Liabilities 7.09 11.0 11.0 11.0 11.0Shareholder’s Equity 297 292 309 327 345Minority Interests 0.0 0.0 0.0 0.0 0.0Total Cap. & Liab. 762 819 776 842 870 Non-Cash Wkg. Capital 221 182 209 218 226Net Cash/(Debt) (217) (224) (224) (223) (219)Debtors Turn (avg days) 117.5 120.7 125.6 127.3 127.7Creditors Turn (avg days) 92.5 95.2 105.6 102.3 103.1Inventory Turn (avg days) 64.3 58.8 62.2 63.3 63.8Asset Turnover (x) 1.0 1.0 0.9 1.0 0.9Current Ratio (x) 3.5 1.7 2.7 2.9 2.9Quick Ratio (x) 2.9 1.4 2.2 2.4 2.4Net Debt/Equity (X) 0.7 0.8 0.7 0.7 0.6Net Debt/Equity ex MI (X) 0.7 0.8 0.7 0.7 0.6Capex to Debt (%) 3.3 3.0 3.6 3.3 3.4Z-Score (X) 2.1 1.8 2.1 2.0 2.1


Driven by better higher margin electrical products


Company Guide

Courts Asia


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

Pre-Tax Profit 21.9 29.4 34.0 34.7 35.8Dep. & Amort. 19.2 18.1 18.1 18.0 18.5Tax Paid (6.0) (6.4) (8.4) (8.0) (8.2)Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0Chg in Wkg.Cap. (19.8) (24.1) (21.8) (21.3) (19.3)Other Operating CF 4.37 14.4 0.0 0.0 0.0Net Operating CF 19.8 31.4 21.9 23.5 26.8Capital Exp.(net) (10.9) (11.3) (11.3) (11.8) (12.2)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 0.0 0.0 0.0 0.0Other Investing CF 0.30 1.26 0.0 0.0 0.0Net Investing CF (10.6) (10.0) (11.3) (11.8) (12.2)Div Paid (4.2) (6.9) (8.5) (8.9) (9.2)Chg in Gross Debt 23.4 48.7 (59.3) 40.6 5.00Capital Issues (8.1) (6.1) 0.0 0.0 0.0Other Financing CF (13.8) (22.6) 0.0 0.0 0.0Net Financing CF (2.8) 13.1 (67.9) 31.7 (4.2)Currency Adjustments (1.2) (3.1) 0.0 0.0 0.0Chg in Cash 5.15 31.4 (57.2) 43.5 10.5Opg CFPS (S cts) 7.18 10.5 8.47 8.66 8.92Free CFPS (S cts) 1.61 3.80 2.07 2.27 2.83


Target Price & Ratings History

Source: DBS Bank

Analyst: Alfie YEO

Andy SIM CFA

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 17 Feb 16 0.32 0.44 BUY

2: 24 Mar 16 0.32 0.44 BUY

3: 25 May 16 0.33 0.44 BUY

4: 30 May 16 0.34 0.45 BUY

5: 12 Aug 16 0.42 0.45 BUY

6: 10 Nov 16 0.45 0.50 BUY

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

1

2

3

4

5

6

0.29

0.31

0.33

0.35

0.37

0.39

0.41

0.43

0.45

0.47

0.49

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

S$


HOLD Last Traded Price ( 23 Feb 2017): S$2.35 (STI : 3,137.57)

Price Target 12-mth: S$2.26 (-4% downside) (Prev S$2.16)

Potential Catalyst: Acquisitions, stronger operational growth

Where we differ: Lower sales growth assumption, higher SG&A Analyst Andy SIM CFA +65 6682 3718 [email protected] Alfie YEO +65 6682 3717 [email protected]

What’s New 4Q16 below expectations on slower sales growth

Record gross margins negated by higher opex

Final DPS of 0.95 UScts proposed

Trimmed FY17F/18F earnings by 4%/2%; Maintain

HOLD

Price Relative

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

Revenue 406 402 442 486 EBITDA 39.5 54.5 62.5 71.9 Pre-tax Profit 7.39 39.2 50.8 59.2 Net Profit (4.7) 26.2 34.6 40.3 Net Pft (Pre Ex.) 15.3 28.2 34.6 40.3 Net Pft Gth (Pre-ex) (%) (69.4) 83.5 22.8 16.5 EPS (S cts) (1.1) 6.02 7.95 9.27 EPS Pre Ex. (S cts) 3.53 6.48 7.95 9.27 EPS Gth Pre Ex (%) (69) 84 23 17 Diluted EPS (S cts) (1.1) 6.02 7.95 9.27 Net DPS (S cts) 3.52 3.25 4.22 4.92 BV Per Share (S cts) 55.7 46.3 51.0 56.0 PE (X) nm 38.9 29.4 25.2 PE Pre Ex. (X) 66.3 36.1 29.4 25.2 P/Cash Flow (X) 23.5 17.0 24.7 23.8 EV/EBITDA (X) 24.6 18.4 15.9 13.7 Net Div Yield (%) 1.5 1.4 1.8 2.1 P/Book Value (X) 4.2 5.1 4.6 4.2 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) (1.8) 11.8 16.4 17.3 Earnings Rev (%): (4) (2) Consensus EPS (S cts): 7.9 9.0 Other Broker Recs: B: 0 S: 3 H: 1


Rationalisation continues

Maintain HOLD; TP revised to S$2.26. We maintain our HOLD

recommendation with a revised TP of S$2.26. We project the group

to continue to post relatively strong earnings growth of 23%/17%

to US$34.6m/ US$40.3m in FY17F/18F, but this is from a low base

in FY16, which in turn was up from a severe decline in 2015. The

counter is trading at 29.4x/25.2x FY17F/18F PE which suggests the

current share price may have factored in the earnings turnaround.

4Q16 results below expectations. While 4Q16 core net profit posted

a strong recovery to US$3.7m from just US$0.8m in 4Q15, this was

behind our expectations of US$7m. For FY16, we were expecting

net profit of US$30m. While gross margins were at a record high of

38.4% in 4Q16, the weaker than expected earnings came about

from slower-than-expected revenue growth in 4Q16, coupled with

higher selling and distribution expenses (+13%). This was attributed

to investments in brand building and strengthening its distribution

channels, such as hiring/ training of merchandising/ sales staff to

ride on the growing modern retail channels. We believe the slower

sales growth could be attributed to the rationalisation efforts by

management on non-performing product lines/ stock-keeping units

(SKUs) in FY16.

Trimmed forecasts by 4%/2%. We adjust our forecasts down by

4%/ 2% for FY17F/18F, as we lowered our revenue growth

assumption marginally down coupled with higher SG&A, offset

partially by higher gross margins. We project gross margins will

moderate marginally to 34% in FY17F, from 34.8% in FY16. Note

that this is higher than the Delfi’s 5-year historical average of

c.32%.

Valuation:

Our TP revised to S$2.26 as we roll our valuations to FY17F/18F

earnings, but still based on 26x PE, in line with regional peers.

Key Risks to Our View:

Earlier-than-expected earnings recovery. An earlier-than-expected

earnings recovery will give rise to upside earnings risk. At A Glance Issued Capital (m shrs) 611

Mkt. Cap (S$m/US$m) 1,436 / 1,017

Major Shareholders (%)

Berlian Enterprises Ltd 50.5

Aberdeen Asset Management 11.7

Free Float (%) 37.8

3m Avg. Daily Val (US$m) 0.12

ICB Industry : Consumer Goods / Food Producers

DBS Group Research . Equity

24 Feb 2017


Delfi Ltd Version 6 | Bloomberg: DELFI SP | Reuters: DELF.SI Refer to important disclosures at the end of this report

53

73

93

113

133

153

173

193

213

1.8

2.3

2.8

3.3

3.8

4.3


Relative IndexS$

Delfi Ltd (LHS) Relative STI (RHS)

ASIAN INSIGHTS VICKERS SECURITIES

Page 2

Company Guide

Delfi Ltd

WHAT’S NEW

Rationalisation continues

4Q16 marginally below: Delfi’s FY16 results were a tad below

expectations, despite posting a turnaround with a profit of

US$26.2m. In FY15, it had reported a headline loss of

US$4.7m due to a one-off charge relating to a dispute

settlement with Barry Callebaut.

Revenue muted, probably due to rationalization exercise of

products. FY16 revenue ended at US$402.1m (-0.9% y-o-y),

mainly due to a drop from regional markets (-8% y-o-y)

arising from the cessation of its Singapore distribution

business. In Indonesia, 4Q16 registered 4.5% y-o-y growth,

helped by a stronger IDR against USD. In local currency terms,

Indonesia market saw a 1.8% dip in revenue. We believe this

could be attributed to rationalisation and removal of

underperforming product lines/ stock-keeping units (SKUs) in

FY16.

Strong gross margins for 4Q16. Gross margins were

exceptionally strong, reaching a record 38.4% in the quarter.

Management attributed this to (i) price increase and product

right sizing effected in late 2015 and early 2016; (ii) cost

efficiencies and positive effects of forward purchase of raw

materials; (iii) higher margin premium products arising from

festive season (earlier Lunar New Year).

EBIT margins declined sequentially due to higher SG&A.

Despite higher gross margin q-o-q in 4Q16, improving further

from 3Q16’s 35.5%, EBIT margins declined to 9% from 12%.

This came about from higher selling and distribution

expenses, which increased by 38% q-o-q and 13% y-o-y to

US$25.4m. This was attributed to investments in brand

building and strengthening its distribution channels, such as

hiring/ training of merchandising/ sales staff particularly to

ride on the growing modern retail channels.

Valuations and forecasts:

Forecasts trimmed marginally by 4%/2%. We adjust our

forecasts down by 4%/ 2% for FY17F/18F, as we lowered our

revenue growth assumption marginally down coupled with

higher SG&A, offset partially higher gross margins. We

project gross margins to moderate marginally to 34% in

FY17F, from 34.8% in FY16. Note that this is higher than

Delphi’s 5-year historical average of c.32%.

Maintain HOLD, TP revised to S$2.26. Notwithstanding the

lower forecasts, our TP is raised marginally to S$2.26 (based

on 26x PE) as we roll our valuation base to an average of

FY17F/18F earnings, from FY17F. The counter is currently

trading at 29.4x/ 25x FY17F/18F PE, in line with regional

consumer peers’ average. While profit growth looks to be

strong at 23%/ 17% for FY17F/18F, this is a reversion back to

the profit level of US$49m in FY14 after a steep drop in FY15.

Quarterly / Interim Income Statement (US$m)

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

Revenue 100 86.6 106 5.6 22.0

Cost of Goods Sold (69.2) (55.8) (65.0) (6.0) 16.4

Gross Profit 30.8 30.7 40.6 31.7 32.1


Operating Profit 4.10 10.4 9.52 132.4 (8.1)


Associates & JV Inc (0.2) (0.3) (0.1) 63.1 71.6

Net Interest (Exp)/Inc (1.2) (1.0) (1.0) 16.9 (3.4)

Exceptional Gain/(Loss) 0.0 0.0 (2.0) - -

Pre-tax Profit 2.60 9.07 6.42 146.9 (29.2)

Tax (1.8) (3.1) (2.8) 53.8 (11.9)

Minority Interest 0.0 0.0 0.0 nm 0.0

Net Profit 0.80 5.93 3.65 356.8 (38.4)

Net profit bef Except. 0.84 5.93 5.65 577.1 (4.7)

EBITDA 5.93 12.2 12.8 115.1 4.4

Margins (%)






Page 3

Company Guide

Delfi Ltd


Earnings Drivers:

Indonesia macro consumption the key driver. Revenue growth is

tied to Indonesia’s consumer spending since Indonesia sales

accounted for 72% of FY16 revenue. Indonesia’s consumer

confidence readings in 2015 had trended down but recently

recovered on expectations of government spending and a

stronger Indonesian rupiah. Our 2017 Indonesia GDP growth

forecast is now at 5.3%, showing an improvement from 2016’s

5% growth. An improvement in consumer confidence would

aid top-line recovery.

Input costs contribute significantly to cost of sales. Key inputs

are cocoa, sugar, milk, palm oil and packaging, all of which

contribute over 75% to cost of sales. We estimate that cocoa,

milk and sugar each makes up 30%, 15% and 15% of total

costs respectively. Commodity inputs are largely imported into

Indonesia and are mainly paid in US dollars, while finished

products are sold mainly in Indonesia in rupiah. While

commodity prices have remained subdued, the weakening

rupiah against the US dollar has weighed on gross margins.

Rupiah movements has impact on gross margins. The

depreciation of the rupiah against the US dollar has led to

significantly higher input costs in 2015. Average gross margins

were over 30% previously but were below this level in the

middle of 2015 due to the weak rupiah. Gross margins

recovered in 2016 given the stable rupiah and management’s

cost containment initiatives. Our sensitivity analysis shows that

every 5% depreciation of the rupiah against the US dollar

would lead to a 1.1% fall in net profit.

Strong market position. Delfi has a dominant market share in

Indonesia of about 50%. Distribution channels cover both

general and modern trade extensively. Delfi's competitive

advantage is in the general trade, as it has a first-mover

advantage and considerable reach into suburban and rural

areas. Global players have already been competing in the

market but mainly in the modern channels.

Philippines positive but still relatively small. Regional markets,

mainly comprising the Philippines, contribute close to 30% of

sales, but insignificantly to EBITDA. Delfi's market share stands

at about 10% and it is still investing into the market, including

its brand portfolio and its route-to-market/distribution channels.

Improvements in operating efficiencies and profitability will

contribute to earnings growth to some extent.

Rupiah assumption

BC vol growth (%)

BC ASP growth (%)

BC gross margins


11800

13000 13300 13400 13600

0.0

1962.3

3924.6

5886.9

7849.1

9811.4

11773.7

13736.0

2014A 2015A 2016A 2017F 2018F

7

-15

-1

10 10

-16.5

-11.2

-5.8

-0.5

4.9

10.2

2014A 2015A 2016A 2017F 2018F

5

3

5 5 5

0.00

1.02

2.04

3.06

4.08

5.10

2014A 2015A 2016A 2017F 2018F

31.929.8

34.8 34 33.5

0.0

7.0

14.0

21.1

28.1

35.1

2014A 2015A 2016A 2017F 2018F


Page 4

Company Guide

Delfi Ltd

Balance Sheet:

Net cash provides buffer for inorganic opportunities. With the

sale of its Cocoa Ingredients to Barry Callebaut, Delfi is in a net

cash position, from a net debt position prior to the disposal.

This could serve as a war chest for Delfi to undertake inorganic

growth opportunities, particularly when economic conditions

deteriorate further, thus providing more options. Even with the

capital reduction of US$60m (completed in June 2016), the

group remains and will still be in a net cash position, barring

any significant investments.

Share Price Drivers:

Potential M&A opportunities. The acquisition of rivals in key

markets such as Indonesia and the Philippines will help the

company defend and gain market share, thereby enhancing its

position in the chocolate confectionery business.

Revenue growth in key market: Indonesia. A sustained top-line

growth will provide an upward push to Delfi's stock price as

investors continue to buy into Indonesia's consumption growth

story.

Key Risks:

Input costs. Commodity price increases particularly in cocoa,

sugar and crude palm oil may erode margins, if there is

insufficient lead time for the company to increase product

prices.

Slowdown in the Indonesian economy. As over 70% of

revenue originates from Indonesia, a slowdown in Indonesia's

economy will affect sales and consumption. A slower

Indonesian economy including lower subsidies, wages,

disposable incomes, etc. will give rise to earnings risks.

Currency risk. The company reports its earnings in US dollars

with a significant portion of its input costs also denominated in

US dollars. Revenues are denominated largely in rupiah. Rupiah

depreciation will erode margins if ASPs remain unchanged.

Company Background

Delfi manufactures, markets and distributes confectionery

products. The company has a broad brand portfolio that

extends across multiple product categories and different price

points. Its key markets are Indonesia, the Philippines, Singapore

and Malaysia. Its brands command approximately 50% market

share in Indonesia.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.9

1.0

1.0

1.1

1.1

1.2

1.2

1.3

1.3

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

2014A 2015A 2016A 2017F 2018F


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2014A 2015A 2016A 2017F 2018F


US$m

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2014A 2015A 2016A 2017F 2018F

Avg: 49.3x

+1sd: 72.9x

+2sd: 96.5x

-1sd: 25.6x

-2sd: 2x1.8

21.8

41.8

61.8

81.8

101.8

121.8

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

(x)

Avg: 5.45x

+1sd: 6.21x

+2sd: 6.97x

-1sd: 4.69x

-2sd: 3.93x

3.2

3.7

4.2

4.7

5.2

5.7

6.2

6.7

7.2

7.7


(x)


Page 5

Company Guide

Delfi Ltd

Key Assumptions

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

Rupiah assumption 11,800 13,000 13,300 13,400 13,600

BC vol growth (%) 7.00 (15.0) (1.0) 10.0 10.0

BC ASP growth (%) 5.00 3.00 5.00 5.00 5.00

BC gross margins 31.9 29.8 34.8 34.0 33.5

Segmental Breakdown

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

Revenues (US$m)

Indonesia 365 296 296 325 357

Regional markets 139 110 107 117 129

Total 504 406 402 442 486

EBITDA (US$m) Indonesia 81.7 39.0 54.2 62.2 71.5

Regional markets 0.21 0.44 0.53 0.59 0.64

Total 81.9 39.5 54.8 62.8 72.2

EBITDA Margins (%) Indonesia 22.4 13.2 18.4 19.2 20.0

Regional markets 0.2 0.4 0.5 0.5 0.5

Total 16.3 9.7 13.6 14.2 14.8

Income Statement (US$m)

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

Revenue 504 406 402 442 486

Cost of Goods Sold (343) (285) (262) (291) (323)

Gross Profit 161 121 140 150 163

Other Opng (Exp)/Inc (86.6) (89.2) (94.1) (95.7) (99.9)

Operating Profit 74.2 31.6 45.6 54.5 62.9

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

Associates & JV Inc 0.50 0.06 (0.3) (0.3) (0.3)

Net Interest (Exp)/Inc (3.1) (4.2) (4.1) (3.3) (3.3)

Exceptional Gain/(Loss) (1.5) (20.1) (2.0) 0.0 0.0

Pre-tax Profit 70.1 7.39 39.2 50.8 59.2

Tax (21.3) (12.1) (13.1) (16.3) (19.0)

Minority Interest (0.1) 0.01 0.0 0.0 0.0

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net Profit 48.7 (4.7) 26.2 34.6 40.3

