Aug 2010 sharebuilder additions

18 Aug 2010

Fraser and Neave 17 shares at $5.56
STI ETF 54 shares at $2.98

Should Genting Singapore be worth more than Capitaland?

Market Capitalisation in SGD billions

2Q 2010 corporate earnings update - Best World, Courage Marine

Best World International

• Shock loss of $806,000 for 2Q10, down substantially from $3.427 million profit a year ago
• 1H 10 profit of $228,000, versus $5.44 million in 1H 09
• Revenue plunged 52.4% y-o-y, mainly due to 87.2% drop for Indonesia, and 54.5% drop for Malaysia
• Huge amount of cash and equivalents of $36.1 million
• Interim dividend of $0.012, unchanged y-o-y

The latest quarter has been exceptionally poor, largely due to the impact of lowered sales in Malaysia and Indonesia. Indonesia sales have suffered as a result of changes in cosmetic and import regulations, and Management has guided that two key products have received product licenses in 2Q10, and were launched in June. Malaysia sales have also taken a hit from increased competition.

We continue to like Best World International as a proxy to emerging Asian consumption, especially with its presence in Indonesia. Import regulations have hurt revenue in the near term, but we think that things will be substantially better in 2H10 with more product approvals granted. We like the business for its ability to generate strong cashflow, and the quality of management is decent. Management is keenly aware of the near-term negative impact of the news, and to buffer stock downside (and given the huge cash position), an unchanged interim dividend of 1.2 cents has been declared, despite poor 1H10 profits.

Courage Marine

• Posted 2Q10 revenue of US$16,277,000, up 26.6% q-o-q (+168.3% y-o-y)
• Logged US$242,000 disposal gains in 2Q10
• Net profit of US$5,176,000 in 2Q10, up from US$3,025,000 in 1Q10
• Remains net cash, with cash and equivalents of US$21.8 million  
• Utilisation rate about 90% for 2Q10, up from 70% in 2Q09

Courage Marine posted a strong quarter, as the BDI rose to about 4,200 in May. However, the BDI dropped to around 2,000 points in June, indicative of the volatile nature of bulk shipping rates. With the current BDI at around 2,400 points, Courage Marine is looking at a weaker 3Q10.

Management prudence is once again reflected in the latest quarter's income statement. While turnover rose a massive 168% y-o-y, cost of sales rose much less (+68% y-o-y), allowing the company to post a decent profit, even with moderate shipping rates in the quarter. The company's strategy to utilise older vessels is evidently effective, and the even after the recent disposal of a Handysize vessel, the company still has 580,000 dwt in its fleet to capitalise on a rebound in the global economy.

Coruage Marine scraps Handysize vessel

Courage Marine announced that it has sent Jeannie III (a 33 year old, 34,537 Dwt Handysize vessel) for demolition, resulting in proceeds of approximately US$2.6 million. Based on rough estimates, the Jeannie III possibly measured about 5,200 ldt, which translates to a selling price of about US$475 per tonne, up from the reported US$425 per ldt which Courage Marine secured for the disposal of MV Cape Ore in April this year.

The ship is understandably old, and the transaction will actually result in a gain of about US$500,000 for the current year. Once again, the management has shown ability to profit from the disposal of old vessels as steel prices gain, an indication of how the company's focus on older vessels increases business flexibility.

Portfolio up 3% in July, STI up 5.4%

Our portfolio gained 3% in July (to $1.03), underperforming the 5.4% gain in the STI (on a total return basis). As of 31 July 2010, 23.8% of the portfolio's assets were held in cash, which weighed on the portfolio's overall return. Despite the substantial cash position, the portfolio managed to capture some of the market upside. YTD, the portfolio is also 3% higher (STI: +4.8%).

In July, we sold CapitaMall Trust on the basis that the estimated yield (approximately 4.5%) was not sufficient to satisfy the portfolio's 6% annual target, and we saw little potential for upside from capital appreciation near the $2 mark. We also received bonus Best World International warrants, and may look to accumulate more should the premium to the mother share narrow.

Guocoleisure was the best performer in the portfolio for July, gaining 14.4% on little news other than a series of open market purchases by Quek Leng Chan. After being one of the worst-performing STI components, Capitaland capped July with a strong 12.5% rebound, while KepCorp also gained 10.6%. The main detractors to the portfolio were Best World (-5.9%), Berkshire Hathaway (-5.1%) and WBL Corp (-2.1%).

Mermaid secures work for MTR-1

As previously guided by the management, the MTR-1 has secured work as an accommodation barge, at a day rate of US$20,000, paltry compared to the US$80-90,000 which the rig should be able to obtain as a tender rig. Nevertheless, the contract means that the MTR-1 will no longer sit idle for the next 160 days, and will bring in revenue of about US$3.2 million.

Major holdings in portfolio report 2Q 10 earnings

Wells Fargo

• 2Q 10 EPS of US$0.55 (consensus: US$0.48), net income of US$3.06 billion
• Revenue of US$21.4 billion; PTPP of US$8.6 billion
• Net interest margin rose to 4.38%, up from 4.27% in 1Q 10
• Supplied US$150 billion in credit, up from US$128 billion in 1Q 10
• Net charge-offs declined
• "We believe credit quality has indeed turned the corner"

In yet another consensus-beating quarter, Wells Fargo managed net income of US$3.06 billion, even as its peers saw profit being impacted by shaking trading revenue. Net interest margin is the highest amongst the large banks, and even managed to post an increase from 1Q 10. Pre-tax pre-provisions profit (PTPP) weaker than usual (WFC managed about US$40 billion in 2009), due to merger integration costs and severance costs related to Wells Fargo Financial. Little guidance has been offered on the potential impact of regulatory reform; until then, company remains highly profitable with very sticky deposits (US$761.8 billion, up from US$759.2 billion in 1Q 10).

Cambridge Industrial Trust (CIT)

• 99.97% portfolio occupancy
• 37 Tampines Street 92, 27 Pandan Crescent and additional 17 strata units at 48 Toh Guan Road East (Enterprise Hub) disposed, generating a gain on disposal of S$1.1 million for 2Q 10
• Portfolio valued at $831,150,000 as of 30 Jun 2010
• NPI down from $16.3 million in 1Q 10 to $16.1 million in 2Q 10, due to divestments
• Distributable income down from $11.1 million to $10.8 million
• DPU of 1.238 cents, down from 1.274 cents in 1Q 10
• NTA at 59.9 cents, up from 59.3 cents in 1Q 10
• Gearing down from 42.6% to 42.3% in 2Q 10, target below 40% by end FY10

Yet another stable quarter with no surprises from CIT; dividend yield is about 9.9%, should be expected to head lower as more assets are sold to lower gearing. Yield is still substantial, and more than average S-Reits (about 6-7%), while rents have been locked in at low levels and have the potential to be raised in future. We are pleased that the management is taking a prudent approach to lower debt without destroying shareholder value by a dilutive rights issue or placement exercise. Portfolio assets have been revalued upwards; strong rebound in manufacturing sector should have positive implications for industrial rents going forward.