Excerpts from latest analyst reports…..
BNP Paribas to revisit its RAFFLES EDUCATION forecasts
Analyst: Brenda Lee, CFA
§ Share price rallies sharply on potential development at OUC
§ RLS expects to fetch RMB7,000/sqm from residential sales
§ Our earnings forecast not yet account for the OUC development
§ We are revisiting our numbers following the positive news flow
At the recent BNP Paribas ASEAN Conference, Raffles Education (RLS) had mentioned that it has identified a property developer in Singapore to co-develop the Oriental University City (OUC) land to monetise its SGD394m investment in the university city.
Turnaround signal to the market?
According to RLS, the average land cost for OUC is SGD94/sqm and the potential property development cost is RMB3,000-3,500/sqm. The company estimates that the residential property development in OUC can fetch RMB7,000/sqm.
Should the company successfully develop the existing 280,000 sqm residential site within OUC (note: overall area of the OUC is 3.3m sqm), we believe it should be able to generate substantial investment returns. As the exact master plan for the OUC residential site has not been announced, our forecasts do not account for any potential NAV revision for RLS for now.
Fundamentally, we estimate the upcoming 2Q11 results will be mediocre on a y-y basis, given the consistent decline in NES and OUC student numbers due to the structural change in China’s education industry. However, we expect the company’s performance to improve on a q-q basis, given the lower-than-expected start-up loss from new PES schools and improved student intake outside China. In view of the recent developments, we are revisiting our numbers.
Valuation
We value RLS on a sum-of-the-parts methodology, valuing OUC at 1x target 2011E P/BV and the income from education services at 13x 2011E target PER. RLS has transformed its asset-light business model to become a provider of higher education services with fixed assets commitment to comply to the new regulation changes in the education sector.
We believe the monetisation progress in OUC will be the biggest value creator and share-price driver in the next 12 months. We have not included any potential property development earnings from OUC at this moment. Earnings growth potential looks skewed to the upside.
Risks: lower- than-expected enrolment numbers and higher-than-expected startup losses for new schools.
CIMB says OKP and YONGNAM could benefit from North-South Expressway construction
The Land Transport Authority (LTA) gave approval for the alignment of the North-South Expressway (NSE) between Admiralty Road West and Toa Payoh Rise. When completed, the NSE will be Singapore's 11th expressway, and will run parallel to the Central Expressway (CTE). Among SGX-listed construction stocks under our coverage, we believe that OKP and Yongnam have the most direct exposure to NSE.
• Road works underway for the next 10years: The 5km Marina Coastal Expressway (MCE) is currently under construction, and is expected to be completed by 2013. Meanwhile, construction of the proposed 16km NSE is expected to commence from 2013 and finish by 2020.
Given the scale (3x longer than MCE measured by length) and complication (described by LTA as “one of the most challenging engineering undertakings to date”) of the NSE, we expect bigger and potentially more lucrative contracts to be awarded to contractors.
• OKP (BUY; TP: S$0.85): OKP is involved in the construction and maintenance of urban and arterial roads, expressways, vehicular bridges, flyovers etc. The company is also likely to benefit from road construction contracts awarded for the NSE project. We like OKP for its high projects visibility in the public sector, and its strong potential overseas expansion story. OKP is also a prime candidate to benefit from governments’ infrastructural spending.
• Yongnam (Outperform; TP S$0.41): As a leading provider of specialist civil engineering (SCE) solutions in Singapore, we believe that Yongnam is well-positioned to secure specialist civil engineering contracts for the NSE project.
The Group won six MCE contracts worth S$363m in aggregate between 2009 and 2010. Given that the NSE is a much bigger project compared to the MCE, we expect its total contract wins for the NSE to surpass its MCE contract wins.
Its order book stands at S$451xm as at 30 Sep 2010, with the record high of S$540m registered on 30 Sep 2009. We expect the specialist civil engineering contracts for the NSE to be awarded from 4Q2012.
Phillip Securities downgrades PEC to a ‘hold’
Analyst: Derrick Heng
EPC contract win worth S$78mn
Estimate outstanding order book worth S$245mn.
Revised contract wins estimates and revenue upwards
Downgrade to Hold with target price of S$1.44 after strong price run up.
PEC announced that they had been awarded a S$78mn EPC contract to provide pipe rack and utilities piping reticulation system for Tuas Power Utilities (TPU). The project will be carried out in TPU’s Tembusu Multi-Utilities Complex in Jurong Island and is targeted for completion by May 2012.
During the conference call for the 1QFY11’s results announcement, Management had expressed optimism over winning contracts from project enquiries worth around S$800-900mn. We remain positive on the outlook for the industry and expect further contract wins by PEC in the coming year.
Estimated order book. With the contract win, we estimate that PEC’s current order book should be worth approximately S$245mn. Incorporating the latest contract announcement, we revised our contract win assumptions for PEC from S$572mn to S$600mn over FY11 and FY12. Consequently, our revised revenue forecasts for PEC are S$448mn and S$588mn in FY11 and FY12 respectively.
Valuation. In valuing the stock of PEC, we used a blended valuation of P/E and P/B (P/E: 8.75X and P/B: 1.75X) to arrive at our revised target price of S$1.44. After incorporating our dividend forecast of 5.8¢ over the next 12 months, we expect total returns for the stock to be 9.2%. Hence, with the strong run up in the stock price of PEC recently, we downgrade our recommendation to Hold as we believe that valuations for the stock are no longer as attractive after returning 30.5% since our initiation.
DBS Vickers downgrades LONGCHEER to sell
Analyst: Tan Ai Teng
Following a16%/20% cut in shipment volume for FY11F/12F, 10% drop in ASP and a 4-4.7% decline in gross margins, we forecast a loss of S$12m in FY11 and S$12.7m profit in FY12.
In view of the drastic change in operating prospects and our expectation of losses in FY11F, we have re-pegged our target price to historical mean P/B of 1.3x FY11, thus yielding a revised TP of S$0.49.
Downgrade to Sell on weakening outlook and >20% downside to TP.