Net Profit before Except. 50.2 15.3 28.2 34.6 40.3

EBITDA 82.4 39.5 54.5 62.5 71.9

Growth

Revenue Gth (%) (0.9) (19.5) (0.9) 9.8 10.0

EBITDA Gth (%) (11.0) (52.1) 37.9 14.7 15.0

Opg Profit Gth (%) (12.2) (57.4) 44.2 19.4 15.5

Net Profit Gth (Pre-ex) (%) (15.4) (69.4) 83.5 22.8 16.5

Margins & Ratio

Gross Margins (%) 31.9 29.8 34.8 34.0 33.5

Opg Profit Margin (%) 14.7 7.8 11.3 12.3 12.9

Net Profit Margin (%) 9.7 (1.2) 6.5 7.8 8.3

ROAE (%) 16.6 (1.8) 11.8 16.4 17.3

ROA (%) 10.4 (1.1) 7.2 9.7 10.5

ROCE (%) 14.2 (5.7) 10.1 13.3 14.3

Div Payout Ratio (%) 72.4 N/A 54.0 53.0 53.1

Net Interest Cover (x) 23.8 7.5 11.2 16.3 18.9


Assumed a relatively stable IDR


Page 6

Company Guide

Delfi Ltd


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

Revenue 100 104 106 86.6 106

Cost of Goods Sold (69.2) (70.5) (71.0) (55.8) (65.0)

Gross Profit 30.8 33.1 35.4 30.7 40.6

Other Oper. (Exp)/Inc (26.7) (20.3) (22.4) (20.4) (31.1)



Associates & JV Inc (0.2) 0.22 (0.1) (0.3) (0.1)


Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 (2.0)

Pre-tax Profit 2.60 11.9 11.8 9.07 6.42

Tax (1.8) (3.5) (3.7) (3.1) (2.8)

Minority Interest 0.0 0.0 0.0 0.0 0.0

Net Profit 0.80 8.45 8.13 5.93 3.65

Net profit bef Except. 0.84 8.45 8.13 5.93 5.65

EBITDA 5.93 14.8 14.7 12.2 12.8

Growth

Revenue Gth (%) 18.2 3.6 2.7 (18.6) 22.0

EBITDA Gth (%) 22.5 150.0 (0.8) (17.0) 4.4

Opg Profit Gth (%) 37.7 211.7 1.2 (19.8) (8.1)

Net Profit Gth (Pre-ex) (%) nm 911.4 (3.8) (27.0) (4.7)

Margins

Gross Margins (%) 30.8 31.9 33.3 35.5 38.4

Opg Profit Margins (%) 4.1 12.3 12.2 12.0 9.0

Net Profit Margins (%) 0.8 8.2 7.6 6.9 3.5

Balance Sheet (US$m)

FY Dec 2014A 2015A 2016A 2017F 2018F Net Fixed Assets 111 117 127 135 143

Invts in Associates & JVs 3.15 2.95 2.77 2.49 2.20

Other LT Assets 8.38 9.36 10.1 10.1 10.1

Cash & ST Invts 172 120 67.7 77.9 85.2

Inventory 72.8 59.6 54.7 63.1 69.4

Debtors 82.1 56.3 61.8 63.1 69.4

Other Current Assets 21.1 23.3 18.5 18.5 18.5

Total Assets 470 388 342 371 398

ST Debt

64.8 59.5 44.2 44.2 44.2

Creditor 31.9 25.9 34.7 27.6 30.4

Other Current Liab 53.3 30.7 39.3 54.2 56.9

LT Debt 9.20 15.2 9.58 9.58 9.58

Other LT Liabilities 13.9 14.1 13.3 13.3 13.3

Shareholder’s Equity 297 242 201 222 244

Minority Interests 0.14 0.12 0.11 0.11 0.11

Total Cap. & Liab. 470 388 342 371 398

Non-Cash Wkg. Capital 90.7 82.5 61.0 62.9 70.1

Net Cash/(Debt) 97.9 44.9 14.0 24.1 31.4

Debtors Turn (avg days) 57.5 62.2 53.6 51.6 49.8

Creditors Turn (avg days) 40.3 38.1 43.7 40.2 33.7

Inventory Turn (avg days) 75.2 87.1 82.4 75.9 77.0

Asset Turnover (x) 1.1 0.9 1.1 1.2 1.3

Current Ratio (x) 2.3 2.2 1.7 1.8 1.8

Quick Ratio (x) 1.7 1.5 1.1 1.1 1.2

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

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

Capex to Debt (%) 38.7 29.4 30.4 31.6 31.6

Z-Score (X) 5.9 6.2 6.3 6.3 6.3



Page 7

Company Guide

Delfi Ltd

Cash Flow Statement (US$m)

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

Pre-Tax Profit 70.1 7.39 39.2 50.8 59.2

Dep. & Amort. 7.72 7.85 9.18 8.32 9.29

Tax Paid (24.2) (19.7) (13.5) (1.4) (16.3)

Assoc. & JV Inc/(loss) (0.5) (0.1) 0.27 0.28 0.29

Chg in Wkg.Cap. (33.9) 24.8 18.3 (16.8) (9.9)

Other Operating CF 3.09 23.0 6.12 0.0 0.0

Net Operating CF 22.2 43.3 59.7 41.2 42.7

Capital Exp.(net) (28.7) (22.0) (16.4) (17.0) (17.0)

Other Invts.(net) 0.0 (0.3) (0.7) 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 0.0 0.0 0.0

Other Investing CF (0.3) (38.8) 0.0 0.0 0.0

Net Investing CF (29.0) (61.1) (17.1) (17.0) (17.0)

Div Paid (38.4) (34.2) (8.3) (14.1) (18.3)

Chg in Gross Debt 19.7 5.91 (24.7) 0.0 0.0

Capital Issues 0.0 0.0 (60.0) 0.0 0.0

Other Financing CF 0.68 (8.0) (2.2) 0.0 0.0

Net Financing CF (18.1) (36.3) (95.2) (14.1) (18.3)

Currency Adjustments 0.05 1.70 0.81 0.0 0.0

Chg in Cash (24.8) (52.4) (51.8) 10.1 7.31

Opg CFPS (S cts) 12.9 4.24 9.51 13.4 12.1

Free CFPS (S cts) (1.5) 4.90 9.96 5.58 5.90



Source: DBS Bank

Analyst: Andy SIM CFA

Alfie YEO

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 24 Feb 16 2.42 2.21 HOLD

2: 13 May 16 2.50 2.56 HOLD

3: 11 Aug 16 2.61 2.42 HOLD

4: 11 Nov 16 2.18 2.16 HOLD


1

23

4

1.97

2.17

2.37

2.57

2.77

2.97


S$


ed: TH / sa: JC, PY

NOT RATED S$0.205 STI : 3,136.48 Closing 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 2018FRevenue 222 199 210 219EBITDA 30.4 22.8 24.7 26.3Pre-tax Profit 18.4 14.9 17.6 20.1Net Profit 14.1 10.5 12.5 14.2Net Pft (Pre Ex.) 14.1 10.5 12.5 14.2EPS (S cts) 1.87 1.40 1.66 1.89EPS Pre Ex. (S cts) 1.87 1.40 1.66 1.89EPS Gth (%) 38 (25) 18 14EPS Gth Pre Ex (%) 38 (25) 18 14Diluted EPS (S cts) 1.87 1.40 1.66 1.89Net DPS (S cts) 0.50 1.50 1.50 1.50BV Per Share (S cts) 23.6 23.0 23.2 23.6PE (X) 11.0 14.6 12.4 10.9PE Pre Ex. (X) 11.0 14.6 12.4 10.9P/Cash Flow (X) 4.5 7.4 6.1 6.5EV/EBITDA (X) 2.2 2.9 2.4 2.2Net Div Yield (%) 2.4 7.3 7.3 7.3P/Book Value (X) 0.9 0.9 0.9 0.9Net Debt/Equity (X) CASH CASH CASH CASHROAE (%) 8.0 6.0 7.1 8.1Consensus EPS (S cts): 2.0 2.0Other Broker Recs: B: 1 S: 0 H: 0ICB 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.

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

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


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

83

103

123

143

163

183

203

0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2


Relative IndexS$

Fu Yu Corp (LHS) Relative STI (RHS)

SMC Research

Equity Explorer

Fu Yu Corp

Page 2

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)

Equity Explorer

Fu Yu Corp

Page 3

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 ExecutivesChing Heng YangVice 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 KitExecutive Director, Co-Founder

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

Tam WaiExecutive 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 LeeChief 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.


Equity Explorer

Fu Yu Corp

Page 4

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

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


Margins Trend

Equity Explorer

Fu Yu Corp

Page 5


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

Revenue 55.6 50.3 52.0 50.0 48.1 48.5Cost 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 8.42Other 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 6.90Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0Associates & JV Inc 0.21 (0.2) 0.05 0.05 0.03 0.0Net Interest (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0Pre-tax Profit 5.97 4.35 1.60 3.57 2.88 6.86Tax (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 5.59Net profit bef Except. 4.73 3.87 0.99 2.13 1.84 5.59EBITDA 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) 0.9EBITDA Gth (%) 43.8 (19.2) (42.3) 39.3 (15.1) 76.6Opg Profit Gth (%) 103.5 (21.5) (65.9) 128.5 (19.1) 142.1Net Profit Gth (%) 231.5 (18.3) (74.4) 115.0 (13.5) 203.9Margins Gross Margins (%) 15.7 19.7 16.9 16.4 14.6 17.3Opg Profit Margins (%) 10.4 9.0 3.0 7.1 5.9 14.2Net 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 44.5Invts in Associates & JVs 4.06 3.11 2.48 2.16 2.16 2.16Other LT Assets 12.7 11.4 11.0 10.3 10.3 10.3Cash & ST Invts 77.1 89.4 107 108 115 121Inventory 18.6 17.1 15.0 16.0 16.4 17.0Debtors 71.2 68.6 54.3 57.0 59.0 61.3Other Current Assets 7.14 11.1 7.11 0.08 0.08 0.08Total Assets 257 262 249 242 249 256 ST Debt 3.24 1.37 0.0 0.0 0.0 0.0Creditor 68.2 62.4 47.3 45.4 48.9 50.9Other Current Liab 1.14 2.00 2.81 2.38 3.60 4.10LT Debt 0.09 0.01 0.0 0.0 0.0 0.0Other LT Liabilities 1.68 1.16 1.02 0.61 0.61 0.61Shareholder’s Equity 163 175 178 174 175 178Minority Interests 19.4 20.2 19.7 19.6 21.2 22.9Total Cap. & Liab. 257 262 249 242 249 256 Non-Cash Wkg. Capital 27.6 32.4 26.3 25.3 22.9 23.4Net Cash/(Debt) 73.7 88.0 107 108 115 121Debtors Turn (avg days) 94.4 100.3 100.8 102.3 98.2 100.3Creditors Turn (avg days) 98.7 116.0 115.6 108.2 106.4 106.1Inventory Turn (avg days) 31.8 31.7 33.9 36.2 34.7 35.5Asset Turnover (x) 1.1 1.0 0.9 0.8 0.8 0.9Current Ratio (x) 2.4 2.8 3.7 3.8 3.6 3.6Quick Ratio (x) 2.0 2.4 3.2 3.5 3.3 3.3Net Debt/Equity (X) CASH CASH CASH CASH CASH CASHNet Debt/Equity ex MI (X) CASH CASH CASH CASH CASH CASHCapex to Debt (%) 201.4 919.8 N/A N/A N/A N/A


Revenue Trend


Net cash of 14 Scts per share

Equity Explorer

Fu Yu Corp

Page 6


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

Pre-Tax Profit 9.75 13.4 18.4 14.9 17.6 20.1Dep. & Amort. 13.5 17.9 13.8 9.79 8.95 8.24Tax 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 0.0Chg 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 0.0Net Operating CF 20.3 23.4 34.2 21.0 25.4 23.6Capital 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 0.0Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 0.0Div from Assoc & JV 0.48 0.50 0.67 0.37 0.0 0.0Other Investing CF 11.8 1.35 1.81 1.88 0.0 0.0Net 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 0.0Capital Issues 0.09 1.81 0.0 0.0 0.0 0.0Other Financing CF 0.02 0.25 (7.8) (3.8) 0.0 0.0Net 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 0.0Chg in Cash 24.1 10.1 19.6 2.69 7.11 5.34Opg CFPS (S cts) 0.74 3.91 3.71 2.70 3.21 3.28Free 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.


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

Peer Comparison (Consensus Earnings)

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

(Debt)*

% Majority Owned

Ex CashFY17F 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

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

BUY Last Traded Price ( 9 Feb 2017): S$2.78 (STI : 3,079.96) Price Target 12-mth: S$3.00 (8% upside) (Prev S$2.47) Potential Catalyst: Better-than-expected results Where we differ: More positive than consensus in the medium term Analyst Rachel TAN +65 6682 3713 [email protected] Derek TAN +65 6682 3716 [email protected]

What’s New • 9M17 core net profit +25% y-o-y, above consensus

• Met 91% of FY17F development completion target

• On-track development starts at 71% of FY17F

target

• Maintain BUY; TP of S$3.00 (1.2x P/NAV)

Price Relative

Forecasts and Valuation FY Mar (US$ m) 2016A 2017F 2018F 2019FRevenue 777 851 946 1,029EBITDA 735 615 688 746Pre-tax Profit 1,343 1,049 543 597Net Profit 690 645 314 346Net Pft (Pre Ex.) (30.0) 68.9 314 346Net Pft Gth (Pre-ex) (%) nm nm 354.9 10.4EPS (S cts) 20.7 19.5 9.50 10.5EPS Pre Ex. (S cts) (0.9) 2.09 9.50 10.5EPS Gth Pre Ex (%) nm nm 355 10Diluted EPS (S cts) 20.7 19.5 9.50 10.5Net DPS (S cts) 6.22 16.8 8.19 9.04BV Per Share (S cts) 249 266 260 263PE (X) 13.5 14.3 29.3 26.6PE Pre Ex. (X) nm 133.5 29.3 26.6P/Cash Flow (X) 22.2 21.0 29.7 17.4EV/EBITDA (X) 24.4 29.5 27.5 26.0Net Div Yield (%) 2.2 6.0 2.9 3.2P/Book Value (X) 1.1 1.0 1.1 1.1Net Debt/Equity (X) 0.3 0.3 0.3 0.4ROAE (%) 8.4 7.6 3.6 4.0

Earnings Rev (%): 140 1 2Consensus EPS (S cts): 8.0 8.8 10.3Other Broker Recs: B: 5 S: 1 H: 7


’Bids’ on the table Maintain BUY on higher TP of S$3.00. We maintain our BUY call for GLP with a revised target price of S$3.00 (vs S$2.47 previously). Our new TP is pegged to a narrower 15% discount to RNAV. Given ongoing corporate activity involving possible various bidders for the company, we believe that near term share price will continue to see support. Strong 9M17 core net profit growth; development completions ahead of target. Core 9M17 net profit (excluding revaluation gains and one-off items) grew 25% y-o-y to S$215m, above the street’s FY17 estimate. 3Q17 fair valuation gains of +34% were mainly from China, following from an increase in development completions and cap rate compressions. Development completions were ahead of the FY17F target (91%) while development starts were 71% of the FY17F target. Pegging to historical take-over premiums. In view of recent discussions on a potential take-over price for GLP, assuming a take-over happens, we peg to CMA’s take-over at a P/BV multiple of 1.23x (table on page 3 shows the historical transactions) – this means a fair value price could be closer to S$3/share. At our target price, this implies a c.39% 6-month VWAP to-date for the company. Valuation:

We maintain our BUY call with a higher target price to S$3.00 for a narrower 15% discount to RNAV. This implies 1.2x P/NAV in view of a potential corporate development on the horizon. Key Risks to Our View:

Key risk to our view will bids that result in no takeover of the company which means that price could drop back to S$2.50-2.60, close to 1.0x P/NAV. At A Glance

Issued Capital (m shrs) 4,687Mkt. Cap (S$m/US$m) 13,030 / 9,199Major Shareholders (%) GIC Pte Ltd 36.9Hillhouse Capital 8.2NB Holdings 6.0

Free Float (%) 43.83m Avg. Daily Val (US$m) 32.3ICB Industry : Real Estate / Real Estate



Global Logistic Properties Version 8 | Bloomberg: GLP SP | Reuters: GLPL.SI Refer to important disclosures at the end of this report

70

90

110

130

150

170

190

210

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4


Relative IndexS$

Global Logistic Properties (LHS) Relative STI (RHS)


Company Guide

Global Logistic Properties

WHAT’S NEW

‘Bids’ on the table

Strong 9M17 core net profit growth; development completions ahead of target.

• GLP’s 9M17 net profit fell 3% y-o-y to US$547m, mainly due to the higher FX losses of US$67m arising primarily from GLP China’s USD intercompany loans which are mitigated by 9% y-o-y increase in fair value gains. GLP reported a strong core 9M17 net profit (excluding revaluation gains and one-off items) of S$215m (+ 25% y-o-y), above the street’s FY17 estimate.

• 3Q17 core net profit grew 11% y-o-y to S$78m, mainly due to higher revenue of 12.9% attributable to the higher development completions in China that were offset by higher net finance cost of 96% as explained above.

• Higher revaluation gains were mainly from China, following an increase in development completions and cap rate compressions.

• In 9M17, GLP recorded a development profit of US$181m (3Q17: US$53m; 2Q17: US$63m; 1Q17: US$65m) at 29% margin (vs 27% in FY16), achieving 91% (ahead) of its full-year target of US$200m.

• GLP achieved 71% of its development starts FY17 target of US$2.1bn, mainly from China which kicked off US$294m of new developments while Japan and Brazil was flat q-o-q at 24% and 56%.

• AUM remained flat q-o-q at US$38m in 3Q17. Similarly, fund fees were relatively flat at US$45m vs US$47m in 2Q17 and US$42m in 1Q17.

Operational highlights

• The group’s lease ratio was stable at 92% (2Q17: 92%; 4Q16: 92%), which was reflected in all four countries’ stable lease ratio.

• The group’s 9M17 same-property net operating income grew 6.9% y-o-y, positive across all markets including Brazil.

• Effective rent upon renewal showed strong growth positive in all markets, ranging from 2.5%-12.3% (on cash basis), except Brazil which saw a 7.7% drop in rental.

• We note that GLP has entered into a financing business, providing financing to some of its tenants in China to acquire cold chain and automation equipment at lower interest rates. This is part of the integrated solution service provided for its tenants. However, this still remains small at the moment.

Outlook: Management expects cap rate compression to stabilize in China while there could be more in Brazil.

• Management continues to see encouraging demand from the China and Japan markets. US market continues to show strong rental reversions.

Maintain BUY; TP S$3.00

• We maintain our BUY call or GLP with a revised target price of S$3.00 (vs S$2.47 previously). Our new TP is pegged to a narrower 15% discount to RNAV. Given ongoing corporate activity involving possible various bidders for the company, we believe that near term share price will continue to see support.

• In view of recent discussions on a potential take-over price for GLP, assuming a take-over happens, we peg to CMA’s take-over at a P/BV multiple of 1.23x (table below shows the historical transactions). Thus, we believe that a fair value price could be closer to S$3/share.

• At our target price, this implies a c.39% 6-month VWAP to-date for the company.


