16 July 2013~ Good Morning Singapore!
Central Execution Team - The Excellence of Execution
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Global Flash: While You Were Sleeping
Source: Marketwatch
Quote for the day :It was patriotism, not communism, that inspired me
- HO CHI MINH
Singapore: The Day AheadSINGAPORE DAYBOOK : Moody's turns bearish on S'pore bank sector. It downgrades outlook to negative on concerns over rapid loan growth and possibility of fall in asset values [SINGAPORE] Moody's Investors Service has downgraded the outlook for Singapore's banking system to negative from stable, owing to rapid loan growth and rising real estate prices at home and in the region.
The profitability of the three local banks has also fallen due to intense competition, said the ratings agency in a report yesterday.
There are worries that the US monetary policy may tighten. This could lead to outflows from the region and potentially trigger a crash in asset values.
"Such outflows could simultaneously place downward pressure on asset prices and collateral in several of the emerging markets where Singapore banks operate," it said.
Fears over tightening US monetary policy caused the Straits Times Index to drop 11 per cent between 22 May and 24 June. At the same time, yields on Singapore government bonds maturing in 2022 rose 120 basis points.
"Rising rates are likely to impact borrowers' ability to pay outstanding obligations," Moody's said.
The report noted the strong financials of the three local banks, underpinning their high average ratings compared to all banking systems globally, both on standalone and supported bases.
All three - DBS Bank, OCBC Bank and United Overseas Bank - have similar bank financial strength rating of B/aa3 and long term bank deposit rating of Aa1.
OCBC and UOB have stable outlooks. DBS has a negative outlook since August 2012 following a review after the bank proposed buying Bank Danamon Indonesia in a deal worth $9.1 billion.
Moody's also highlighted the strong support from the government which has a strong fiscal position.
Chng Sok Hui, DBS Bank chief financial officer said: "Singapore's well capitalized banking system remains resilient, notwithstanding that credit costs would likely rise from the current low levels."
The MAS has put in place a number of measures to rein in excessive leverage by the private sector, said Ms Chng.
"For DBS in particular, a rise in short term interest rates will lift our net interest income which will help mitigate the higher credit costs from a rise in interest rates," she said.
Said Collins Chin, OCBC Bank head of investor relations: "While we recognise the potential risks in the operating environment that have led to the revision in Singapore's banking system outlook, we note too that Singapore's banks continue to be prudently run, with sound financial metrics, and supported by strong credit ratings."
Domestically, household debt increased to 77.2 per cent of gross domestic product (GDP) as of March 2013 from 64.4 per cent at end-2007. For the same time period, prices for private property grew 1.2 times and prices for HDB flats 1.7 times. "Regionally, we observe similar or even more dramatic trends," the report said.
Household debt in Malaysia has increased to 80.5 per cent of GDP as of year-end 2012. In Hong Kong, residential property prices increased 122 per cent between 2009 and 2012, while the system faces increasing exposure to Mainland China.
Since 2009, credit growth in Singapore has exceeded historical medians, in terms of both Singapore dollars (SGD) and non-domestic currencies.
In terms of SGD, credit has grown at a 20.4 per cent compound annual growth rate (CAGR) since 2009, compared to 8.1 per cent for the previous 15 years. As a percentage of GDP, credit now exceeds its historic median.
"The ratio of credit growth to GDP growth is particularly high, considering the maturity of Singapore's economy. While this situation partly stems from Singapore's role as an off-shore banking centre, recent credit growth has outpaced similar regional banking centres, such as Hong Kong, when considered relative to GDP growth," said the report.
Moody's expects loan growth, which was a hefty 12.4 per cent in Q1 2013, to remain strong, with increased competition in the consumer and small and medium enterprise segments.
The SGD loan-to-deposit ratio has risen steadily and is now at its highest in six years.
"We expect that loan growth will continue to outpace deposit growth, meaning that competition for deposits will stay strong. Such competition will mean downward pressure on net interest margins, though this scenario may be somewhat offset when rates begin to rise."
On the banks' more risky regional exposure, Moody's noted that this grew at a faster 15 per cent CAGR between 2009 and 2012, compared to 11 per cent for Singapore assets.
Assets outside Singapore represented 37 per cent of total bank assets.
"We expect the operating environment in several of these markets (such as Malaysia, Indonesia, and China) to become more challenging due to changing growth and interest rate conditions," it said.
Last year, 77 per cent of the three local banks' non-performing loans (NPLs) were related to loans made by borrowers outside Singapore, compared to 65 per cent in 2008. While the banks have improved their NPLs over the past few years, asset quality has potentially peaked both at home and in many of the regional markets, it said.
The average NPL last year was 1.20 per cent.
A turning point in the credit cycle is likely to lead to a worsening of NPL ratios and higher credit costs, it said. (Source: The Business Times)
MARKET SCOOP
K-Green Trust net profit drops 10.7% to $3.9m
Fortune Reit DPU for Q2 up 11.9 per cent
Keppel Reit posts DPU of 1.97 cents in Q2
Qian Hu net profit down 84%
SPH net profit up 81% including one-off items
Keppel T&T to buy 60% of Guangdong river port for RMB 165.73m
CapitaMalls Asia buys 10th mall in Beijing for 1.74b yuan
(Source: The Business Times)
DBS VICKERS Securities says...
