Market Pulse: Singapore Office Sector, KepCorp & HMI (14 Sep 2011)

Market Pulse: Singapore Office Sector, KepCorp & HMI (14 Sep 2011)

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Singapore Office Sector: Inflection points ahead

Summary: We expect office absorption to be impacted by a weaker macro economic outlook going forward. Net absorption is estimated to mostly balance out supply over FY11-12. However, vacancy rates could spike to 13.7% in FY13 with ~3m sq ft of office space coming online against an estimated 1.5m sq ft of net absorption. As a result, we believe office rentals could dip 5% and 8% in the central and fringe regions respectively in FY13. We downgrade the office sector to NEUTRAL. In addition, we update the assumptions for our KPLD valuation and also apply a heavier 20% discount to RNAV for its office exposure. Maintain BUY on KPLD with a revised fair value estimate of S$3.97 (20% discount to RNAV). We similarly update our valuation for CapitaCommercial Trust (CCT) and revise its fair value to S$1.45 versus S$1.67 previously. Maintain BUY. (Eli Lee)

Keppel Corporation: Still our preferred pick for the sector

Summary: With recent developments in the global economy, downside risks to growth have increased significantly. In the face of volatility, we would advocate defensive and high quality names, and the latter would include Keppel Corporation (KEP), as 1) it has a strong order book to ride through a downturn, 2) a strong balance sheet to take advantage of opportunities, 3) it is keen to enhance its product offerings, and 4) its top-notch brand is synonymous with quality. KEP has secured S$7.5b worth of new orders YTD, accounting for 88% of our S$8.5b full year order win estimate. However, should the global economy take a turn for the worse in the coming quarters, our earnings estimates for FY12 and beyond would be at risk, especially in a situation with tighter financing. Hence we lower our peg for the O&M business from 16x to 14x, and with a lower fair value estimate for Keppel Land by our property analyst, our SOTP fair value estimate falls to S$12.12 (prev. S$12.92). Maintain BUY. (Low Pei Han)

Health Management International: Visit to flagship Mahkota Medical Centre

Summary: We recently visited Health Management International's (HMI) flagship Mahkota Medical Centre (MMC) in Malacca, Malaysia. The hospital is well-equipped with advanced medical and diagnostics equipment. The group also reversed its net losses suffered in FY10, reporting a PATMI of RM2.0m in FY11. However, this was due to fair value gains on its investment properties amounting to RM6.8m, without which it would have remained in the red. This was due to start-up losses at its Regency Specialist Hospital (RSH). Notwithstanding this, we are encouraged by the operating statistics of both its hospitals. We believe that the breakeven of RSH could be a positive turning point for the group, given the positive outlook on Malaysia's healthcare scene and the importance of operating leverage in the industry. HMI's FY11 P/NTA of 1.57x is currently below its 5-year historical average and also that of its more profitable peers. This suggests that investors could be incentivised to pay a higher premium for HMI's shares once it turns profitable and earnings begin to gain traction. We do not have a rating on HMI. (Wong Teck Ching Andy)

For more information on the above, visit www.ocbcresearch.comfor detailed report.

NEWS HEADLINES

- A high-level panel of economists, business leaders and former senior Treasury officials has urged the US Congress to take a 'go-big approach' towards the US$1.5t deficit reduction target.

- Technics Oil & Gas has secured a S$32m contract from Vietsovpetro, for the provisioning of topside modules for two wellhead satellite platforms in offshore Vietnam.

- DBS Bank (China) said that its 1H11 earnings have already surpassed its full-year earnings in 2010, following a 160% YoY surge in net profits and a 90% jump in deposits.

- Despite a sizeable amount of new homes due for completion in 2014 and 2015, the residential market here will not see a correction, Jones Lang LaSalle said. This is due to continued population growth and immigration.

- The more cautious bidding mood among developers for residential land at state tenders has spread to the industrial market. OKH's top bid yesterday for a Woodlands leasehold industrial plot at S$142 psf was 6.6% lower than the S$152 psf that it had paid for the next-door plot in June this year.