Company Guide


Historical Transactions involving listed property developers (2010-now)

Announcement Date

Target Company

Acquirer Final Offer Price

Deal Value Premium/ Disc

P/RNAV P/NAV

(S$) S$'m 1-mth VWAP (x) (x)Aug-2016 Sim Lian Coronation 3G 1.08 216 16.8% n.a. 0.9x

Jan-2015 Keppel Land Keppel Corp 4.38 2,749 25.0% 0.66x 0.88x

Apr-2014 Hotel Properties Limited Wheelock 4.05 200 33.8% 0.79x 1.32x

Apr-2014 CapitaMalls Asia CapitaLand Limited 2.35 3,025 35.8% 0.89x 1.26x

Feb-2014 Singapore Land Limited United Industrial Corporation Limited

9.40 650 16.9% 0.67x 0.72x

Dec-2012 SC Global Developments Limited

MYK Holdings Pte Ltd 1.80 318 57.2% 0.8x 1.15x

May-2012 Wing Tai Ascend Capital Limited 1.39 1,104 14.3% 0.62x 0.55x

May-2011 Allgreen Limited Brookevale Investment Pte Ltd

1.60 1,060 40.6% 0.81x 0.99x

Sep-2010 Soilbuild Limited Dolphin Acquisitions 0.80 113 15.6% 1.07x 1.26x

Aug-2010 MCL Hong Kong Land Holdings Limited

2.45 189 27.3% 0.75x 0.96x

Min 14.3% 0.62x 0.62x

Mean 28.3% 0.78x 1.0x

Median 26.1% 0.79x 1.0x

Max 57.2% 1.07x 1.32x

Source: DBS Bank


Company Guide




Revenue 199 214 232 16.9 8.8

Cost of Goods Sold (39.2) (37.5) (39.3) 0.3 4.9

Gross Profit 160 176 193 21.0 9.6


Operating Profit 102 120 133 29.4 10.5

Other Non Opg (Exp)/Inc 55.8 3.03 (0.1) nm nm

Associates & JV Inc 48.5 70.7 48.1 (0.8) (32.0)


Exceptional Gain/(Loss) 202 117 251 24.5 114.3

Pre-tax Profit 364 281 344 (5.4) 22.2

Tax (94.6) (60.6) (88.2) (6.7) 45.6

Minority Interest (84.9) (47.8) (85.4) (0.6) 78.7

Net Profit 184 173 170 (7.5) (1.6)

Net profit bef Except. (17.4) 55.9 (80.7) (362.9) nm

EBITDA 105 120 133 25.9 10.5

Margins (%)






Company Guide



Earnings Drivers:

Riding on the growing demand from e-commerce players for logistics space. Riding on the tailwinds of China’s rising consumerism and thriving e-commerce sector, Global Logistic Properties (GLP) remains in the front seat to take advantage of China’s rapidly changing retail landscape. With an extensive portfolio of warehouses (11.8m sqm of space) in 35 cities in China, the group is one of the leading providers of modern logistics solutions to end-users. GLP’s network of warehouses enables customers to expand; this has been positively received by current users of its space. Its strong network of warehouses enables management to enjoy recurring demand from existing clients. Close to 90% of GLP’s portfolio is occupied by businesses geared towards domestic consumption. Strong operational momentum across markets. As expected, FY16 recorded a strong year largely led by positive effective rent growth on renewal and same-property net operating income. The group’s lease ratio remains relatively stable at 92% with WALE of 2.4-5.5 years. While management has turned cautious on China and Japan, hence reducing development targets, the US market appears to have strong growth potential. Fund management platform delivers superior returns at lower risk. GLP’s fund management platform delivers superior returns at lower risk. Management fees increased 80% to US$130m in FY16 and this segment is expected to potentially earn US$400m in the medium term. As of end-March 2016, total AUM had risen to US$35bn, with another US$11bn of uncalled capital to be deployed. We expect the fund management business to continue growing through new funds due to its scalable nature, boosting returns and ROEs for the group. Going forward, the group is looking to launch a new China fund with equity capital of c.US$3bn to increase its reach in China. Development starts and completion pipeline. In FY17, GLP has set lower targets for development starts and completions of US$2.1bn (vs US$2.8bn in FY16) and US$1.5bn (vs US$2.1bn in FY16) respectively as management turns cautious. Nevertheless, value creation margin at 27% remains above historical average of 25%. Deepening presence in US. We are positive on GLP’s announcement of a US$1.1bn (at valuation) logistics portfolio in the US from Hillwood, a property developer. The acquisition will be in various tranches – initial closing of US$700m is fully leased and income producing by end of December 2016 and the remaining US$400m, when the target properties under development complete and achieve pre-agreed lease ratios. GLP intends to pare down its effective stake in this portfolio to 10% upon syndication to third-party capital partners. Assets are located in key markets of Dallas, Chicago and Atlanta, which according to Colliers, have one of the brightest outlooks for absorption and rental growth in the US.

Top line and EBIT (US$’m)

Revenue Breakdown by segment (US$’m)

EBIT Margins (%)

RNAV


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

FY15A FY16A FY17F FY18F FY19F

US$

'mn

Revenue Operating profit (ex reval)

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0


US$

'mn

China Japan US & Brazil

45.0

47.0

49.0

51.0

53.0

55.0

57.0

59.0


EBIT

Mar

gins

(%)

V aluat ion of GLP US$'mJapan Logistics Business 3,511

China Logistics Business 6,519

Other Assets 5,044

Fee income business (15x P/E) 1,054

Gross Asset Value 16,128 Less: Estimated net debt (3,300)

Less: Perpetuals (594) RNAV 12,234

RNAV/ share (US$) 2.61

RNAV/ share (S$) 3.52

Discount 15%Target Price 3.00

NAV (3QFY18F) 1.78

NAV (FY18F) S$ 2.49

Premium / (discount) to NAV 21%


Company Guide


Balance Sheet:

Low leverage ratio. Total debt-to-asset ratio is expected to remain fairly stable at c.0.40x, which is well within management's comfortable level. As such, this provides GLP with additional debt headroom for future debt-funded acquisitions. Currently, the group has 70% of its debt on fixed rate with a weighted average cost of debt of 3.0% and a long debt maturity of 5.2 years. Share Price Drivers:

Robust outlook for e-commerce in China. GLP has a large (11.8m sqm in completed properties) portfolio in China that is positioned strategically to benefit from growth in e-commerce through its modern logistics space, and it has another US$5.3bn slated for completion in FY17-19. We expect the group’s assets to hit higher occupancies and pricier leases, if e-commerce increases in scale (8-year CAGR was 80%) on the back of strong consumer demand (11-year CAGR was 63%, expected to double over the next three years). Incremental earnings contribution from China would be a share price catalyst. Realisation of value through its fund business. GLP continues to expand through its fund platform. Looking ahead, the potential conversion of its development funds in China and Japan into income funds could unlock performance fees, offering upside to the earnings that are currently not in our estimates. Additionally, GLP continues to look for opportunities in the US and potentially Europe to expand its fund management business. Key Risks:

Slowdown in Chinese economy If a slowdown in the Chinese economy leads to a reduced appetite for logistics warehouse space, there could be slower-than-projected revenue growth. Foreign currency risks Exposure to various currencies (CNY, JPY, BRL) could lead to volatility in the group's USD earnings. Company Background

Global Logistics Properties (GLP) is a leading provider of modern logistics facilities in China, Japan, Brazil and the US. The group develops, owns and manages c.41m sqm GFA of logistics properties, catering to growing domestic consumption.


Capital Expenditure

ROE (%)

PB Band (x)


0.0

0.0

0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.1

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

2015A 2016A 2017F 2018F 2019F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

2015A 2016A 2017F 2018F 2019F


US$m

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2015A 2016A 2017F 2018F 2019F

Avg: 1.09x

+1sd: 1.33x

+2sd: 1.57x

-1sd: 0.86x

-2sd: 0.62x0.5

0.7

0.9

1.1

1.3

1.5

1.7


(x)


Company Guide



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

Revenue 708 777 851 946 1,029Cost of Goods Sold (139) (157) (137) (173) (204)Gross Profit 570 620 714 773 825Other Opng (Exp)/Inc (165) (229) (241) (245) (250)Operating Profit 405 392 473 527 575Other Non Opg (Exp)/Inc 0.0 91.1 23.6 25.4 26.6Associates & JV Inc 71.4 241 107 124 133Net Interest (Exp)/Inc (47.9) (101) (130) (134) (137)Exceptional Gain/(Loss) 434 720 576 0.0 0.0Pre-tax Profit 862 1,343 1,049 543 597Tax (194) (310) (250) (56.8) (62.6)Minority Interest (182) (314) (125) (144) (160)Preference Dividend (32.0) (28.7) (28.7) (28.7) (28.7)Net Profit 454 690 645 314 346Net Profit before Except. 201 (30.0) 68.9 314 346EBITDA 488 735 615 688 746Growth Revenue Gth (%) 13.3 9.8 9.4 11.2 8.8EBITDA Gth (%) (4.4) 50.7 (16.3) 11.9 8.4Opg Profit Gth (%) 6.0 (3.2) 20.8 11.5 9.0Net Profit Gth (Pre-ex) (%) (18.6) nm nm 354.9 10.4Margins & Ratio Gross Margins (%) 80.4 79.8 83.9 81.7 80.2Opg Profit Margin (%) 57.2 50.4 55.6 55.8 55.8Net Profit Margin (%) 64.2 88.8 75.8 33.1 33.6ROAE (%) 5.6 8.4 7.6 3.6 4.0ROA (%) 2.9 3.4 2.7 1.3 1.4ROCE (%) 2.1 1.7 1.8 2.4 2.5Div Payout Ratio (%) 41.7 30.1 86.2 86.2 86.2Net Interest Cover (x) 8.4 3.9 3.6 3.9 4.2


Top line driven mainly by development completions in China, supported by stable occupancy rates in Japan. In addition, top line is driven from increased fund management fees in US and Brazil


Company Guide



FY Mar 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Revenue 199 199 207 214 232Cost of Goods Sold (39.2) (41.3) (38.2) (37.5) (39.3)Gross Profit 160 158 168 176 193Other Oper. (Exp)/Inc (57.3) (78.3) (54.3) (56.2) (60.6)Operating Profit 102 79.6 114 120 133Other Non Opg (Exp)/Inc 55.8 (0.4) 7.86 3.03 (0.1)Associates & JV Inc 48.5 38.9 57.3 70.7 48.1Net Interest (Exp)/Inc (44.7) (39.6) (70.0) (29.5) (87.7)Exceptional Gain/(Loss) 202 214 208 117 251Pre-tax Profit 364 292 317 281 344Tax (94.6) (82.7) (67.0) (60.6) (88.2)Minority Interest (84.9) (78.1) (47.2) (47.8) (85.4)Net Profit 184 131 203 173 170Net profit bef Except. (17.4) (82.2) (5.0) 55.9 (80.7)EBITDA 105 82.6 114 120 133 Growth Revenue Gth (%) 5.1 0.1 3.7 3.4 8.8EBITDA Gth (%) 15.2 (21.6) 38.2 5.2 10.5Opg Profit Gth (%) 15.9 (22.3) 43.4 5.2 10.5Net Profit Gth (Pre-ex) (%) nm (371.6) 93.9 nm nmMargins Gross Margins (%) 80.3 79.3 81.5 82.4 83.1Opg Profit Margins (%) 51.5 40.0 55.2 56.2 57.0Net Profit Margins (%) 92.6 65.9 98.2 81.0 73.3

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

Net Fixed Assets 52.2 52.9 52.9 52.9 52.9Invts in Associates & JVs 1,544 1,954 2,285 2,634 2,992Other LT Assets 12,479 14,656 14,856 15,053 15,368Cash & ST Invts 1,446 1,025 1,026 556 470Inventory 0.0 0.0 0.0 0.0 0.0Debtors 475 548 709 788 858Other Current Assets 1,467 4,895 4,895 4,895 4,895Total Assets 17,462 23,129 23,824 23,979 24,636 ST Debt 371 1,021 1,021 1,021 1,021Creditor 811 1,026 724 933 1,111Other Current Liab 21.9 2,965 3,162 2,968 2,974LT Debt 2,476 3,750 3,950 4,150 4,350Other LT Liabilities 1,019 1,208 1,208 1,208 1,208Shareholder’s Equity 8,780 8,888 9,363 9,158 9,272Minority Interests 3,983 4,272 4,398 4,541 4,701Total Cap. & Liab. 17,462 23,129 23,824 23,979 24,636 Non-Cash Wkg. Capital 1,109 1,451 1,717 1,782 1,667Net Cash/(Debt) (1,402) (3,746) (3,944) (4,615) (4,900)Debtors Turn (avg days) 227.0 240.1 269.6 288.8 291.9Creditors Turn (avg days) 2,092.7 2,307.7 2,547.5 1,872.9 1,939.8Inventory Turn (avg days) N/A N/A N/A N/A N/AAsset Turnover (x) 0.0 0.0 0.0 0.0 0.0Current Ratio (x) 2.8 1.3 1.4 1.3 1.2Quick Ratio (x) 1.6 0.3 0.4 0.3 0.3Net Debt/Equity (X) 0.1 0.3 0.3 0.3 0.4Net Debt/Equity ex MI (X) 0.2 0.4 0.4 0.5 0.5Capex to Debt (%) 53.5 0.2 4.1 3.9 5.9Z-Score (X) 0.0 0.8 0.8 0.8 0.7


Gearing (D/E) to remain conservative at 0.4x


Company Guide



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

Pre-Tax Profit 862 1,343 1,049 543 597Dep. & Amort. 11.6 11.8 11.8 11.8 11.8Tax Paid (28.5) (31.5) (53.5) (250) (56.8)Assoc. & JV Inc/(loss) (71.4) (241) (107) (124) (133)Chg in Wkg.Cap. 45.5 27.3 (463) 129 109Other Operating CF (375) (691) 0.0 0.0 0.0Net Operating CF 444 418 438 310 528Capital Exp.(net) (1,523) (8.0) (204) (200) (318)Other Invts.(net) (1,467) 212 0.0 0.0 0.0Invts in Assoc. & JV (422) (472) (225) (225) (225)Div from Assoc & JV 12.9 2.77 0.0 0.0 0.0Other Investing CF (10.5) (4,672) 0.0 0.0 0.0Net Investing CF (3,409) (4,937) (429) (425) (543)Div Paid (174) (200) (208) (556) (270)Chg in Gross Debt 687 1,964 200 200 200Capital Issues 159 0.0 0.0 0.0 0.0Other Financing CF 2,246 2,525 0.0 0.0 0.0Net Financing CF 2,918 4,289 (7.6) (356) (70.1)Currency Adjustments 0.0 0.0 0.0 0.0 0.0Chg in Cash (47.0) (230) 1.74 (471) (85.2)Opg CFPS (S cts) 11.7 11.7 27.3 5.48 12.7Free CFPS (S cts) (31.7) 12.3 7.10 3.33 6.36



Source: DBS Bank

Analyst: Rachel TAN

Derek TAN

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 17 Feb 16 1.65 2.47 BUY

2: 20 May 16 1.83 2.47 BUY

3: 12 Aug 16 1.93 2.47 BUY

4: 14 Sep 16 1.83 2.47 BUY

5: 09 Nov 16 2.04 2.47 BUY


1

23

4 5

1.51

1.71

1.91

2.11

2.31

2.51

2.71

2.91


S$


BUY Last 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


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. Share Price Drivers:

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


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


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


1

2

3

4

5

67

89

1011

0.08

0.10

0.12

0.14

0.16

0.18

0.20

0.22

0.24

0.26

Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17

S$

Healthy operating cash flows inspire confidence

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

BUY

Last 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



Last 14 vessels in orderbook to be delivered


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 2018FRevenue 500 575 381 433EBITDA 25.3 37.9 21.9 31.7Pre-tax Profit (7.2) 28.1 12.3 17.7Net Profit (5.3) 22.4 9.80 14.1Net Pft (Pre Ex.) 11.3 15.6 3.73 14.1EPS (S cts) (2.1) 8.77 3.84 5.54EPS Pre Ex. (S cts) 4.43 6.10 1.46 5.54EPS Gth (%) nm nm (56) 44EPS Gth Pre Ex (%) (7) 38 (76) 280Diluted EPS (S cts) (2.1) 8.77 3.84 5.54Net DPS (S cts) 1.00 3.00 2.00 2.00BV Per Share (S cts) 80.4 86.0 84.9 91.2PE (X) nm 7.1 16.1 11.2PE Pre Ex. (X) 14.0 10.2 42.5 11.2P/Cash Flow (X) 4.9 2.9 8.2 5.0EV/EBITDA (X) 3.4 1.0 1.5 0.5Net Div Yield (%) 1.6 4.8 3.2 3.2P/Book Value (X) 0.8 0.7 0.7 0.7Net Debt/Equity (X) CASH CASH CASH CASHROAE (%) (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) 253Mkt. Cap (S$m/US$m) 157 / 111Major Shareholders (%)

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




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%

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Middle East8%

Asia Pacific Region (ex.

Sg)40%

Europe9%

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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.