EZRA HOLDINGS | FULLY VALUED | TP: S$0.90
Stripping out exceptional gains of about US$65m, including gains on disposal of its remaining stake in Ezion, Ezra would have recorded a core net loss of about US$58m in 3Q-FY13
The underperformance was driven by i) negative contribution from subsea division as a result of project delays in the North Sea, adverse timing of revenue receipts and write-offs related to legacy projects and ii) lower revenue and weaker margins from the offshore chartering division owing to sub-optimal utilisation of fleet
Admin expenses were also higher than normal levels
The subsea division EMAS AMC reported order wins of about US$400m across North Sea, West Africa and Gulf of Mexico, taking YTD order wins to US$1.4bn
However, with most projects requiring long lead times and stretching from 2014 to 2016, near term impact is not significant
We continue to expect another US$1.5bn worth of new subsea contracts in FY14
Apart from costs associated with certain legacy projects, project delays and other risks associated with offshore EPC contracts will continue to impact Ezra's subsea operations, in our view
The integration of AMC has taken longer than expected and we rationalize our margin expectations, going forward
As a result, we now forecast a full year core net loss of US$55m and cut our FY14 net profit forecast by 46% to US$37m
Our SOTP valuation is revised down to S$0.90, based on 0.8x P/BV for Ezra's core operations, down from 1.15x P/BV earlier, to account for lower margins and ROEs as well as risks associated with a highly geared balance sheet amidst a potentially rising interest rate environment in future
Downgrade to Full Valued
CIMB Securities says ...
EZRA HOLDINGS | UNDERPERFORM | TP: S$0.70
9M13 core net loss was US$47m vs. our expected profit of US$16m, due to project delays and cost overruns in subsea
3Q13 net profit (US$7m) was boosted by a US$67m divestment gain of Ezion's shares
We cut our FY13-15 EPS by 8-144% for 3Q13 losses and lower subsea and offshore margins
We would revisit the stock post 1Q14 if it survived the winter lull.
Our target price falls to S$0.70 from S$0.80, still based on 10.5x CY14 P/E, -1 s.d. from its 5-year mean
Subsea made a loss in 3Q13 as Ezra wrote off costs for project delays due to client rescheduling as well as cost overruns for some
The lack of project baseload means the group cannot afford to have any major shifts in its project execution timeline due to high overheads and subcontractors' costs
Q13 should be profitable with some of the projects being completed but we believe FY13 is a watershed year
We are worried about low vessel utilisation during winter (Nov-Jan), which could eat into subsea's profitability in 1Q14
In 1Q13, the winter caused a dip in the subsea gross margin to 15% from 18% in 4Q12 but the margin could have been be worse given the recent kitchen-sinking exercise
We now expect FY14 subsea gross margin of 12% (from 14%) for potential hiccups
The subsea order book stood at US$1.6bn with US$1.4bn orders won YTD
US$505m were announced recently, including a US$120m maiden contract for its ice class vessel, Lewek Constellation
Eight vessels were idle in the offshore division with gross margins of less than 17% (avg: 20% in the past year)
We cut our offshore gross margin to 20% for FY14 (from 22%) in view of 5-8 upcoming contract renewals
UOB KAY HIAN says...
EZRA HOLDINGS | HOLD | TP: S$1.07
A net loss for 3QFY13, if other operating income is excluded
3QFY13 results were a major disappointment
Excluding other operating income of US$63.5m (substantially due to a gain from the disposal of Ezion shares at end-July), Ezra would have posted a net loss of S$56.3m
Gross profit margin collapsed. 3QFY13's gross margin collapsed to 0.7% (-16.0ppt) from 16.7% a year ago
There were multiple cost pressures
Administrative costs leaped to US$44.1m (+30% yoy) in 3QFY13 from US$37.1m in 2QFY13 and US34.0m in 3QFY12
Interest expense was also higher at US$12.2m (+23% yoy) in 3QFY13 compared with US$10.5m in 2QFY13 and US$9.9m in 2QFY12
These cost increases were offset by better associates' and JVs' earnings
Associated companies contributed US$4.2m vs a loss of US$0.3m a year ago due to better performance posted by associate EOC
Subsea services segment posted a loss. Instead of a rebound from 2QFY13's estimated low gross margin of 9% (1QFY13: 15%), the subsea services segment posted a loss because of a) delays in the execution of certain projects (at clients' request) and b) the recognition of additional costs that were previously unexpected for certain projects
We understand from management one of these is a legacy project, secured prior to the acquisition of Emas AMC
Execution risk is now a key risk, despite good subsea contract wins
Subsea order wins have been robust
Emas AMC has won an aggregate of approximately US$1.4b new contracts for the current financial year to date
The new deepwater pipelay vessel Lewek Constellation announced its maiden contract for a US$120m project offshore West Africa in 2014
Despite Emas AMC's strong contract wins, the poor margins in the subsea services segment in the last two quarters have raised concerns over project execution
Share price is in doldrums as Ezra has disappointed again
While Ezra's current P/B of 0.77x - half of its long-term P/B mean of 1.75x - is undemanding, share price will continue to languish due a) investors' disenchantment with another set of disappointing quarterly results and b) the subsea services segment - previously viewed as the major future earnings growth driver - is now clouded by execution risks following two quarters of poor performance
The key risk is Ezra's thin net profit margin (3QFY13 gross profit margin: 0.7%)
Net profit is highly vulnerable to cost upsets
On the flipside, net profit is highly leveraged to turnover improvement if costs can be contained
We lower our core FY13, FY14 and FY15 net profit forecasts by 59%, 56% and 40% respectively to US$53m, US$40m and US$80m respectively on lower margins for the subsea services and offshore support services segments
We now project subsea services gross margin at 8%, 12% and 15% for FY13, FY14 and FY15 respectively, down from 13.5%, 16% and 17.5% previously
Downgrade to HOLD
We cut our target price from S$1.46 to S$1.07
We now value Ezra at 0.75x FY14F P/B
This is -1SD below its long-term mean of 1.75x
Entry price is S$0.86 or below |
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