After Budget 2013 - Cost pressure continues to build

Shared By Stock Fanatic on Monday, March 4, 2013 | 4.3.13

Singapore announced its budget last week. Small-caps are likely to feel the pressure from rising business costs and a labour shortage. Foreign worker levies, especially for unskilled workers, will be raised and the dependency ratio will also be reduced.

Construction, offshore marine and the services industry will be negatively hit. Productivity improvements and innovations will gain urgency. However, the government is taking a calibrated approach and businesses will have time to adapt. Healthcare small-caps such as Raffles Medical will heave a sigh of relief as the government will allow foreign healthcare manpower to increase.

For Myanmar exposure
Yongnam’s 4Q/FY12 profit was in line. Order book remains strong. A key catalyst is Yongnam’s involvement in a consortium that will be bidding to build and operate a new international airport in Myanmar. We understand that the tender closes in late-April. Given the renown of the partners in the consortium and Yongnam’s proven track record with airport construction, they stand a good chance of winning the contract. Maintain Outperform and target price of S$0.36. Parkson Retail Asia and Del Monte Pacific also offer exposure to Myanmar.

Key changes
We downgraded ARA Asset Management, Pan-United but upgraded Ezion to Outperform. CWT, our high conviction small-cap pick, reported in-line results.

Earnings have normalised at Eratat although stronger sales growth will depend on further realignment of its distribution network. Trade receivables remain the key risk. 

BBR should benefit from the strong construction demand and earnings over CY13/CY14 will be buttressed by its property development project, Bliss@Kovan. We also highlight Jadason for its attractive dividend yield. Other stocks with potential are Del Monte Pacific Limited, Banyan Tree and GuocoLeisure. (Read Report)

5. STOCK HIGHLIGHT : GUOCOLEISURE LIMITED - ** A Privatisation Candidate **

5.1 What will April bring?
121212, a beautiful number? On that day, HK-listed Guoco Group Ltd (53 HK) announced that it had received an offer from GuoLine Overseas Limited to privatise the company and delist from the stock exchange. Want to guess the offer price? HK$88 per share (sound great if you say it in Cantonese). At that price, the offer values Guoco Group at 0.65x historical P/BV based on FY6/12 BVPS.

Of interest to readers would be the fact that Guoco owns a 66.64% stake in GuocoLeisure, which is listed on the SGX. GuoLine’s privatisation offer resulted in the appointment of Somerley Limited as the independent financial adviser to advise the Independent Board Committee of Guoco. Given the many businesses own by the Guoco Group, the timeline for the issuance of the Independent Financial Adviser’s report has been pushed back to 30 April 13 from 2 January 13 previously.

5.2 Revaluation upside for GuocoLeisure’s assets?
Hotels, property and equipment accounted for 87% of GuocoLeisure’s FY12 fixed assets. Given that the group does not appear to have revalued its hotel assets for the past two years at least, there could be upside to GuocoLeisure’s reported book value of 87.8 US cts (2Q FY13). GuocoLeisure operates two hotel brands, Guoman and Thistle, primarily in Europe. The reported book value of its hotels, property and equipment as at end-December 12 was US$1.2bn. We believe Somerley’s updated valuation on GuocoLeisure just from the hotel assets alone could be more reflective of the replacement value of these assets. Other than the hotel business, GuocoLeisure’s other assets are:

1) Gaming
Involved in the gaming industry in the UK through its wholly-owned subsidiary, Clermont Leisure (UK) Limited (Clermont). Clermont owns and operates The Clermont Club (TCC), an exclusive members-only casino in Mayfair, London, and has five other dormant gaming licences across the UK.

2) Oil & Gas
Receives royalties from the Bass Strait Oil Trust (BSOT), which is a unit trust managed by Bass Strait Oil Management Limited, a wholly-owned subsidiary of the Group in Australia, by virtue of BSOT’s 55.11% entitlement to the Weeks Royalty.

The Weeks Royalty refers to a 2.5% overriding royalty relating to all hydrocarbons produced by BHP Billiton Limited (formerly known as The Broken Hill Proprietary Company Limited) (BHP) from designated areas in the Bass Strait, Australia, granted by BHP. Production is currently undertaken in those designated areas by BHP and Esso Australia Resources Pty Ltd (Esso).

3) Property Development
Involved in property development through its wholly-owned subsidiaries, Molokai Properties Limited (Molokai Properties) and Tabua Investments Limited (Tabua Investments). Molokai Properties owns a 54,677-acre property on the island of Molokai in Hawaii. This was closed in 2008 and remains so. Currently, Molokai Properties maintains a small staff force on the island to perform routine maintenance of buildings and other assets. Molokai Properties is working with various parties who are exploring development opportunities, such as renewable energy projects, on its property.

Tabua Investments is the group’s property investment arm in Denarau, Fiji. The company intends to divest its property investments completely and eventually exit from Fiji.

5.3 If Guoco gets privatised, how about GuocoLeisure?
The markets will likely want to believe that major shareholder Quek Leng Chan will eventually want to take GuocoLeisure private. History supports this view as the Guoco Group did make an offer of S$1.25 (S$1.20 initially) per share for shares in GuocoLeisure in 2005. Mr Quek (through GuoLine) has also been buying shares from the open market. The last reported transaction was on 16 Oct 12 when 667,000 shares were purchased at S$0.65 per piece. 

At the same time, no major shareholder per se seems to have enough holdings to thwart any privatisation attempt. We believe Guoco’s current privatisation is likely to keep GuoLine busy. Privatisation of GuocoLeisure, if at all, will have to wait till the Guoco deal comes to a conclusion. Even then, one should not read too much into the 2005 offer as the key objective then (on hindsight) seems to be the importance of Guoco having a controlling stake in GuocoLeisure.

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Source : CIMB Research

Posted on Monday, March 4, 2013 | 4.3.13

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