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Segmental Breakdown FY Jun 2013A 2014A 2015A 2016A 2017F 2018F

Revenues (S$m) Project works 424 338 363 448 253 304 Plant maintenance and 151 141 165 151 152 153 Other operations 3.99 4.12 3.12 3.04 4.04 5.04 Eliminations (33.9) (33.6) (31.4) (26.5) (27.8) (29.2) Others 0.0 0.0 0.0 0.0 0.0 0.0Total 545 449 500 575 381 433Gross profit (S$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 0.0Total 87.0 98.1 93.0 106 71.7 87.2Gross 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/ATotal 16.0 21.8 18.6 18.5 18.8 20.2

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


Margins Trend

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FY Jun 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017

Revenue 162 152 118 143 82.8 119Cost of Goods Sold (137) (131) (91.4) (110) (65.9) (97.9)Gross Profit 25.5 21.1 26.4 33.2 16.9 20.7Other 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) 1.11Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0Associates & JV Inc 0.02 0.02 0.14 0.23 0.14 0.09Net Interest (Exp)/Inc (0.1) 0.18 0.05 0.0 0.19 0.27Exceptional Gain/(Loss) 0.44 9.40 (3.6) (0.8) 1.87 4.20Pre-tax Profit 4.29 8.54 4.61 10.6 0.67 5.67Tax (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) 4.24Net profit bef Except. 2.61 (4.9) 6.73 8.96 (2.1) 0.04EBITDA 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) 43.3EBITDA Gth (%) (55.5) nm nm 39.9 nm nmOpg Profit Gth (%) (56.7) nm nm 39.5 nm nmNet Profit Gth (%) (51.2) 48.0 (31.2) 163.0 nm nmMargins Gross Margins (%) 15.7 13.8 22.4 23.2 20.4 17.5Opg Profit Margins (%) 2.4 (0.7) 6.8 7.9 (1.8) 0.9Net 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 81.1Invts in Associates & JVs 3.12 3.59 4.64 4.81 4.81 4.81Other LT Assets 2.48 12.9 14.5 11.7 11.7 11.7Cash & ST Invts 80.2 82.3 114 150 156 175Inventory 0.49 0.58 0.73 0.62 0.46 0.51Debtors 94.0 69.3 97.3 87.4 61.3 69.5Other Current Assets 66.5 70.8 76.6 51.0 51.7 55.3Total Assets 356 339 406 400 372 398 ST Debt 3.20 4.29 16.8 8.86 8.86 8.86Creditor 42.8 29.1 39.6 31.1 24.2 26.9Other Current Liab 78.8 68.9 116 116 98.1 105LT Debt 3.25 5.56 12.0 9.28 9.28 9.28Other LT Liabilities 4.56 4.50 2.63 2.12 2.12 2.12Shareholder’s Equity 212 215 205 219 217 233Minority Interests 11.6 11.4 13.3 13.0 13.0 13.0Total 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 157Debtors Turn (avg days) 49.2 66.4 60.9 58.6 71.2 55.2Creditors Turn (avg days) 35.0 39.1 32.0 28.5 34.1 28.0Inventory Turn (avg days) 0.3 0.6 0.6 0.5 0.7 0.5Asset Turnover (x) 1.6 1.3 1.3 1.4 1.0 1.1Current Ratio (x) 1.9 2.2 1.7 1.9 2.1 2.1Quick Ratio (x) 1.4 1.5 1.2 1.5 1.7 1.7Net Debt/Equity (X) CASH CASH CASH CASH CASH CASHNet Debt/Equity ex MI (X) CASH CASH CASH CASH CASH CASHCapex to Debt (%) 496.2 127.3 54.4 32.3 33.1 44.1


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

Pre-Tax Profit 13.8 13.3 (7.2) 28.1 12.3 17.7Dep. & Amort. 11.3 14.8 14.7 15.6 14.1 12.9Tax 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 0.0Chg in Wkg.Cap. (16.5) (5.0) (5.0) (5.0) (1.4) 3.47Other Operating CF (4.4) 2.42 32.5 17.3 0.0 0.0Net Operating CF (0.2) 22.2 32.6 55.4 19.3 31.6Capital 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 0.0Invts in Assoc. & JV 0.0 (0.2) 0.0 (0.1) 0.0 0.0Div from Assoc & JV 0.25 0.68 0.25 0.25 0.0 0.0Other Investing CF 0.0 (0.6) 0.0 0.02 0.0 0.0Net 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 0.0Capital Issues 0.0 0.0 0.0 0.0 0.0 0.0Other Financing CF 0.07 (1.1) (0.2) (3.9) 0.0 0.0Net 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 0.0Chg in Cash (34.1) 2.61 30.0 38.6 5.67 18.5Opg CFPS (S cts) 6.41 10.7 14.7 23.7 8.12 11.0Free 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 CASHBaker Tech 0.67 136 NM 0.6 -1.7 CASHMencast 0.17 72 NM 0.5 -5.9 1.33MTQ 0.41 63 NM 0.6 -22.8 0.17Kim Heng 0.08 53 NM 0.6 -7.3 CASHHiap Seng 0.16 49 7.8 0.7 9.6 CASHPEC 0.62 158 9.4 0.7 7.9 CASH

Source: DBS Bank, Bloomberg Finance L.P

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(x)

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

HOLD

Last Traded Price ( 3 Feb 2017): S$3.52 (STI : 3,041.94) Price Target 12-mth: S$3.58 (2% upside) (Prev S$3.53) Potential Catalyst: Special dividends, M&A, privatisation Where we differ: Largely in line with consensus on earnings and call Analyst Suvro SARKAR +65 6682 3720 [email protected] Singapore Research Team [email protected]

What’s New • Strong JV contribution boosts core earnings in

3Q17

• Core operating profit margin remains stable

• High cash balance of c.S$560m, likelihood of

special dividends at end of FY17

Price Relative

Forecasts and Valuation FY Mar (S$ m) 2015A 2016A 2017F 2018FRevenue 1,121 1,113 1,081 1,063EBITDA 233 243 227 215Pre-tax Profit 205 202 348 180Net Profit 183 177 326 158Net Pft (Pre Ex.) 177 181 169 158Net Pft Gth (Pre-ex) (%) (33.1) 2.0 (6.4) (6.7)EPS (S cts) 16.3 15.7 28.8 13.9EPS Pre Ex. (S cts) 15.8 16.1 15.0 13.9EPS Gth Pre Ex (%) (33) 2 (7) (7)Diluted EPS (S cts) 16.1 15.5 28.6 13.8Net DPS (S cts) 14.5 14.0 12.5 12.5BV Per Share (S cts) 118 132 148 150PE (X) 21.5 22.4 12.2 25.4PE Pre Ex. (X) 22.3 21.8 23.5 25.4P/Cash Flow (X) 41.1 51.3 12.4 30.5EV/EBITDA (X) 15.2 14.9 15.2 16.2Net Div Yield (%) 4.1 4.0 3.6 3.6P/Book Value (X) 3.0 2.7 2.4 2.3Net Debt/Equity (X) CASH CASH CASH CASHROAE (%) 13.6 12.6 20.6 9.3



Better quarterly showing

Maintain HOLD as risk-reward looks fair at current price level. After a brief nose-dive, SIA Engineering’s (SIE) share price has recovered to just around our previous target price of S$3.53, and the stock is now trading in line with its historical average forward PE of about 25x. While fundamental weakness in the widebody MRO (maintenance, repair and overhaul) space due to lower work content and longer intervals between checks on newer aircraft/engine models continues to cast a shadow on SIE’s future earnings projections, we think the possibility of a special dividend at the year-end (due to its large cash balance of c.S$560m, boosted by receipts from disposal of its stake in HAESL in 1QFY17) as well privatisation prospects by parent SIA should continue to provide some support to SIE’s share price. 3Q-FY17 core net profit higher than expected on strong JV contributions. Core net profit of S$50.3m for 3QFY17 was up c.41% q-o-q, boosted by a sharp jump in JV profits of about S$9.4m q-o-q. However, given that the engine repair and overhaul business, which accounts for the bulk of SIE’s JV takings, will continue to face structural issues, we think this quarter’s upswing is more a timing/recognition issue rather than an indicator of a sustainable recovery. Expecting 12.5 Scts full-year dividend. We have raised our earnings forecasts for FY17 to account for better associate/JV profit in 3QFY17, but we are still skeptical about a sustained recovery in associate/JV contributions. We now expect a full year dividend of 12.5Scts (excluding special dividends) in FY17/18, roughly in line with SIE’s payout policy of 85-90% of core earnings. Valuation:

Rolling over our multiple pegs to FY18, our TP is adjusted up to S$3.58. Our TP is based on a blended valuation framework (PE, EV/EBITDA, dividend yield and DCF), and includes a 20% M&A/privatisation premium. Key Risks to Our View:

We cannot rule out a lengthy period of weak MRO demand amid structural changes in the industry. Increasing competition could also lead to renewed stress on the margin front. Upside risk exists in the form of potential privatisation/M&A (see pg4). At A Glance

Issued Capital (m shrs) 1,120Mkt. Cap (S$m/US$m) 3,944 / 2,797Major Shareholders (%) Singapore Airlines Ltd 77.6

Free Float (%) 22.43m Avg. Daily Val (US$m) 0.57ICB Industry : Industrials / Industrial Transportation



SIA Engineering Version 7 | Bloomberg: SIE SP | Reuters: SIAE.SI Refer to important disclosures at the end of this report


Company Guide

SIA Engineering

WHAT’S NEW

JV takings boost earnings

Core earnings up q-o-q mainly from strong associate and JV contributions. Core earnings of S$50.3m for 3QFY17 was up c.41% q-o-q mainly from a jump in associate and JV profits by about S$14.4m q-o-q. While revenues for the quarter inched up by c.3% q-o-q to S$272.3m, this was offset by higher staff costs and overheads during the quarter. Operating profit margin remained fairly stable q-o-q at 9.3%. On a y-o-y basis, SIE stated that line maintenance has been the stronger performer, while its fleet management and heavy maintenance segments continue to underperform; this is in line with previous trends.

JV and associate profit up q-o-q. After three quarters of weakness in JV and associate profits (of ~S$17-20m per quarter), largely due to weaker contributions from the engine shops, there was a sudden surge in profits from these companies to S$31.6m in 3QFY17. While associate profits increased by about S$4m to S$17.3m for the quarter, it was the profit from JVs that accounted for the lion’s share of the upswing, increasing by S$9.4m q-o-q to S$14.3m in 3QFY17.

The reason for the q-o-q variation in JV profits was not explicit. However, given that Singapore Aero Engine Services Pte Ltd (SAESL) has historically accounted for the bulk (c.90%) of SIE’s JV profits and that the engine repair and overhaul sector is expected to continue facing strong headwinds, we would tend to see this quarter’s strong JV contributions arising more from timing issues related to revenue/profit recognition rather than as an indicator of a cyclical upturn in the widebody engine MRO space.

Cash balance remains high; gearing low. SIE’s cash balance remains high at ~S$560m as of end-3QFY17, having received a boost in 2QFY17 from cash of about S$156m from the divestment of its stake in HAESL. With gross debt of only S$29.7m in total, SIE thus remains in a strong net cash position. Given SIE’s large cash hoard, we think a special dividend in conjunction with the fourth quarter results is likely, though the magnitude is anyone’s guess, given that management has guided for increased capex on new technology initiatives going forward.



Revenue 275 265 272 (1.1) 2.8

Cost of Goods Sold (246) (240) (247) 0.4 2.8

Gross Profit 29.0 24.5 25.2 (13.1) 2.9

Other Oper. (Exp)/Inc 0.0 0.0 0.0 - -

Operating Profit 29.0 24.5 25.2 (13.1) 2.9


Associates & JV Inc 33.2 17.2 31.6 (4.8) 83.7

Net Interest (Exp)/Inc 1.80 0.80 0.80 (55.6) 0.0

Exceptional Gain/(Loss) (7.1) (0.2) 2.30 nm nm

Pre-tax Profit 56.9 42.3 59.9 5.3 41.6

Tax (5.9) (5.5) (6.3) 6.8 14.5

Minority Interest (1.6) (1.3) (1.0) 37.5 (23.1)

Net Profit 49.4 35.5 52.6 6.5 48.2

Net profit bef Except. 56.5 35.7 50.3 (11.0) 40.9

EBITDA 73.2 54.9 70.2 (4.1) 27.9

Margins (%)






Company Guide

SIA Engineering


Earnings Drivers:

Close to 70% of top line is driven by parent SIA. This is mainly due to legacy reasons, as SIE was born as the in-house MRO operations centre of SIA before it was independently listed in 2000. The growth and maintenance cycle of SIA's fleet therefore strongly impacts SIE’s core businesses of line maintenance, heavy maintenance and fleet management. Line maintenance division largely driven by Changi Airport traffic. SIE already captures around 90% of the line maintenance market at Changi Airport, thus market share gains are unlikely. We estimate flights handled by SIE to grow by 3-4% annually in FY17 and FY18. In the longer term, continued growth of Singapore as a tourism hub to the region and the addition of capacity via the upcoming Terminals 4 and 5 should help drive line maintenance revenues and earnings. Heavy maintenance headwinds prevail in near term. The heavy maintenance segment saw revenues decline by 15% and 8% in FY15 and FY16 respectively, which was largely attributed to the phasing in of newer aircraft with longer maintenance cycles and less need for maintenance by virtue of just being new. This trend would weigh on SIE’s heavy maintenance business. SIE’s partnerships with airframe OEMs provide a first-mover advantage. SIE incorporated a fleet management JV with Boeing in 2015 and earlier this year, inked another airframe MRO JV with Airbus. These deals will give SIE a strong foothold in securing fleet management and MRO work in Asia Pacific derived from the airframe OEM’s total care programmes, which have been gaining traction with airlines. While MRO providers now have to carve out some of the pie to airframe OEMs, SIE’s JV agreements are a bet that the volumes allocated to the JVs will more than offset the sharing of profits. By positioning itself as an OEM partner early in the game, SIE should benefit in the long term from the territorial exclusivity granted to it. JVs/associates contribute roughly 50-60% to the bottom line. SIE has 25 associates and JVs in nine countries, with engine overhaul centres comprising the bulk of JV/associate revenues. However, the phasing out of older generation engine models and extended maintenance cycles for their successors continue to dampen contributions from the company’s key engine MRO centres Eagle Services Asia and SAESL. The recent sale of SIE’s 10% shareholding in HK-based engine centre HAESL has resulted in one-off disposal gains of close to S$178m, but SIE will lose recurring dividend income of about S$8-10m annually. Low oil prices have not fed through to MRO players significantly. The slump in fuel prices means that some airlines have delayed the retirement of older aircraft but it is unclear if these older aircraft will be put through the next round of heavy checks or be sent to the scrapyards, given the substantial backlog of new aircraft under construction.

Base maintenance revenue

Line maintenance revenue

Fleet management revenue

Profit from associates & JVs


579

490451 438

416

0.0

83.6

167.1

250.7

334.2

417.8

501.3

584.9

2014A 2015A 2016A 2017F 2018F

435 442460

479 493

0.0

100.5

201.1

301.6

402.2

502.7

2014A 2015A 2016A 2017F 2018F

165

188202

141132

0.00

41.15

82.29

123.44

164.59

205.73

2014A 2015A 2016A 2017F 2018F

163

10694.2 90

70

0.0

32.8

65.7

98.5

131.4

164.2

2014A 2015A 2016A 2017F 2018F


Company Guide

SIA Engineering

Balance Sheet:

Strong balance sheet provides headroom for expansion. SIE has very low leverage, with gross debt-to-equity ratio at only 0.02x, and is in a net cash position with about S$560m of cash reserves on its balance sheet. SIE therefore has ample room to take on additional debt to fund attractive projects, should they arise. Share Price Drivers:

M&A and other corporate activity are catalysts. In order to tackle some of the structural issues, SIE may consider merging with or partnering third-party MROs with complementary business models. We continue to believe in the merits of a combination of SIA Engineering and ST Aerospace to better consolidate Singapore’s credentials as an aviation hub, as synergies are realised in the form of bigger scale, cost efficiencies and breadth of offerings. Under such a scenario, the target company – in this case, SIA Engineering – usually sees a positive reaction in share price, as other parties may need to pay a premium over market prices. Special dividend is a possibility. We are currently expecting total dividends of 12.5Scts each in FY17/18 (lower than 14Scts for FY16), but SIE could choose to be more generous with special dividends arising from the proceeds of the sale of its 10% stake in HAESL. This could provide an upside catalyst, if and when announced. However, there is no certainty of a major special dividend at the end of FY17 as SIE’s organic growth potential remains low and amid challenging industry conditions, there could be multiple uses of cash including investments in widening strategic partnerships with OEMs. Key Risks:

Slow growth at certain associates and joint ventures (JVs). Some of the engine MRO JVs caters to older widebody models, which are being phased out. Demand may be negatively affected as a result. Risk of cannibalisation by OEM partnerships remains salient. New JVs and associates, such as the Boeing fleet management JV, carry the risk of cannibalising some of the group's existing revenue lines, which could slow growth. Company Background

Leading regional aircraft maintenance, repair and overhaul (MRO) company with bases in Singapore and Philippines. A comprehensive cluster of JVs with renowned OEMs allows it to provide a full suite of MRO services.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.5

0.6

0.6

0.7

0.7

0.8

0.8

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

70.0

80.0

2014A 2015A 2016A 2017F 2018F


S$m

0.0%

5.0%

10.0%

15.0%

20.0%

2014A 2015A 2016A 2017F 2018F

Avg: 25.9x

+1sd: 28.7x

+2sd: 31.4x

-1sd: 23.2x

-2sd: 20.5x

17.7

19.7

21.7

23.7

25.7

27.7

29.7

31.7

33.7


(x)

Avg: 3.44x

+1sd: 4.06x

+2sd: 4.68x

-1sd: 2.81x

-2sd: 2.19x1.9

2.4

2.9

3.4

3.9

4.4

4.9


(x)


Company Guide

SIA Engineering

Key Assumptions

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

Base maintenance revenue 579 490 451 461 438Line maintenance revenue 435 442 460 479 493Fleet management revenue 165 188 202 141 132

Profit from associates & JVs 163 106 94.2 90.0 75.0


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

Revenue 1,178 1,121 1,113 1,081 1,063Cost of Goods Sold (1,063) (1,037) (1,008) (987) (967)Gross Profit 116 84.0 104 93.4 96.4Other Opng (Exp)/Inc 0.0 0.0 0.0 0.0 0.0Operating Profit 116 84.0 104 93.4 96.4Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0Associates & JV Inc 163 106 94.2 90.0 75.0Net Interest (Exp)/Inc 15.1 9.20 7.80 7.82 8.69Exceptional Gain/(Loss) 0.70 5.90 (4.4) 157 0.0Pre-tax Profit 294 205 202 348 180Tax (23.0) (20.0) (20.8) (17.4) (18.0)Minority Interest (5.3) (2.1) (4.6) (4.4) (4.1)Preference Dividend 0.0 0.0 0.0 0.0 0.0Net Profit 266 183 177 326 158Net Profit before Except. 265 177 181 169 158EBITDA 315 233 243 227 215Growth Revenue Gth (%) 2.7 (4.9) (0.7) (2.9) (1.6)EBITDA Gth (%) 0.7 (26.0) 4.0 (6.3) (5.2)Opg Profit Gth (%) (9.8) (27.3) 24.3 (10.6) 3.3Net Profit Gth (Pre-ex) (%) (1.7) (33.1) 2.0 (6.4) (6.7)Margins & Ratio Gross Margins (%) 9.8 7.5 9.4 8.6 9.1Opg Profit Margin (%) 9.8 7.5 9.4 8.6 9.1Net Profit Margin (%) 22.6 16.4 15.9 30.2 14.9ROAE (%) 20.0 13.6 12.6 20.6 9.3ROA (%) 15.9 10.9 10.2 16.9 7.7ROCE (%) 7.6 5.3 6.3 5.3 4.9Div Payout Ratio (%) 105.0 88.7 89.1 43.4 90.1Net Interest Cover (x) NM NM NM NM NM


Lower fleet managementrevenues on loss of Airbus fleet count under SIE management to Airbus’ own programme

Gains and dividend received related to sale of 10% stake in HAESL, less additional staff provision costs


Company Guide

SIA Engineering


FY Mar 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Revenue 275 294 272 265 272Cost of Goods Sold (246) (267) (252) (240) (247)Gross Profit 29.0 27.5 19.7 24.5 25.2Other Oper. (Exp)/Inc 0.0 0.0 0.0 0.0 0.0Operating Profit 29.0 27.5 19.7 24.5 25.2Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0Associates & JV Inc 33.2 18.3 20.7 17.2 31.6Net Interest (Exp)/Inc 1.80 2.10 3.90 0.80 0.80Exceptional Gain/(Loss) (7.1) (0.1) 157 (0.2) 2.30Pre-tax Profit 56.9 47.8 201 42.3 59.9Tax (5.9) (4.8) (1.3) (5.5) (6.3)Minority Interest (1.6) (1.6) (1.4) (1.3) (1.0)Net Profit 49.4 41.4 198 35.5 52.6Net profit bef Except. 56.5 41.5 41.6 35.7 50.3EBITDA 73.2 57.2 52.6 54.9 70.2 Growth Revenue Gth (%) 3.5 6.9 (7.7) (2.5) 2.8EBITDA Gth (%) 29.6 (21.9) (8.0) 4.4 27.9Opg Profit Gth (%) 7.4 (5.2) (28.4) 24.4 2.9Net Profit Gth (Pre-ex) (%) 35.5 (26.5) 0.2 (14.2) 40.9Margins Gross Margins (%) 10.5 9.3 7.3 9.3 9.3Opg Profit Margins (%) 10.5 9.3 7.3 9.3 9.3Net Profit Margins (%) 18.0 14.1 73.0 13.4 19.3

