STRACO target raised to 96 c; KIM HENG still a buy, 30-c target

Excerpts from analysts' reports

CIMB highlights Straco's "strong underlying momentum"

Analysts: Jessalynn CHEN and Kenneth NG, CFA (left)

Straco’s 1H14 net profit formed 39% of our full-year forecast, which we deem in line as 2H is seasonally stronger (peak season falls in 3Q and typically accounts for 45% of the year’s net profit).

Visitor arrivals at its aquariums surprised on the upside, driven by favourable government policies that incentivise domestic travel. However, forex losses continued to hit the bottomline as the Rmb depreciated against the S$, bringing net profit closer to our estimates.

Our DCF-based target price rises to S$0.96 after we tweak our FY14-16 EPS forecasts and remove the liquidity premium (WACC 11%). Possible re-rating catalysts are potential acquisition of a tourism asset in Asia, better capacity utilisation and potential ticket price revisions. Maintain Add.

Strong quarter downplayed by forex loss

2Q14 revenue surged 20% yoy as the combined visitor arrivals at Shanghai Ocean Aquarium and Underwater World Xiamen rose by a stellar 22% yoy, exceeding our expectations of +10% yoy growth.

Another positive is that operating expenses (-4% yoy) were managed well, as the decrease in fixed costs (c.80% of operating expenses) outpaced the growth in variable costs.

straco_SOA5.14

Straco's flagship aquarium, the Shanghai Ocean Aquarium (above) and its Underwater World Xiamen attracted a 22% jump in visitors in 2Q this year. Photo: Internet
However, the operational efficiency gains were downplayed by admin expenses (+142% yoy), which continued to be hit by forex losses as the Rmb depreciated further against the S$. Excluding forex losses, PBT would have grown by 30% yoy instead of the +13% yoy recorded, while admin expenses would have risen by a more palatable 14% yoy on higher employee share option expenses and miscellaneous costs.

Straco ended the quarter with S$100m net cash, which leaves more than sufficient funds to complete the acquisition of the tourism asset that it has guided for.

Remains an Add

Straco’s share price has risen 25% since its 1Q14 results, in anticipation of an announcement on its acquisition of a tourism asset. While valuations are more demanding now at 17x FY15 P/E, we note that this is still less than the 23x P/E it listed at in 2004. We believe growth will hinge on the potential acquisition, which we have yet to factor into our estimates.

Other (smaller) catalysts include:

1) better capacity utilisation in the off-peak season, and 2) potential hike in ticket prices in FY15 (prices are typically revised once in three years; last revision was in FY11).

Excluding contributions from the potential acquisition, our target price implies 20x FY15 P/E, in line with regional tourism peers.

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DBS Vickers says expect a stronger 2H from Kim Heng Offshore

Analyst:Ho Pei Hwa (left)

Highlights
2Q14 below. While Kim Heng had earlier issued a profit guidance for 2Q14 earnings to be lower y-o-y, the announced results had substantially undershot our expectations. Recurring net profit plunged 68% y-o-y to S$1.5m against our revised expectations of S$3m. Key underperformance was due to the weak gross margin of 30%, a far cry from the 42-45% achieved in 1Q14 and 2Q13. This was due largely to higher proportion of revenue from lower margin projects and vessel sales, and the delay in arrival of customers’ drilling rigs and OSVs. Besides, distribution costs also crept up by S$0.5m as a result of higher marketing and promotional activities to seek new business opportunities and brokerage and commission fees in relation to secured projects.

Our View
Expect a stronger 2H14. As at July 2014, Kim Heng has forward commitments with revenue estimated at S$86m; a significant portion of these forward commitments is expected to be recognised in 2H14. Management expects the arrival of the deferred rigs in 2H to make up for the “loss of income” in 2Q14. We have trimmed our FY14/15F recurring net profit by 9% /3.5% after lowering gross margin assumptions in FY14/15F by 2ppts/1ppt, factoring in higher proportion of low margin projects. Considering that a lumpy earnings pattern is part and parcel of the nature of this type of business, we remain optimistic on Kim Heng’s prospects, driven by higher rig deliveries for the next two years.

Recommendation
Maintain BUY; TP lowered to S$0,30. Our TP is adjusted lower to S$0.30, still pegged to 11x FY14F EPS. We believe the poor results are largely reflected in the price weakness, following the lifting of 6-month moratorium post listing and weak profit guidance. With 25% upside potential, we maintain BUY on Kim Heng.

Re-rating catalysts could come from: 1) sequential improvement in 2H14 earnings; 2) securing high value projects like jackup conversions and newbuild orders, which may boost the bottomline by up to 25% per project if executed well; and 3) earnings accretion from potential acquisitions of subsea equipment servicing & engineering businesses or other assets such as OSVs, on the back of its fortified balance sheet post-listing. Kim Heng has net cash of S$33m or 4.7 Scts per share as of end Jun 2014.

Kim Heng Offshore's 2Q results presentation is available here.

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STRACO target raised to 96 c; KIM HENG still a buy, 30-c target

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