Summary: The S-REIT theme in 2008 is likely to be a departure from previous years' story of acquisition growth. The climate has changed and there are many issues facing the sector. Some of these include S$ strength, inflation, higher cost of debt and equity, lack of investment-grade assets, and finally too many players in a crowed space. Against this backdrop, the past growth strategy by acquisition is probably over. Focus should thus be moderating expectations or alternatively providing new avenues for growth. We see some options available such as development projects, "share buy-back", taking over or merging with another REIT. In this uncertain climate our selection criteria is thus defensive. We prefer S-REITs positioned in the more resilient retail or commercial sector, with trading unit price at or below book value and REITs who are delivering high yield. Simplistically, we are targeting capital preservation with high distribution per unit. Finally if the worst case economic scenario does occur, we see a strong likelihood of M&A emerging in the form of merger between the smaller REITs and/or larger REITs taking over smaller ones. Our preferred REITs are thus Suntec, FCT, CCT and MMP. However for those with higher risk appetite, we are seeing value emerging from MLT and ART. (Winston Liew)
For more information on the above, visit www.ocbcresearch.com for detailed report.
Cacola Furniture International Ltd: Direct beneficiary of booming China economy
Summary: Cacola Furniture International Ltd (Cacola) designs, manufactures and distributes home and office furniture in the PRC. It recently impressed with a 89.4% YoY surge in 3Q07 net profit on the back of a 26.0% rise in revenue. Cacola is a beneficiary of China's booming economy, as studies have estimated that the growth of home furnishings in China will outpace GDP growth by 3%-4%. It enjoys a low cost manufacturing base in Dongguan, and uses readily-available materials for its products, making it less susceptible to fluctuations in raw materials' prices. Cacola's geographical reach has multiplied since 2000, and it plans to intensify its presence in major cities by setting up of more mega stores and a new home-deco centre. Cacola is trading at an attractively low 6.1x FY07 PER despite reporting higher profit margin than its peers. We project a 24.3% increase in FY07 revenue to RMB 566.5m and a 63.4% surge in net profit to RMB122.9m. Based on 8x FY08 PER, we derive a fair value estimate of S$0.75. We initiate coverage on Cacola Furniture International Ltd with a BUY rating. (Lee Wen Ching)
For more information on the above, visit www.ocbcresearch.com for detailed report.
NEWS HEADLINES
- Frontline Technologies Corporation Ltd has been acquired by British telecom company BT Group for S$202m (at S$0.245 per share) to help strengthen its presence in Asia.
- SPH is expecting a significant boost to its profits for the next 2 years from its Sky@eleven condominium project, where all 273 units were sold out.
- Hong Fok Corporation Ltd will pay S$62.35m for a plot of state land at Claymore Hill, which it plans to combine with its International Building property to build a commercial development.
- Sky China Petroleum has secured exclusive rights to use a new extraction technology which can raise the extraction yield of a single oil well by another 5% over its current technology.
- ST Engineering's electronics arm has bagged an S$36m contract to design and install communication systems for Taipei's Songshan and Xinyi MRT lines.
- Swissco International Limited has ordered four more offshore support vessels worth S$18.5m.
- Tri-M Technologies will be consolidating its manufacturing operations in Shenzhen from two plants into one for a total cost of about S$3.7m.
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