Balance Sheet (S$m) FY Mar 2014A 2015A 2016A 2017F 2018F

Net Fixed Assets 337 344 341 367 393Invts in Associates & JVs 436 464 492 507 519Other LT Assets 68.9 76.1 63.4 63.4 63.4Cash & ST Invts 536 464 394 582 585Inventory 107 125 155 151 148Debtors 117 95.5 91.0 88.4 86.9Other Current Assets 106 88.7 286 286 286Total Assets 1,707 1,657 1,822 2,045 2,082 ST Debt 8.20 9.30 8.80 8.80 8.80Creditor 242 227 228 257 253Other Current Liab 26.0 19.8 19.8 19.2 19.8LT Debt 13.6 23.9 24.5 24.5 24.5Other LT Liabilities 26.8 26.6 29.5 29.5 29.5Shareholder’s Equity 1,361 1,325 1,486 1,674 1,711Minority Interests 29.6 24.7 26.4 30.8 34.9Total Cap. & Liab. 1,707 1,657 1,822 2,045 2,082 Non-Cash Wkg. Capital 61.4 61.6 285 249 249Net Cash/(Debt) 514 431 361 549 551Debtors Turn (avg days) 31.5 34.5 30.6 30.3 30.1Creditors Turn (avg days) 86.9 86.2 86.1 93.8 101.0Inventory Turn (avg days) 38.2 42.5 52.9 59.1 59.1Asset Turnover (x) 0.7 0.7 0.6 0.6 0.5Current Ratio (x) 3.1 3.0 3.6 3.9 3.9Quick Ratio (x) 2.4 2.2 1.9 2.4 2.4Net Debt/Equity (X) CASH CASH CASH CASH CASHNet Debt/Equity ex MI (X) CASH CASH CASH CASH CASHCapex to Debt (%) 338.5 161.1 123.1 210.2 210.2Z-Score (X) 9.8 9.8 9.6 9.0 9.1



Company Guide

SIA Engineering


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

Pre-Tax Profit 294 205 202 348 180Dep. & Amort. 37.0 42.8 43.9 43.9 43.9Tax Paid (23.6) (23.3) (18.6) (18.0) (17.4)Assoc. & JV Inc/(loss) (163) (106) (94.2) (90.0) (75.0)Chg in Wkg.Cap. (20.6) (5.1) (65.9) 36.8 (0.3)Other Operating CF (11.2) (17.4) 9.90 0.0 0.0Net Operating CF 113 96.1 77.1 321 131Capital Exp.(net) (73.8) (53.5) (41.0) (70.0) (70.0)Other Invts.(net) 0.0 0.0 0.0 0.0 0.0Invts in Assoc. & JV 1.80 0.0 (19.4) 0.0 0.0Div from Assoc & JV 157 112 78.5 75.0 62.5Other Investing CF 16.1 18.9 3.60 0.0 0.0Net Investing CF 101 77.7 21.7 5.00 (7.5)Div Paid (245) (269) (163) (157) (141)Chg in Gross Debt 16.1 8.80 0.80 0.0 0.0Capital Issues 30.3 17.2 5.80 20.0 20.0Other Financing CF (3.1) (7.9) (11.2) 0.0 0.0Net Financing CF (202) (251) (168) (137) (121)Currency Adjustments 0.0 5.10 (1.1) 0.0 0.0Chg in Cash 12.8 (72.0) (69.8) 188 2.40Opg CFPS (S cts) 12.0 9.02 12.7 25.1 11.6Free CFPS (S cts) 3.51 3.80 3.21 22.2 5.38



Source: DBS Bank



S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 02 Feb 16 3.40 3.84 BUY

2: 11 May 16 3.80 3.84 BUY

3: 12 May 16 3.80 3.84 HOLD

4: 31 May 16 3.79 3.84 HOLD

5: 27 Jul 16 3.69 3.81 HOLD

6: 03 Nov 16 3.66 3.53 HOLD


1

2

3

4

5

6

3.18

3.28

3.38

3.48

3.58

3.68

3.78

3.88

3.98

4.08


S$


ed: JS / sa: AS, PY

NOT RATED S$1.465 STI : 3,130.44 Closing price as of 7 Mar 2017 Return *: 2 Risk: Moderate Potential Target 12-mth* : 12-Month S$ 1.64 (12% 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 674 684 719 750 EBITDA 79.7 81.0 72.4 79.0 Pre-tax Profit 42.8 47.2 37.4 43.3 Net Profit 42.1 39.1 30.9 35.7 Net Pft (Pre Ex.) 42.1 39.1 30.9 35.7 EPS (S cts) 22.7 20.9 16.4 19.0 EPS Pre Ex. (S cts) 22.7 20.9 16.4 19.0 EPS Gth (%) 38 (8) (22) 16 EPS Gth Pre Ex (%) 38 (8) (22) 16 Diluted EPS (S cts) 22.2 20.5 16.2 18.7 Net DPS (S cts) 5.00 6.00 7.00 7.00 BV Per Share (S cts) 178 188 196 208 PE (X) 6.5 7.0 8.9 7.7 PE Pre Ex. (X) 6.5 7.0 8.9 7.7 P/Cash Flow (X) 4.0 5.2 4.7 4.4 EV/EBITDA (X) 3.4 3.2 3.4 2.9 Net Div Yield (%) 3.4 4.1 4.8 4.8 P/Book Value (X) 0.8 0.8 0.7 0.7 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 13.2 11.5 8.6 9.4 Consensus EPS (S cts): 15.0 16.0 Other Broker Recs: B: 2 S: 0 H: 0 ICB Industry : Industrials ICB Sector: Industrial Engineering Principal Business: Sunningdale provides one-stop turnkey plastic solutions. The group is mainly focused on four business segments - Automotive, Consumer/IT, Healthcare, and Mould Fabrication. Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Ripe for harvest

Amid challenging operating climate, Sunningdale is one of few precision engineering plays that actively invests in future growth

Steady growth outlook underpinned by strong business fundamentals

At 0.7x P/BV and 9x FY17F PE, the stock’s attractive valuations could lead to a potential takeover – especially from PE funds

The Business

Leading manufacturer of precision plastic components. Ranked among the largest high-precision plastic solutions providers globally, Sunningdale’s competitive advantages lie in its advanced manufacturing capabilities, global manufacturing footprint, and scale. The group also stands out for its diversified MNC customer base – majority of its customers each contribute between 3-5% to group sales on average, which greatly reduces customer concentration risk seen among small-mid cap peers.

Strong fundamentals underpin steady growth outlook. Riding on its strong business fundamentals, Sunningdale has delivered consistent margin improvement and growth over the last few years. Bearing in mind that several one-offs (such as foreign exchange and disposal gains) led to record earnings in FY16, we see core earnings growing to S$30.9m in FY17F and S$35.7m in FY18F as the group (1) ramps up production on new automotive and healthcare projects, (2) strengthens business development efforts, to enjoy greater economies of scale.

The Stock

Fair value of S$1.64 based on 10x FY17F PE. With reference to peers, we opine that leading local player, Sunningdale, should at least trade on par with peers’ average of 10x given its robust growth outlook, and thus value the company at S$1.64. At current price, Sunningdale also offers a decent yield of 4.8%.

Potential takeover candidate. Backed by strong cash flow generation, healthy balance sheet and attractive valuations of 0.7x P/BV and 9x FY17F PE (vs peers’ average of 1.1x and 10x respectively), Sunningdale could be an attractive takeover target for PE funds or larger players seeking to acquire advanced manufacturing capabilities, global manufacturing facilities or to gain immediate access to a diversified MNC customer base.

At A Glance Issued Capital (m shrs) 188 Mkt. Cap (S$m/US$m) 276 / 195 Major Shareholders (%) Boon Hwee Koh 8.5 Yarwood Engineering and Trading 8.1 Goi Seng Hui 8.1 Free Float (%) 68.4 3m Avg. Daily Val (US$m) 0.28



Sunningdale Tech Ltd

Bloomberg: SUNN SP | Reuters: SUND.SI Refer to important disclosures at the end of this report

SMC Research

Equity Explorer


Page 2

REVENUE DRIVERS

One of the largest high-precision plastic solutions providers globally. Established in 1984, Sunningdale provides one-stop turnkey plastic solutions, with capabilities ranging from product & mould designs, mould fabrication, injection moulding, micro-precision engineering, complementary finishings, through to the precision assembly of complete products. The group is mainly focused on four business segments - Automotive, Consumer/IT, Healthcare, and Mould Fabrication, which contributed 36%, 40%, 7% and 17%, respectively, to FY16 sales. Apart from its strong suite of capabilities, we believe that Sunningdale’s key competitive advantages lie in its global presence and growing scale. We also like the group’s diversified customer base – 80% of FY16 sales were from its top 30 blue chip customers. Automotive segment to lead growth. Including contributions from mould fabrication, we estimate that the Automotive segment is currently the largest source of revenue for Sunningdale (45.7% in FY16). Tapping onto ongoing outsourcing trends from the US, Europe and Japan, steadily increasing demand for in-vehicle plastic components and fairly long product life cycles, the automotive industry continues to offer strong growth opportunities for the group. As Sunningdale gradually ramps up on new projects secured over the last few years, we see Automotive revenue growing by 8-10% p.a. in FY18F. Stable outlook across remaining segments. While outlook in the broader Consumer/IT space remains subdued, we think that modest growth over the near-term will likely be sustained by ongoing business development initiatives and healthy order backlogs from end-FY16. After delays in 2H16, the recent commencement of a new healthcare project – which generally has longer product life cycles of 10-15 years - should provide stronger earnings visibility going forward. Further, given its expertise and strong manufacturing capabilities, we believe that Sunningdale is well-positioned to take on complex projects that may arise across the Automotive, Consumer/IT, and Healthcare space. KEY OPERATING ASSETS

Global manufacturing footprint. With 19 manufacturing locations in nine countries across Asia, Europe, North and South America, Sunningdale is better able to provide local support to key clients compared to most peers, and could potentially leverage on its global manufacturing presence and existing relationships with MNC customers to capture opportunities in new markets.

Breakdown of Revenue by Business Segments (FY16) – S$m

Estimated Breakdown of Revenue (%) by Sector Exposure (FY16)

19 Manufacturing Facilities Across 9 Countries


Equity Explorer


Page 3

GROWTH PROSPECTS

Steady growth outlook underpinned by wider product mix, greater economies of scale. Sunningdale has delivered consistent margin improvements and growth over the last few years. With the Zhongshan (China) restructuring initiative and construction of the new Chuzhou (China) plant completed in FY16, the group is now well poised to leverage on the following initiatives to deliver sustainable growth:

(i) Strengthen business development activities to further expand higher-margin product mix

(ii) Development of new engineering capabilities

(iii) Cost advantages through growing scale

Notwithstanding one-offs (such as foreign exchange and disposal gains) which resulted in record earnings in FY16, we expect core earnings to remain on a positive growth trajectory ahead. Planning for the future. While most of the industry is focused on managing costs amid the challenging business climate, Sunningdale is one of few precision engineering plays that continue to actively invest in future growth.

Recent investments include a 50,000 square metre manufacturing facility in Chuzhou (China), aimed at mitigating rising labour costs in first-tier cities, and the tender for a manufacturing site in Penang (Malaysia) which is of close proximity to the operations of a number of Fortune 500 companies (including several of Sunningdale’s existing customers) and in anticipation of the group’s medium-to-longer term capacity requirements. Potential takeover candidate. Sunningdale’s proven record of strong cash flow generation, healthy balance sheet with net cash of S$15.1m, and attractive valuations - currently trades at just 0.7x P/BV and 9x PE (vs peer average of 1.1x and 10x, respectively) sets it as potential for a takeover offer. Given the group’s advanced manufacturing capabilities, global manufacturing footprint and diversified MNC customer base, we see Sunningdale as an attractive takeover target for PE funds or larger top-tier players in the precision plastic field seeking Asian exposure. MANAGEMENT & STRATEGY

Managed by non-founder management team. Key members of the management team have been with the group for over a decade, and each carry over two decades of experience in their respective fields. Under their leadership, Sunningdale’s profits have nearly quadrupled from S$10.1m in FY03 to S$39.1m in FY16. Increasing dividend payments. While Sunningdale does not have a fixed dividend policy, we note that dividends paid have grown steadily alongside earnings growth, from 3 Scts per share in FY12 to 6 Scts in FY16.

Key Local Competitors

Key Management Team

Mr Khoo Boo Hor Group Chief Executive Officer

Mr Khoo is primarily responsible for Sunningdale’s manufacturing operations, and played a significant role in integrating the operations of Sunningdale Precision Industries Ltd and Tech Group Asia Ltd following the merger of the two companies in July 2005. He also holds a Bachelor of Science and a Bachelor of Engineering (Honours) from Monash University, and a Master of Business Administration from the University of Louisville, Kentucky.

Ms Soh Hui Ling Chief Financial Officer (CFO)

As CFO, Ms Soh is responsible for the Group’s financial and management accountings, treasury and taxation. Prior to joining Sunningdale, Ms Soh was the Finance and Administrative Manager of Dew Management Advancement Consultants.

Mr Chan Tung Sing Business Development Vice President

Mr Chan is focused on the Automotive segment and previously served as the General Manager for Sunningdale’s Shanghai operations, where he was responsible for the plant’s performance.

Increasing Dividend Payments (FY12-FY16) – DPS vs EPS


Equity Explorer


Page 4

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016A 2017F 2018F Revenues (S$m) Automotive 106 122 219 245 270 292 Consumer / IT 225 211 269 273 278 284 Healthcare 34.7 37.7 49.8 48.5 50.4 52.4 Mould Fabrication 111 105 137 118 120 122 Total 476 476 674 684 719 750


FY Dec 2013A 2014A 2015A 2016A 2017F 2018F Revenue 476 476 674 684 719 750 Cost of Goods Sold (421) (416) (584) (590) (618) (644) Gross Profit 55.4 59.9 90.8 94.3 101 107 Other Opng (Exp)/Inc (39.6) (44.9) (62.8) (64.2) (66.1) (66.8) Operating Profit 15.8 15.0 28.0 30.1 34.5 39.8 Other Non Opg (Exp)/Inc 4.62 14.4 17.3 19.2 5.00 5.00 Associates & JV Inc 0.0 0.14 0.90 0.94 0.94 0.94 Net Interest (Exp)/Inc (1.3) (1.3) (3.4) (3.0) (3.0) (2.4) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 19.1 28.2 42.8 47.2 37.4 43.3 Tax (5.5) (0.6) (0.7) (8.2) (6.5) (7.6) 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 13.7 27.7 42.1 39.1 30.9 35.7 Net Profit before Except. 13.7 27.7 42.1 39.1 30.9 35.7 EBITDA 47.4 54.1 79.7 81.0 72.4 79.0 Growth Revenue Gth (%) 5.5 (0.1) 41.8 1.5 5.0 4.4 EBITDA Gth (%) 12.9 14.1 47.3 1.7 (10.7) 9.2 Opg Profit Gth (%) 40.8 (5.0) 86.3 7.6 14.5 15.3 Net Profit Gth (Pre-ex) (%) 42.7 102.8 52.1 (7.2) (21.0) 15.7 Margins & Ratio Gross Margins (%) 11.6 12.6 13.5 13.8 14.0 14.2 Opg Profit Margin (%) 3.3 3.2 4.2 4.4 4.8 5.3 Net Profit Margin (%) 2.9 5.8 6.2 5.7 4.3 4.8 ROAE (%) 5.6 9.9 13.2 11.5 8.6 9.4 ROA (%) 3.3 5.5 7.0 6.2 4.7 5.3 ROCE (%) 4.0 6.9 8.5 7.8 5.9 6.8 Div Payout Ratio (%) 38.9 24.3 22.0 28.7 42.7 36.9 Net Interest Cover (x) 11.9 11.6 8.3 10.0 11.3 16.3


Margins Trend

Equity Explorer


Page 5


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 Revenue 177 178 161 167 172 184 Cost of Goods Sold (151) (154) (139) (144) (148) (159) Gross Profit 25.3 23.7 21.9 22.9 24.4 25.1 Other Oper. (Exp)/Inc (18.2) (15.0) (17.4) (19.3) (14.2) (16.8) Operating Profit 7.05 8.68 4.51 3.60 10.3 8.29 Other Non Opg (Exp)/Inc 11.9 1.33 1.09 2.55 3.16 15.8 Associates & JV Inc 0.08 0.34 0.13 0.35 0.24 0.22 Net Interest (Exp)/Inc (0.9) (0.8) (0.8) (0.9) (0.8) (0.6) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 18.2 9.55 4.92 5.62 12.9 23.8 Tax (2.3) (3.6) (1.4) (1.8) (2.8) (2.3) Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 15.9 5.94 3.58 3.81 10.2 21.5 Net profit bef Except. 15.9 5.94 3.58 3.81 10.2 21.5 EBITDA 27.0 18.2 13.4 13.9 21.0 31.5 Growth Revenue Gth (%) 6.7 0.9 (9.4) 3.3 3.5 6.7 EBITDA Gth (%) 66.9 (32.5) (26.2) 3.7 50.5 50.1 Opg Profit Gth (%) 20.4 23.1 (48.1) (20.0) 185.1 (19.3) Net Profit Gth (%) 164.6 (62.6) (39.8) 6.5 167.4 111.1 Margins Gross Margins (%) 14.3 13.3 13.6 13.8 14.2 13.6 Opg Profit Margins (%) 4.0 4.9 2.8 2.2 6.0 4.5 Net Profit Margins (%) 9.0 3.3 2.2 2.3 5.9 11.7


Balance Sheet (S$m)

FY Dec 2013A 2014A 2015A 2016A 2017F 2018F Net Fixed Assets 136 194 187 192 196 198 Invts in Associates & JVs 0.0 5.19 5.54 5.27 4.91 4.55 Other LT Assets 17.5 23.5 20.8 19.4 18.4 17.4 Cash & ST Invts 79.2 103 121 115 127 144 Inventory 76.6 109 106 115 116 121 Debtors 104 158 168 194 190 199 Other Current Assets 2.81 5.02 4.36 7.68 7.68 7.68 Total Assets 417 598 613 649 660 691 ST Debt 54.0 91.6 74.0 67.6 67.6 67.6 Creditor 53.8 77.6 150 184 175 182 Other Current Liab 47.7 69.0 2.25 3.93 6.54 7.57 LT Debt 5.77 45.4 46.0 32.2 32.2 32.2 Other LT Liabilities 2.79 9.20 9.58 9.58 9.58 9.58 Shareholder’s Equity 253 305 331 351 369 392 Minority Interests 0.0 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 417 598 613 648 660 691 Non-Cash Wkg. Capital 82.2 126 126 129 132 137 Net Cash/(Debt) 19.5 (33.9) 1.11 15.5 27.5 43.8 Debtors Turn (avg days) 77.8 100.8 88.3 96.6 97.7 94.6 Creditors Turn (avg days) 52.0 61.3 75.7 109.1 111.8 106.9 Inventory Turn (avg days) 73.6 86.7 71.5 72.2 71.8 70.7 Asset Turnover (x) 1.2 0.9 1.1 1.1 1.1 1.1 Current Ratio (x) 1.7 1.6 1.8 1.7 1.8 1.8 Quick Ratio (x) 1.2 1.1 1.3 1.2 1.3 1.3 Net Debt/Equity (X) CASH 0.1 CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH 0.1 CASH CASH CASH CASH Capex to Debt (%) 25.9 3.3 20.0 28.8 35.1 35.1


Revenue Trend


Equity Explorer


Page 6


FY Dec 2013A 2014A 2015A 2016A 2017F 2018F Pre-Tax Profit 19.1 28.2 42.8 47.2 37.4 43.3 Dep. & Amort. 26.9 24.5 33.5 30.8 31.9 33.3 Tax Paid (6.8) (5.9) (2.5) (6.2) (3.9) (6.5) Assoc. & JV Inc/(loss) 0.0 (0.1) (0.9) (0.9) (0.9) (0.9) Chg in Wkg.Cap. (0.5) (9.6) (3.1) (10.8) (5.5) (5.9) Other Operating CF 4.77 (8.9) (2.3) (7.3) 0.0 0.0

Net Operating CF 43.6 28.3 67.4 52.8 58.9 63.1

Capital Exp.(net) (15.5) (4.5) (24.0) (28.8) (35.0) (35.0) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 (63.7) (1.2) 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.76 1.08 1.30 1.30 Other Investing CF 0.0 0.0 0.0 0.0 0.0 0.0

Net Investing CF (15.5) (68.2) (24.4) (27.7) (33.7) (33.7)

Div Paid (4.6) (5.4) (7.4) (9.3) (13.2) (13.2) Chg in Gross Debt 0.94 36.9 (18.3) (21.2) 0.0 0.0 Capital Issues 0.0 24.9 0.0 0.0 0.0 0.0 Other Financing CF 2.05 7.37 0.71 (0.5) 0.0 0.0

Net Financing CF (1.6) 63.8 (25.0) (31.0) (13.2) (13.2)

Currency Adjustments 0.0 0.0 0.0 0.0 0.0 0.0 Chg in Cash 26.5 23.9 18.0 (5.9) 12.0 16.3 Opg CFPS (S cts) 29.0 22.5 38.0 34.1 34.3 36.7 Free CFPS (S cts) 18.5 14.2 23.4 12.9 12.7 15.0


Capital Expenditure

VALUATIONS

Attractive valuations could lead to potential takeover. Based on our estimates, the stock currently trades at just 0.7x FY17F P/BV and 9x FY17F PE, which offers value viz-a-viz its peers. With reference to peers, we opine that as the leading local player, Sunningdale should at least trade on par with peers’ average of 10x given its steady growth outlook, and thus value the company at S$1.64 based on 10x FY17F PE. At current price, Sunningdale also offers a prospective yield of 4.8%, which is decent. At current valuations, and given the group’s advanced manufacturing capabilities, global manufacturing footprint and diversified MNC customer base, we see Sunningdale as

an attractive takeover target for top-tier global players seeking Asian exposure. 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

Peer Comparison (Consensus Earnings)

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

(Debt)*

% Majority Owned Company Last Px US$m Crnt Forw Hist Crnt Crnt Yield

MEMTECH INTL. SGD 0.645 65.8 7.9 7.3 0.5 0.6 7.1% 3.9% 37.4% 55.8%

FISCHER TECH SGD 1.900 75.1 8.3 n.a. 1.1 1.0 n.a. 4.2% 28.2% 75.8%

VALUETRONICS SGD 0.695 189.3 10.5 9.6 1.8 1.6 15.1% 5.2% 46.0% 36.4%

VENTURE SGD 10.780 2,134.7 15.0 13.6 1.6 1.5 10.0% 4.6% 13.5% 47.6%

FU YU SGD 0.215 114.7 10.8 10.8 n.a. 0.9 8.7% 7.0% 69.8% 53.0%

Average 10.5 10.3 1.2 1.1 0.10 5.0% SUNNINGDALE TECH SGD 1.425 189.9 9.5 8.9 n.a. 0.8 7.9% 4.2% 5.8% 34.5%

*based on cash position as at latest financial reporting period Source: Company filings, ThomsonReuters, DBS Bank

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

BUY (Upgrade from HOLD)

Last Traded Price ( 1 Mar 2017): S$0.68 (STI : 3,122.77) Price Target 12-mth: S$0.73 (7% upside) (Prev S$0.61) Potential Catalyst: Demand for higher-tech semicondutor equipment, M&A Where we differ: Our estimates are below consensus Analyst Paul YONG CFA +65 6682 3712 [email protected] Singapore Research Team [email protected]

What’s New • UMS riding on strong demand to deliver better than

expected 4Q16 earnings • Successful renewal of Endura contract by 3+3 years

provides earnings visibility into 2023 • Dividend of 6Scts for FY16 represents yield of 8.9% • Upgrade to BUY, with higher TP of S$0.73

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016A 2017F 2018FRevenue 111 104 111 117EBITDA 44.1 32.0 36.8 38.4Pre-tax Profit 36.8 24.7 30.6 32.3Net Profit 34.3 22.6 27.5 29.1Net Pft (Pre Ex.) 34.3 22.6 27.5 29.1Net Pft Gth (Pre-ex) (%) 37.6 (34.1) 21.8 5.7EPS (S cts) 7.99 5.26 6.41 6.78EPS Pre Ex. (S cts) 7.99 5.26 6.41 6.78EPS Gth Pre Ex (%) 38 (34) 22 6Diluted EPS (S cts) 7.99 5.26 6.41 6.78Net DPS (S cts) 6.00 6.00 6.00 6.00BV Per Share (S cts) 45.3 44.2 44.6 45.4PE (X) 8.5 12.9 10.6 10.0PE Pre Ex. (X) 8.5 12.9 10.6 10.0P/Cash Flow (X) 8.2 8.6 9.5 8.6EV/EBITDA (X) 5.7 7.8 6.8 6.5Net Div Yield (%) 8.8 8.8 8.8 8.8P/Book Value (X) 1.5 1.5 1.5 1.5Net Debt/Equity (X) CASH CASH CASH CASHROAE (%) 17.8 11.8 14.5 15.1



Attractive takeover target

Upgrade to BUY with higher TP of S$0.73; raised FY17F/18F earnings by 13%/10% as UMS is well positioned to benefit from positive global semiconductor equipping trends. The construction of new 300mm fabs by chipmakers provides early indication of a potential round of equipment spending towards the end of 2017. Key client, Applied Materials, which contributes c.90% of the group’s revenue and profit on average, is poised to benefit from this trend.

Involved in the manufacture of components for various semiconductor equipment and handling c.70% of manufacturing and assembly for Applied Material’s Endura deposition system, UMS should naturally benefit from the positive semiconductor industry outlook, with earnings visibility strengthened by the successful renewal of the Endura contract by 3+3 years to Jan 2023.

Given the improved earnings profile and attractive 8.9% yield, we upgrade UMS to BUY, with potential total return of 17%.

Attractive yield of 8.9% on offer. The uptick in end-demand, coupled with UMS’ strong cash flow generation and net cash position of S$42.4m supports our expectations of dividends of 6 Scts dividend for FY17F, as well as to leverage on potential value-accretive M&A opportunities.

Separately, the proposed acquisition of a 51% stake in water and chemical engineering solutions company, Kalf Engineering, and investment in aerospace component business (via 10% stake in All Star Fortress Sdn. Bhd.) is likely to bear fruit in the longer term.

Primed for takeover. The group only has one large shareholder with a 20% stake. With the renewal of the Endura contract providing good earnings visibility, strong cash flow and net cash of S$42.4m (c.15% of market cap), UMS is an attractive takeover target.

Valuation: Upgrade to BUY with TP of S$0.73, which is based on DCF valuation with a cost of equity of 10% (as the group is in a net cash position). Coupled with an attractive prospective yield of 8.9%, UMS potentially offers total return of 17%.

Key Risks to Our View: Key client risk. Historically, between 80-90% of UMS’ revenues on average can be attributed to Applied Materials. Disruptions to its existing entrenched relationship or weakness in Applied Materials’ end demand could significantly weigh on UMS’ outlook.

At A Glance

Issued Capital (m shrs) 429Mkt. Cap (S$m/US$m) 292 / 208Major Shareholders (%) Andy Luong 20.0

Free Float (%) 80.03m Avg. Daily Val (US$m) 0.23ICB Industry : Industrials / Industrial Engineering



UMS Holdings Version 5 | Bloomberg: UMSH SP | Reuters: UMSH.SI Refer to important disclosures at the end of this report

84

104

124

144

164

184

204

224

0.3

0.4

0.4

0.5

0.5

0.6

0.6

0.7

0.7

0.8

0.8


Relative IndexS$

UMS Holdings (LHS) Relative STI (RHS)


Company Guide

UMS Holdings

WHAT’S NEW

Successful renewal of Endura contract by 3+3 years provides earnings visibility into 2023

Better than expected 4Q performance despite one-offs. UMS continued to ride on strong order momentum, delivering top-line growth in both the components manufacturing and assembly businesses of 5.3% and 46.8% q-o-q to S$13.9m and S$18.5m, respectively. Including contributions from other segments, group revenue jumped c.31% in the quarter to S$34.2m.

Net profit declined 12% q-o-q to S$6m, as forex gains (of S$2.1m) from the stronger USD was more than offset by the partial impairment of goodwill (of S$1.6m) arising from the acquisition of Integrated Manufacturing Technologies Inc and an increase in the allowance for inventory obsolescence (by S$2.3m). 6-Sct dividend maintained for FY16. Even as earnings declined c.34.1% y-o-y from S$34.3m in FY15 to S$22.6m in FY16 (dragged by a weaker first half in 2016), UMS maintained its 6-Sct dividend. Supported by current net cash of 10 Scts per share, consistently strong cash flows and positive global semiconductor demand outlook, we think UMS would be able to sustain its dividends of 6 Scts per share ahead, which represents a current yield of nearly 9%.

Medium-term earnings profile supported by successful renewal of Endura contract. The successful renewal of the Endura contract by three years from Jan 2017, with the option for a further 3-years into 2023, provides good earnings visibility for UMS as the Endura product typically represents 50-60% of group revenue.

Some progress on the M&A front. As part of its diversification strategy, UMS also recently announced plans to acquire a 51% stake in Singapore-based water and chemical engineering solutions company, Kalf Engineering, for a cash consideration of under S$990k. As at 31 Mar 2016, Kalf had a net asset value of approximately S$2.9m.

Upgrade to BUY with higher TP of S$0.73. We have raised FY17F/18F earnings by 13%/10% given the (1) improved global semiconductor equipment market outlook, and (2) better earnings visibility from the renewal of the Endura contract.

With 8% potential upside to our revised TP of S$0.73 and an attractive 8.9% yield on offer, we upgrade UMS to BUY with potential total return of >16%.



Revenue 21.9 26.1 34.2 56.1 30.9

Cost of Goods Sold (5.3) (11.1) (18.5) 250.2 66.7

Gross Profit 16.6 15.0 15.6 (5.9) 4.4

Other Oper. (Exp)/Inc (7.1) (7.4) (6.9) (2.0) (6.5)

Operating Profit 9.51 7.53 8.67 (8.8) 15.1

Other Non Opg (Exp)/Inc 0.11 0.0 (2.5) nm nm

Associates & JV Inc 0.0 0.0 0.0 - -

Net Interest (Exp)/Inc 0.06 0.03 0.06 10.7 129.6


Pre-tax Profit 9.67 7.54 6.23 (35.6) (17.3)

Tax 0.29 (0.8) (0.3) nm (63.7)

Minority Interest 0.0 0.0 0.0 nm nm

Net Profit 9.96 6.79 5.96 (40.2) (12.2)

Net profit bef Except. 9.96 6.79 5.96 (40.2) (12.2)

EBITDA 11.3 9.07 7.73 (31.3) (14.8)

Margins (%)






Company Guide

UMS Holdings


Earnings Drivers:

Current capex trends of chipmakers and foundries point to uptick in demand at end-2017. As the procurement of semiconductor equipment tends to lag the construction of new fabs/facilities by chipmakers and foundries by 12-18 months, we believe that the construction of new 300mm fabs in 2015 and 2016 provides support for more robust growth in equipment spending towards the end of 2017. The pick-up in Applied Materials’ and UMS’ orders in recent quarters also confirms this. Earnings to recover from trough in FY16. As a long-standing manufacturing partner to Applied Materials in the manufacture of components for various semiconductor equipment, and as the main manufacturer and sub-assembler of Applied Materials’ flagship Endura deposition system, UMS naturally benefits from the uplift in demand for Applied Materials’ higher-tech wafer fabrication equipment. Recovering from the trough in FY16, we assume moderate revenue growth of 7% and normalised operating margin of 27% in FY17F, which implies that earnings is projected to rise 22% from c. S$22.6m in FY16 to c. S$27.5m in FY17F. Strong cash flow generation provides security for expectations of dividends of 6 Scts. Despite operating in a highly cyclical industry, the group’s strengths lie in its stable cash flow (even after paying dividends) generation, which coupled with its strong net cash position of 10 Scts per share and low capex needs, provides further security for dividends of 6 Scts to be paid. In the longer term, UMS’ diversification into aerospace components via 10% stake in All Star Fortress Sdn. Bhd. (ASF) could also bear fruit. While we think that ASF is unlikely to be profitable within the next 2-3 years, risks inherent in this recent diversification remains low given the small initial investment. However, we believe that this investment should provide the group with alternate growth opportunities in the medium-to-long term, as the growing outsourcing trends by international aerospace players should benefit players along the aerospace manufacturing supply chain, such as ASF.

Gross Profit (S$ m)

Revenue Growth (%)

Operating Profit Margin (%)

Effective Tax Rate (%)

Capex (S$ m)


59.6

66.9

56.4

62.465.6

0.0

9.7

19.3

29.0

38.6

48.3

57.9

67.6

2014A 2015A 2016A 2017F 2018F

-8.86

1.18

-6.22

7

5.02

-9.7

-6.4

-3.0

0.4

3.8

7.1

2014A 2015A 2016A 2017F 2018F

24.9

30.7

28.227 27.2

0.00

6.27

12.53

18.80

25.07

31.34

2014A 2015A 2016A 2017F 2018F

10

6.71

8.68

10 10

0.0

2.0

4.0

6.1

8.1

10.1

2014A 2015A 2016A 2017F 2018F

6.65

4.46

2.68

6.4 6.29

0.0

1.3

2.7

4.0

5.4

6.7

2014A 2015A 2016A 2017F 2018F


Company Guide

UMS Holdings

Balance Sheet:

Healthy balance sheet. UMS’ net cash position has strengthened significantly, and has more than doubled from S$15.3m in FY12 to S$42.4m in 4Q16. All else constant, our projections show that UMS should be able to fund management’s projected capital expenditure of S65m in FY17F internally, with ample balance to fund margin-accretive M&A opportunities, if any.

Declining PPE as most of UMS’ machines are almost fully depreciated. PPE (property, plant and equipment) has been trending downwards from S$50.2m in FY12 to S$31.7m in FY16, as UMS’ machines are depreciated based on useful lives of 7-8 years, but can be effectively used for 15 years or more. With average machine life of about seven years currently, we do not expect major capex needs in the medium term.


Acquisition of new clients. As part of its strategy, UMS has also embarked on new customer acquisition efforts and is actively seeking sustainable, margin-accretive opportunities.

Given the relatively low machine utilisation rates of 50-60%, we think the successful acquisition of new clients ahead should lead to improved utilisation and drive net margin expansion.

M&A opportunities. Following its recent 10% stake in aerospace component manufacturer, ASF, UMS continues to be on the lookout for diversification opportunities (outside of the semiconductor industry) with good long-term growth potential. If successful, these new avenues of growth could help drive further re-rating of the share price.

Potential takeover target. UMS only has one large shareholder with a 20% stake. With the renewal of the Endura contract providing good earnings visibility, consistently strong cash flows and net cash of S$42.4m (and growing), we now see UMS as an attractive takeover target. Key Risks:

Key client risk – Applied Materials. UMS' performance is closely tied to that of Applied Materials. Management estimates that between 80% and 90% of UMS’ revenues is attributable to Applied Materials. Underlying demand for semiconductor manufacturing equipment. As demand for semiconductor manufacturing equipment is largely driven by capex cycles of chipmakers and foundries, an extension of the life-cycle of existing systems or slowdown in global economy could result in deferments in their planned capital investments. Company Background

UMS Holdings (UMSH SP) is an integrated OEM for front-end semiconductor equipment manufacturing, providing both component manufacturing and sub-assembly services, primarily to key client, Applied Materials.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.4

0.4

0.4

0.5

0.5

0.5

0.5

0.5

0.6

0.6

0.6

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

2014A 2015A 2016A 2017F 2018F


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2014A 2015A 2016A 2017F 2018F


S$m

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2014A 2015A 2016A 2017F 2018F

Avg: 8.1x

+1sd: 9.9x

+2sd: 11.6x

-1sd: 6.3x

-2sd: 4.6x3.7

4.7

5.7

6.7

7.7

8.7

9.7

10.7

11.7

12.7


(x)

Avg: 1.1x

+1sd: 1.33x

+2sd: 1.57x

-1sd: 0.87x

-2sd: 0.63x0.5

0.7

0.9

1.1

1.3

1.5

1.7


(x)


Company Guide

UMS Holdings

Key Assumptions

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

Gross Profit (S$ m) 59.6 66.9 56.4 62.4 65.6 Revenue Growth (%) (8.9) 1.18 (6.2) 7.00 5.02 Operating Profit Margin 24.9 30.7 28.2 27.0 27.2 Effective Tax Rate (%) 10.0 6.71 8.68 10.0 10.0 Capex (S$ m) 6.65 4.46 2.68 6.40 6.29


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

Revenue 110 111 104 111 117Cost of Goods Sold (50.3) (44.2) (47.8) (49.1) (51.5)Gross Profit 59.6 66.9 56.4 62.4 65.6Other Opng (Exp)/Inc (32.2) (32.8) (27.0) (32.3) (33.7)Operating Profit 27.3 34.1 29.4 30.1 31.8Other Non Opg (Exp)/Inc 0.31 2.51 (4.7) 0.0 0.0Associates & JV Inc 0.0 0.0 0.0 0.0 0.0Net Interest (Exp)/Inc 0.06 0.13 0.15 0.47 0.48Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0Pre-tax Profit 27.7 36.8 24.7 30.6 32.3Tax (2.8) (2.5) (2.1) (3.1) (3.2)Minority Interest 0.0 0.0 0.0 0.0 0.0Preference Dividend 0.0 0.0 0.0 0.0 0.0Net Profit 24.9 34.3 22.6 27.5 29.1Net Profit before Except. 24.9 34.3 22.6 27.5 29.1EBITDA 35.4 44.1 32.0 36.8 38.4Growth Revenue Gth (%) (8.9) 1.2 (6.2) 7.0 5.0EBITDA Gth (%) (12.6) 24.5 (27.3) 15.0 4.4Opg Profit Gth (%) (14.5) 24.8 (14.0) 2.6 5.8Net Profit Gth (Pre-ex) (%) (13.7) 37.6 (34.1) 21.8 5.7Margins & Ratio Gross Margins (%) 54.2 60.2 54.1 56.0 56.0Opg Profit Margin (%) 24.9 30.7 28.2 27.0 27.2Net Profit Margin (%) 22.7 30.9 21.7 24.7 24.8ROAE (%) 13.1 17.8 11.8 14.5 15.1ROA (%) 11.8 16.6 10.8 13.2 13.9ROCE (%) 13.0 17.7 11.7 14.6 15.2Div Payout Ratio (%) 103.3 75.1 114.0 93.5 88.5Net Interest Cover (x) NM NM NM NM NM



Company Guide

UMS Holdings


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

Revenue 21.9 20.4 23.6 26.1 34.2Cost of Goods Sold (5.3) (8.1) (10.0) (11.1) (18.5)Gross Profit 16.6 12.2 13.6 15.0 15.6Other Oper. (Exp)/Inc (7.1) (6.7) (6.3) (7.4) (6.9)Operating Profit 9.51 5.55 7.25 7.53 8.67Other Non Opg (Exp)/Inc 0.11 (1.9) 0.0 0.0 (2.5)Associates & JV Inc 0.0 0.0 0.0 0.0 0.0Net Interest (Exp)/Inc 0.06 0.03 0.03 0.03 0.06Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0Pre-tax Profit 9.67 3.71 7.27 7.54 6.23Tax 0.29 (0.3) (0.8) (0.8) (0.3)Minority Interest 0.0 0.0 0.0 0.0 0.0Net Profit 9.96 3.38 6.47 6.79 5.96Net profit bef Except. 9.96 3.38 6.47 6.79 5.96EBITDA 11.3 5.10 8.81 9.07 7.73 Growth Revenue Gth (%) (28.7) (7.0) 15.9 10.5 30.9EBITDA Gth (%) 1.0 (54.7) 72.8 3.0 (14.8)Opg Profit Gth (%) 25.7 (41.7) 30.8 3.9 15.1Net Profit Gth (Pre-ex) (%) 16.8 (66.1) 91.4 4.9 (12.2)Margins Gross Margins (%) 75.8 60.1 57.6 57.3 45.7Opg Profit Margins (%) 43.4 27.2 30.7 28.9 25.4Net Profit Margins (%) 45.5 16.6 27.4 26.0 17.4

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

Net Fixed Assets 41.7 34.8 31.7 31.4 31.1Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0Other LT Assets 84.3 84.1 83.2 83.2 83.2Cash & ST Invts 33.8 38.9 42.6 41.2 43.1Inventory 33.3 37.4 31.7 39.2 41.2Debtors 12.9 12.4 20.9 12.7 13.3Other Current Assets 0.0 0.0 0.0 0.0 0.0Total Assets 206 208 210 208 212 ST Debt 0.0 0.0 0.25 0.25 0.25Creditor 11.1 9.76 16.6 11.4 12.1Other Current Liab 2.36 1.98 2.21 3.06 3.23LT Debt 0.0 0.0 0.0 0.0 0.0Other LT Liabilities 1.79 1.42 1.68 1.68 1.68Shareholder’s Equity 191 194 189 191 195Minority Interests 0.0 0.0 0.0 0.0 0.0Total Cap. & Liab. 206 208 210 208 212 Non-Cash Wkg. Capital 32.8 38.0 33.9 37.4 39.2Net Cash/(Debt) 33.8 38.9 42.4 40.9 42.8Debtors Turn (avg days) 56.9 41.5 58.4 55.0 40.5Creditors Turn (avg days) 128.6 103.4 118.9 120.6 95.7Inventory Turn (avg days) 302.7 351.0 312.2 305.8 326.7Asset Turnover (x) 0.5 0.5 0.5 0.5 0.6Current Ratio (x) 6.0 7.6 5.0 6.3 6.2Quick Ratio (x) 3.5 4.4 3.3 3.7 3.6Net Debt/Equity (X) CASH CASH CASH CASH CASHNet Debt/Equity ex MI (X) CASH CASH CASH CASH CASHCapex to Debt (%) N/A N/A 1,077.5 2,569.7 2,524.7Z-Score (X) 13.1 15.1 14.5 13.9 13.5



Company Guide

UMS Holdings


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

Pre-Tax Profit 27.7 36.8 24.7 30.6 32.3Dep. & Amort. 7.74 7.43 7.43 6.70 6.58Tax Paid (4.0) (2.8) (2.7) (2.2) (3.1)Assoc. & JV Inc/(loss) 0.0 0.0 0.05 0.0 0.0Chg in Wkg.Cap. 4.00 (4.9) 0.53 (4.4) (1.9)Other Operating CF 0.12 (0.7) 3.80 0.0 0.0Net Operating CF 35.6 35.8 33.9 30.7 34.0Capital Exp.(net) (6.6) (4.5) (2.7) (6.4) (6.3)Other Invts.(net) 0.0 0.0 0.0 0.0 0.0Invts in Assoc. & JV 0.0 0.0 (0.9) 0.0 0.0Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0Other Investing CF 0.06 0.12 0.14 0.0 0.0Net Investing CF (6.6) (4.3) (3.4) (6.4) (6.3)Div Paid (24.9) (25.7) (25.7) (25.7) (25.8)Chg in Gross Debt 0.0 0.0 0.25 0.0 0.0Capital Issues 0.0 0.0 0.0 0.0 0.0Other Financing CF 0.0 0.25 0.0 0.0 0.0Net Financing CF (24.9) (25.5) (25.5) (25.7) (25.8)Currency Adjustments 0.46 (0.5) (1.3) 0.0 0.0Chg in Cash 4.55 5.39 3.69 (1.5) 1.92Opg CFPS (S cts) 7.36 9.48 7.77 8.17 8.35Free CFPS (S cts) 6.75 7.30 7.27 5.66 6.45



Source: DBS Bank

Analyst: Paul YONG CFA


S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 11 Apr 16 0.61 0.70 NOT RATED

2: 15 Apr 16 0.63 0.73 BUY

3: 11 May 16 0.60 0.61 HOLD

4: 16 Aug 16 0.60 0.61 HOLD

5: 11 Nov 16 0.62 0.61 HOLD


1

2

3

45

0.49

0.54

0.59

0.64

0.69

0.74


S$


ed: TH / sa: JC, PY

NOT RATED S$2.94 STI : 3,136.48 Closing price as of 2 Mar 2017 Return *: 2 Risk: Moderate Potential Target 12-mth* : S$ 2.89 (-2% downside) Analyst Rachel TAN +65 6682 3713 [email protected] Derek TAN + 65 6682 3716 [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$m) 2015A 2016A 2017F 2018FRevenue 851 480 564 567EBITDA 183 151 143 143Pre-tax Profit 63.5 29.5 61.6 61.8Net Profit 71.6 27.3 51.0 51.3Net Pft (Pre Ex.) 71.6 27.3 51.0 51.3EPS (S cts) 11.2 4.43 8.28 8.32EPS Pre Ex. (S cts) 11.2 4.43 8.28 8.32EPS Gth (%) (42) (61) 87 0EPS Gth Pre Ex (%) 250 (61) 87 0Diluted EPS (S cts) 11.2 4.43 8.28 8.32Net DPS (S cts) 9.67 12.4 12.4 12.4BV Per Share (S cts) 287 306 301 297PE (X) 26.2 66.3 35.5 35.3PE Pre Ex. (X) 26.2 66.3 35.5 35.3P/Cash Flow (X) 6.9 6.6 10.1 8.6EV/EBITDA (X) 18.2 17.8 18.1 17.3Net Div Yield (%) 3.3 4.2 4.2 4.2P/Book Value (X) 1.0 1.0 1.0 1.0Net Debt/Equity (X) 0.4 0.3 0.2 0.2ROAE (%) 3.9 1.5 2.7 2.8 Other Broker Recs: B: 1 S: 0 H: 1ICB Industry : Industrials ICB Sector: Construction & Materials Principal Business: United Engineers Limited is a holding company and property developer. The Company's subsidiaries primarily operate engineering design services for power and water treatment plants, property development and construction, healthcare services


Centenarian with Prized Commercial Portfolio

• Established centennial Singapore company with key

businesses which are subject to a potential take-over as

major shareholders look to exit

• Substantial portion of prized commercial portfolio are on

either 999-year leasehold or freehold titles

• Upside for acquirer comes from active leasing of empty

space while more capex is needed to spruce up an

ageing portfolio

The Business A cleaner “real estate play” after a series of divestments of non-core assets in the last two years, with prized commercial portfolio. United Engineers is a diversified conglomerate with businesses in real estate, engineering and distribution. Since 2014, the group has looked to focus on its hospitality and real estate divisions and started to divest its non-core assets since 2014 in a bid to streamline its businesses.

Potential take-over prospects as major shareholders look to sell out. Major shareholders, OCBC, Great Eastern and affiliates, have announced a potential sale of their combined stake of c.32% of the stock and according to media reports, received bids by different consortiums for their stake, which include the likes of Ascendas-Singbridge, Perennial Real Estate, among others. Given the heighted interest in the firm, we believe that an offer could turn exuberant. A sale could spark a general offer, based on SGX listing rules. The jewels of the portfolio are well-positioned assets – UE Bizhub City (UE Square), One North mixed development, as well as UE Bizhub West which are strategically located at the fringe of the Central Business District (CBD) or in key suburban commercial districts. The Stock Valuation. Our target price of S$2.89 is based on 1.0x P/NAV, based on historical transactions for developer’s acquisition. Our revalued NAV (RNAV) for UE at S$3.30/share is at a 20% premium to NAV of S$2.75/share. The stock is currently trading c.6% below our price target of S$2.89.

What is in it for acquirers. Apart from acquiring a commercial portfolio that sits on substantially FH/999-LH land and upside to earnings through active leasing of empty spaces, we believe that more capital expenditure is needed to spruce up the portfolio in order to remain relevant to tenant needs. This could point to higher values in the medium term.

Risks: Lacklustre sales and lease for the China projects, Chengdu Orchard Villa and Shenyang Orchard Summer Palace.

At A Glance

Issued Capital (m shrs) 637Mkt. Cap (S$m/US$m) 1,873 / 1,326Major Shareholders (%) OCBC 20.5Lee Foundation Singapore 8.3




United Engineers Bloomberg: UEM SP | Reuters: UTES.SI Refer to important disclosures at the end of this report

60

80

100

120

140

160

180

200

220

1.4

1.9

2.4

2.9

3.4


Relative IndexS$

United Engineers (LHS) Relative STI (RHS)

SMC Research

Equity Explorer

United Engineers

Page 2

REVENUE DRIVERS Stable contribution from UE’s prized commercial portfolio in Singapore. The group has a 100% stake in the following properties: UE Bizhub City, UE Square Shopping Mall, Park Avenue Clemenceau, Park Avenue Rochester, Rochester Mall, UE Bizhub Tower, UE Bizhub West, UE Bizhub Central, Park Avenue Robertson, and 30% stake in Seletar Mall through a joint venture with Singapore Press Holdings (Refer to Appendix 1 for details on commercial portfolio). We note that the four business parks and office properties have attained near-full occupancy rates in FY2015.

On top of its owned properties, UE also manages UE Bizhub East and Changi Link, and continues to operate Park Avenue Changi, although having divested the properties in 2014. Collectively, the property rental and services segment has seen relatively stable revenue contribution with high recurring rental income. Post divestment of UE Bizhub East in 2013, rental revenue contribution was in the range of S$140-S$150m for both FY2015 and FY2014, down from S$210m in FY2013.

Sales of residential property developments primarily in Malaysia and China. UE’s Singapore residential development, Eight Riversuites, had achieved >97% sales as of end-2015 and attained TOP status in January 2016. The Malaysia development, the Manhattan, has achieved >65% sales and is expected to be completed in 2017. In China, Shenyang Orchard Summer Palace is a mix of shopping centre, 408 units of serviced apartments and 448 units of residential apartments, as well as commercial offices. Sales and lease for its retail and office space have begun, while the serviced apartments are currently still under construction. Chengdu Orchard Villa, another project in China, is still under construction and will see 1,358 units of terraced and semi-detached houses. These projects are likely to bring in revenue for the property development segment over the next few years as sales are underway (Refer to Appendix 2 for details).

Other businesses. After a series of disposals of non-core businesses and streamlining (Refer to Appendix 3 for details), UE now has businesses in environmental engineering, systems integration, distribution of various materials, equipment and LPG, manufacturing of printed circuit boards and precision engineering. With the exception of precision engineering which is accounted for under “Technology & Manufacturing” revenue segment, the rest of the businesses are parked under “Corporate Services & Others” revenue segment. These business segments accounted for 71.4% of FY2015’s revenue, driven mainly by the printed circuit boards business – 60% indirectly owned subsidiary Multi-Fineline Electronix Inc (“MFLEX”). With the latest proposed disposal of MFLEX in February 2016, we expect revenue contribution from these segments to decline substantially to ~50% for FY2016. Going forward, post disposal of MFLEX, UE’s revenue will predominantly stem from its property development and property rental and services divisions. COST STRUCTURE Stable operating margins from Property rental and services segment. Operating margins for the Property rental and services segment peaked in FY2013 at 87.8%. Post divestment of UE Bizhub East in 2014, operating margins have stabilised at c.50% for FY2014 and FY2015. Operating margins for Property Development segment decreased from 5.1% in FY2014 to 4.6% in FY2015, still in line with observed industry margins. With the disposal of various non-core businesses and streamlining efforts, operating margins for the Technology and manufacturing, as well as Corporate services and others segments, have improved from -1.4% and 0.1% in FY2014 respectively, to 6.7% and 3.9% in FY2015.

Chart 1: Revenue Breakdown by Business (FY2015A)*

Chart 2: Segment Assets’ Distribution (FY2015)

Chart 3: Est. Segment Assets’ Distribution (FY2016), post MFLEX’s sale and TOP of Eight Riversuites in 2016


Property rental and services,

7%

Property development,

22%

Corporate services and others, 19%

Technology and manufacturing (MFLEX), 48%

Technology and manufacturing (others), 4%

*Est using FY2015YE USD/SGD exchange rate of 1.4115


47%


22%

Technology and manufacturing,

18%


Total Segment Assets = S$4.2bn


59%


20%

Technology and manufacturing,

4%


Total Est. Segment Assets = S$3.2bn

Equity Explorer

United Engineers

Page 3

DIVERSIFICATION OF NON-CORE ASSETS The path to realising UE’s real estate portfolio. UE has mentioned of its intention to focus on its real estate and hospitality businesses. With the acquisition of WBL Corporation, UE has expanded its business offerings to include distribution, manufacturing and technology, as well as gained a foothold in China’s property businesses through WBL’s projects. Over the last two years, UE has been streamlining its portfolio by selling non-core assets to realise its real estate portfolio. In July 2016, UE completed the sale of MFLEX which is listed on NASDAQ with a market capitalisation of c.US$560m, and expects to book a gain of close to S$115.2m (c.S$0.18 per share). The disposal of MFLEX, which contributed to ~48% of UE’s FY2015’s revenue, is a significant step for UE as it moves towards becoming a cleaner “real estate play”. Disposal of non-core assets continues as part of UE’s ongoing

process to unlock value in assets. UE continues its effort of divesting non-core assets in its engineering and distribution segment, pending completion of several disposals estimated to give rise to S$15.1m of gains (UES Holdings Pte Ltd, UE Envirotech Pte Ltd, UE Asia Pacific (Beijing) Co Ltd, Hengyang City Songmu Water Co Ltd). Most recently in August 2016, UE completed the sales of an agricultural seedlings production and distribution business, Suzhou Speedling Co Ltd (Refer to Appendix 3 for details on past disposals). KEY OPERATING ASSETS

UE’s commercial assets are its crown jewels, with estimated

RNAV of ~S$2bn. In our view, UE’s crown jewels are UE Bizhub City (UE Square), One North mixed development and UE Bizhub West on Alexandra Road, especially as they are located either along the fringes of the Central Business District (CBD), or emerging suburban commercial hubs with good infrastructure and a critical mass of workers. Its other assets include UE Bizhub Tower (Office), UE Bizhub Central (Industrial), Park Avenue Robertson (Serviced Apartments) as well as a 30% stake in a suburban mall, Seletar Mall. We note that UE’s three business parks and office properties had attained near-full occupancy rates in FY2015. Collectively, we estimate that these properties have RNAV of ~S$2bn, with current valuation of c.S$1.8bn. At this value, the assets are yielding approximately 3.9% of operating income. On an aggregated basis, these assets accounted for 47% of UE’s total segment assets in FY2015, and an estimated 59% for FY2016, making them the crown jewels of UE.


New Group Managing Director, Mr Norman Ip, to lead the company. Following the retirement of UE’s then-Group Managing Director Mr Jackson Chevalier Yap in January 2014, the position has been left vacant. Mr Norman Ip’s appointment as Group Managing Director in November 2015 is seen as positive for UE due to his extensive knowledge of UE’s businesses. Mr Ip has been on UE’s Board of Directors since 2009, and had personally overseen the integration of WBL Group upon UE’s acquisition, as Chairman of the Corporate Office. Prior to the appointment, Mr Ip served as Acting Group CEO. No formal dividend payout policy. While UE does not have a formal dividend payout policy, payout has ranged from 40% to 75% in the last four years. Including special dividends, UE currently has a dividend yield of 3.1%.

Table 4: UE’s Divestments Over the Years

Chart 5: UE’s Shareholding Structure

Source: Company, Thomson Reuters, DBS Bank

Great Eastern, 13%

OCBC, 10%

Lee Foundation, 9%

WBL Corporation,

3%

Others, 64%

Year S$'m Major assets 2013 523.7 UE BizHub East 2014 1,263.4 Various entities in the manufacturing,

technology, automotive businesses and properties

2015 23.8 Non-core assets 2016 -current

552.4 MFLEX

Suzhou Speedling Co Ltd Yet to complete: UES Holdings Pte Ltd, UE Envirotech Pte Ltd, UE Asia Pacific (Beijing) Co Ltd, Hengyang City Songmu Water Co Ltd

Source: SGX Announcements, DBS Bank

Equity Explorer

United Engineers

Page 4

Segmental Breakdown FY Dec 2011A 2012A 2013A 2014A 2015A

Revenues (S$m) Property rental & svcs 143 181 206 151 139 Property development 767 0 40 881 402 Technology & manuftg N/A N/A N/A 880 971 Corporate svcs & others 8 8 8 1,314 356 Engineering 416 453 55 N/A N/A Others/ Elimination (147) (46) 1356 (16) (11)Total 1,187 596 1,665 3,210 1,857

Note: Figures as disclosed by Company, will not tie to operating margins derived below Income Statement (S$m) FY Dec 2014A 2015A 2016A 2017F 2018F Revenue 3,209 851 480 564 567Cost of Goods Sold (2,795) (632) (286) (381) (391)Gross Profit 415 219 194 183 175Other Opng (Exp)/Inc (319) (155) (160) (92.5) (84.7)Operating Profit 95.4 64.2 33.9 90.7 90.7Other Non Opg (Exp)/Inc 6.34 29.0 25.9 0.0 0.0Associates & JV Inc (0.3) 4.40 2.89 0.0 0.0Net Interest (Exp)/Inc (38.8) (34.2) (33.2) (29.1) (28.8)Exceptional Gain/(Loss) 103 0.0 0.0 0.0 0.0Pre-tax Profit 166 63.5 29.5 61.6 61.8Tax (35.3) (0.5) (8.8) (10.5) (10.5)Minority Interest (7.0) 8.68 6.64 0.0 0.0Preference Dividend (0.1) (0.1) (0.1) (0.1) (0.1)Net Profit 124 71.6 27.3 51.0 51.3Net Profit before Except. 20.4 71.6 27.3 51.0 51.3EBITDA 202 183 151 143 143Growth Revenue Gth (%) 92.8 (73.5) (43.6) 17.5 0.5EBITDA Gth (%) nm (9.8) (17.4) (5.1) 0.0Opg Profit Gth (%) nm (32.7) (47.2) 167.3 0.0Net Profit Gth (Pre-ex) (%) nm 250.3 (61.8) 86.8 0.4Margins & Ratio Gross Margins (%) 12.9 25.7 40.4 32.5 30.9Opg Profit Margin (%) 3.0 7.5 7.1 16.1 16.0Net Profit Margin (%) 3.8 8.4 5.7 9.1 9.0ROAE (%) 7.0 3.9 1.5 2.7 2.8ROA (%) 2.1 1.5 0.7 1.3 1.3ROCE (%) 1.5 1.5 0.6 2.1 2.1Div Payout Ratio (%) 34.9 86.1 279.8 149.8 149.1Net Interest Cover (x) 2.5 1.9 1.0 3.1 3.1


Margins Trend

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2014A 2015A 2016A 2017F 2018F


Corporate services & others include engineering and distribution businesses

Includes net gain of S$16.5m on disposal of subsidiaries, associates (See details in Appendix 3)

~48% of FY2015’s revenue comes from MFLEX

Technology & manufacturing includes MFLEX MFLEX revenue for FY2015: US$637m

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United Engineers

Page 5


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

Revenue 468 445 429 334 142 102Cost of Goods Sold (393) (361) (333) (275) (96.9) (56.8)Gross Profit 75.6 83.9 95.3 58.4 45.3 45.0Other Oper. (Exp)/Inc (49.0) (52.1) (66.4) (50.8) (35.7) (34.3)Operating Profit 26.6 31.8 29.0 7.60 9.65 10.7Other Non Opg (Exp)/Inc 3.50 5.39 1.19 0.97 1.90 11.1Associates & JV Inc 6.46 (1.7) 0.31 2.29 1.43 0.74Net Interest (Exp)/Inc (6.9) (7.7) (8.5) (9.2) (8.7) (8.1)Exceptional Gain/(Loss) (1.1) 6.49 17.0 0.0 (1.2) 0.0Pre-tax Profit 28.6 34.3 39.0 1.64 3.01 14.4Tax (1.8) (7.0) 3.93 (2.2) (0.5) (3.6)Minority Interest (9.2) (8.7) (1.8) 7.52 0.34 0.97Net Profit 17.6 18.6 41.0 6.94 2.87 11.7Net profit bef Except. 18.6 12.1 24.0 6.94 4.10 11.7EBITDA 20.6 22.3 21.3 18.8 4.97 0.0 Growth Revenue Gth (%) (9.1) (4.9) (3.7) (22.2) (57.4) (28.5)EBITDA Gth (%) (0.2) 8.1 (4.3) (12.0) (73.5) nmOpg Profit Gth (%) (21.4) 19.8 (8.9) (73.8) 27.0 10.4Net Profit Gth (%) (29.8) 5.9 120.8 (83.1) (58.7) 307.4Margins Gross Margins (%) 16.1 18.9 22.2 17.5 31.9 44.2Opg Profit Margins (%) 5.7 7.2 6.8 2.3 6.8 10.5Net Profit Margins (%) 3.7 4.2 9.6 2.1 2.0 11.5


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

Net Fixed Assets 389 359 163 110 57.9Invts in Associates & JVs 209 183 158 158 158Other LT Assets 1,967 1,973 1,928 1,943 1,958Cash & ST Invts 731 554 632 720 1,140Inventory 122 109 31.2 45.0 46.4Debtors 260 232 217 247 248Other Current Assets 1,222 1,069 668 668 570Total Assets 4,900 4,480 3,798 3,892 4,179 ST Debt 334 614 295 295 295Creditor 255 421 219 360 371Other Current Liab 365 59.2 50.4 29.2 29.2LT Debt 1,383 829 897 897 1,197Other LT Liabilities 183 168 142 142 142Shareholder’s Equity 1,804 1,831 1,883 1,858 1,832Minority Interests 576 557 312 312 312Total Cap. & Liab. 4,900 4,480 3,798 3,892 4,179 Non-Cash Wkg. Capital 984 930 648 571 464Net Cash/(Debt) (986) (890) (559) (471) (352)Debtors Turn (avg days) 42.2 105.4 170.9 150.4 159.6Creditors Turn (avg days) 34.5 280.7 403.8 400.0 400.0Inventory Turn (avg days) 16.5 72.8 57.5 50.0 50.0Asset Turnover (x) 0.5 0.2 0.1 0.1 0.1Current Ratio (x) 2.4 1.8 2.7 2.5 2.9Quick Ratio (x) 1.0 0.7 1.5 1.4 2.0Net Debt/Equity (X) 0.4 0.4 0.3 0.2 0.2Net Debt/Equity ex MI (X) 0.5 0.5 0.3 0.3 0.2Capex to Debt (%) 3.8 2.2 3.4 1.3 1.0


Revenue Trend


-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0

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2Q20

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3Q20

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Lower property development revenue, post TOP of Eight Riversuites

Includes net loss from discontinued ops (MFLEX) S$5.1m

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United Engineers

Page 6


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

Pre-Tax Profit 266 63.5 29.5 61.6 61.8Dep. & Amort. 101 84.9 88.2 52.5 52.5Tax Paid (51.9) (37.1) (21.3) (31.7) (10.5)Assoc. & JV Inc/(loss) 0.29 (4.4) (2.9) 0.0 0.0Chg in Wkg.Cap. 135 124 241 97.4 107Other Operating CF (164) 42.0 (58.6) 0.0 0.0Net Operating CF 286 272 276 180 211Capital Exp.(net) (65.7) (32.1) (41.1) (15.0) (15.0)Other Invts.(net) 16.3 16.6 0.0 0.0 0.0Invts in Assoc. & JV 260 (5.4) 235 0.0 0.0Div from Assoc & JV 14.7 35.5 0.0 0.0 0.0Other Investing CF 122 38.2 61.8 0.0 0.0Net Investing CF 347 52.8 255 (15.0) (15.0)Div Paid (58.7) (116) (141) (76.4) (76.4)Chg in Gross Debt (930) (267) (224) 0.0 300Capital Issues 1.42 0.25 0.0 0.0 0.0Other Financing CF 0.98 0.50 (8.4) 0.0 0.0Net Financing CF (986) (382) (373) (76.4) 224Currency Adjustments 1.40 0.36 (78.1) 0.0 0.0Chg in Cash (351) (56.2) 79.9 88.3 420Opg CFPS (S cts) 23.8 23.4 5.66 13.4 16.9Free CFPS (S cts) 34.7 37.7 38.1 26.7 31.8


Capital Expenditure

VALUATIONS

Currently trading at above average valuations. UE currently

trades at close to NAV in the wake of recent news of a potential sale

involving a possible general offer (GO) on the company. We believe

that a 1x P/NAV is a fair take-over premium, in line with historical

transaction premiums. This work outs to S$2.89 per share, which is

the current price.



Sales from China property developments may be volatile.

According to UE, the challenging macroeconomic conditions may

affect its China property division. We expect demand to be patchy

for its new developments.

Key stakeholders control close to one-third of the company.

On 26 September 2016, OCBC and Great Eastern Holdings (GEH)

announced that they were reviewing strategic options for their

stakes in UE. OCBC’s intention to dispose of UE can be traced back

to 2014 where it was reportedly in exclusive talks with Thai

billionaire Chareon Sirivadhanabhakdi. OCBC, GEH and Lee

Foundation collectively own ~30% of shares in UE. A sale of their

stakes to a third party will trigger a general offer for UE, according

to the current listing rules.

Table 6: UE’S RNAV

Revalued NAV (RNAV of UE) S$'mDevelopment 88.72 ACommercial Portfolio 1,988.1less: Value on Balance Sheet (1,859)Surplus 128.68 BGain from MFLEX sale - CNAV (ex minority Interest and perps) 1,783.0 D

RNAV 2,000.4 SUM

Shares 616.2

RNAV / share 3.25

NAV / share 2.89

Source: DBS Bank

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2014A 2015A 2016A 2017F 2018F


S$m

Equity Explorer

United Engineers

Page 7

APPENDIX 1. UE’S RESIDENTIAL PROPERTIES

Project Type Location Stake GFA (sqft) RemarksEight Riversuites Condo Singapore 100.0% 701 >97% sold and achieved TOP in 2016.The Manhattan Condo Jalan Raja Chulan, Kuala

Lumpur 100.0% 265 >65% sold. Residential property in the golden

triangle of KL. Expected to complete in 2017. Chengdu Orchard Villa Landed Chengdu, China 67.6% 3,171 Sold >30% of the units. Located within 15

minutes' drive from downtown. Shenyang Orchard Summer Palace

Mixed dev

Shenyang, China 67.6% 2,681 Mixed-use project consisting of a shopping mall, Grade A offices, 408 serviced residences and 440 residential units. Located on Shenyang’s “Financial Street”, where Sofitel Shenyang Lido and Marriott Shenyang are located.

APPENDIX 2. UE’S COMMERCIAL PROPERTIES

No Property Development Type Title Holdings NLA (sqft)

1 UE Bizhub City Mixed Use LH 929 100%

UE Bizhub City – Office Office LH 929 100% 317,000

UE Bizhub City - Shopping Mall Retail LH 929 100% 79,000

Park Avenue Clemenceau Serviced Apartments LH 929 100% 150 rooms

8 UE Bizhub East* Office LH 99 0% -

UE Bizhub East Office LH 99 0% -

Park Avenue Changi Serviced Apartments LH 99 0% -

Changi Link Retail 0% -

2 Mixed Development One North Mixed Use LH 99 100%

Rochester Mall Mall LH 99 100% 96,478

Park Avenue Rochester Serviced Apartments LH 99 100% -

3 UE Bizhub West Office/Industrial FH 100%

452 Alexandra Road Industrial FH 100% 345,101

450 Alexandra Road Commercial FH 100% 155,932

4 UE Bizhub Tower Office FH 100% 28,162

5 UE Bizhub Central Industrial 29 years 100% 258,068

6 Seletar Mall Mall LH 99 30% 188,000

7 Park Avenue Robertson Serviced Apartments n.a. 100% 36

* Divested in November 2013. UE, however, continues to operate Park Avenue Changi, as well as manages UE Bizhub East and Changi Link.


Equity Explorer

United Engineers

Page 8

APPENDIX 3. UE’S DISPOSAL OF ASSETS/ NON-CORE BUSINESSES

Completion Date Development/ Business Consideration ($m) Gain (Loss) (S$m)

Aug-13 UE Managed Solutions SGD 5.7 3.0

Nov-13 UE BizHub EAST SGD 518.0 115.9

Jan-14 First Class Automotive Co Ltd SGD 2.0 Not material

Feb-14 Delichem Group SGD 0.8 Not material

Aug-14 MFS Technology (S) Pte Ltd SGD 124.2 Not material

Sep-14 UE Orchard Pte Ltd SGD 0.2 Not material

UE Somerset Pte Ltd SGD 353.0 Not material

Nov-14 Suzhou Industrial Park Jian Wu Heng Ye Property Development Co Ltd RMB 490.0 14.0

Nov-14 Wearnes Automotive Pte. Ltd. and Associated Motor Industries (Private) Ltd SGD 455.0 17.1

Dec-14 UE E&C Ltd SGD 230.2 43.5

Jan-15 United Managed Solutions Group SGD 12.2 Not material

Jan-15 UE ServiceCorp (Taiwan) Ltd SGD 0.5 Not material

Jan-15 RFNet Technologies Pte Ltd SGD 2.4 Not material

Jan-15 Tangshan UE Shengxing Renewable Resources Co Ltd RMB 6.0 Not material

Jun-15 Chengdu Huaxin Ruitai Property Mgmt Co Ltd RMB 2.0 Not material

Jun-15 Shanghai Olympics Property Mgmt Co Ltd RMB 0.5 Not material

Oct-15 PT United Engineers Indonesia IDR 70,000.0 13.2

Jul-15 Multi-Fineline Electronix IncUE E SGD 505.3 115.2

Aug-16 Suzhou Speedling Co Ltd SGD 1.1 Not material

Pending completion of disposal

Proposed Development/ Business Consideration (S$m) Gain (Loss) (S$m)

May-16 UES Holdings Pte Ltd 16.0 7.2

May-16 UE Envirotech Pte Ltd, UE Asia Pacific (Beijing) Co Ltd, Hengyang City Songmu Water Co Ltd

30.0 7.9

Source: Company, SGX announcements, DBS Bank

APPENDIX 4. UE’S BALANCE SHEET (2015 VS 1H2016)

Balance Sheet (S$m) FY Dec 2018F 1H2016

Net Fixed Assets 57.9 163Invts in Associates & JVs 158 168Other LT Assets 1,958 1,925Cash & ST Invts 1,140 181Inventory 46.4 28Debtors 248 240Other Current Assets 570 1,333Total Assets 4,179 4,038 ST Debt 295 508Creditor 371 201Other Current Liab 29.2 192LT Debt 1,197 757Other LT Liabilities 142 147Shareholder’s Equity 1,832 1,750Minority Interests 312 482Total Cap. & Liab. 4,179 4,038 Non-Cash Wkg. Capital 464 588Net Cash/(Debt) (352) (1,085)Current Ratio (x) 2.9 1.9Quick Ratio (x) 2.0 1.1Net Debt/Equity (X) 0.2 0.5Net Debt/Equity ex MI (X) 0.2 0.6Capex to Debt (%) 1.0 2.0


Includes disposal group (MFLEX) classified as held for sale, S$639m assets

Includes disposal group (MFLEX) classified as held for sale, S$149m liabilities

Cash decreases as disposal group (MFLEX) has S$286m of cash

Equity Explorer

United Engineers

Page 9

APPENDIX 5. PEER COMPARISON

Mkt Price 12-mth Company FYE Cap 2-Mar-17 RNAV *Assumed Target Price Upside P/RNAV Latest Qtr

(S$m) (S$) (S$) Discount

(%) (S$) % Rcmd (x) P/NBV

Frasers Centrepoint Ltd Sep 4,824 1.66 2.86 -30% 2.00 20% BUY 0.58 0.78

Global Logistics Properties Mar 12,514 2.67 3.53 -30% 3.00 12% BUY 0.76 1.18

UOL Dec 5,278 6.56 10.23 -25% 7.64 16% BUY 0.64 0.77

Source: Bloomberg Finance L.P, DBS Bank

APPENDIX 6. HISTORICAL TRANSACTIONS INVOLVING LISTED PROPERTY DEVELOPERS (2010-NOW)

Announcement Date

Target Company

Acquirer Final Offer Price

Deal Value(S$m)

Premium/ Disc

P/RNAV(x)

P/NAV(x)

1-mth VWAP

Aug-2016 Sim Lian Coronation 3G 1.08 216 16.8x 0.9x n.a.

Jan-2015 Keppel Land Keppel Corp 4.38 2,749 25.0x 0.88x 0.66x

Apr-2014 Hotel Properties Limited Wheelock 4.05 200 33.8x 1.32x 0.79x

Apr-2014 CapitaMalls Asia CapitaLand Limited 2.35 3,025 35.8x 1.26x 0.89x

Feb-2014 Singapore Land Limited United Industrial Corporation Limited 9.40 650 16.9x 0.72x 0.67x

Dec-2012 SC Global Developments Limited MYK Holdings Pte Ltd 1.80 318 57.2x 1.15x 0.8x

May-2012 Wing Tai Ascend Capital Limited 1.39 1,104 14.3x 0.55x 0.62x

May-2011 Allgreen Limited Brookevale Investment Pte Ltd 1.60 1,060 40.6x 0.99x 0.81x

Sep-2010 Soilbuild Limited Dolphin Acquisitions 0.80 113 15.6x 1.26x 1.07x

Aug-2010 MCL Hong Kong Land Holdings Limited 2.45 189 27.3x 0.96x 0.75x

Min 14.3x 0.62x 0.62x

Mean 28.3x 0.78x 1.0x

Median 26.1x 0.79x 1.0x

Max 57.2x 1.07 1.32

Source: DBS Bank

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

BUY Last 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


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


EBITDA 62.1 67.2 78.9 27.1 17.4

Margins (%)






Page 3

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


Page 4

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)


Page 5

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




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


Page 6

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)





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


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


Page 7

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

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Page 10

DBS Bank Equity Explorer return ratings reflect return expectations based on an assumed earnings profile and valuation parameters:

1 (>20% potential returns over the next 12 months)

2 (0 - 20% potential returns over the next 12 months)

3 (negative potential return over the next 12 months)

The risk assessment is qualitative in nature and is rated as either high, low or moderate risk. (see section on risk assessment)

Note that these assessments are based on a preliminary review of factors deemed salient at the time of publication. DBSV does not commit to ongoing coverage and updated assessments of stocks covered under the Equity Explorer product suite. Such updates will only be made upon official initiation of regular coverage of the stock.

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: 8 Mar 2017 9:45:35 (SGT)

Dissemination Date: 8 Mar 2017 13:21:34 (SGT)

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank 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:

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(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.

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 research analyst

(s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer

of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of

the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for

the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research

report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. 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. 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. There is no direct link of DBS Group's compensation to any specific investment banking

function of the DBS Group.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary positions in

Venture Corporation, Global Logistic Properties, Sembcorp Marine, SIA Engineering recommended in this report as of 31 Jan 2017.

2. Neither DBS Bank Ltd, DBS Bank (Hong Kong) Limited (“DBS HK”) nor DBS Vickers (Hong Kong) Ltd (“DBSV HK”) market makes in equity

securities of the issuer(s) or company(ies) mentioned in this Research Report.

Compensation for investment banking services:

3. 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 Courts Asia, United Engineers as of 31 Jan 2017.

4. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities

for Eu Yan Sang, Otto Marine Limited, Courts Asia, United Engineers in the past 12 months, as of 31 Jan 2017.

5. 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.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of

which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.

2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.

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Disclosure of previous investment recommendation produced:

6. 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.

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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 has been prepared by a person(s) who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Vickers Hong Kong Limited, a licensed corporation licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].

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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.

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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, 3rd 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.

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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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