Brokers' Take

Chartered Semiconductor

June 4 close: S$0.87

Morgan Stanley, June 3

GIVEN the tight capacity at leading edge, judicious capital spending in the industry, and competitors' announced intentions to raise prices, we see Chartered as the key beneficiary with potential for share gains and better profitability this year.

We upgrade the stock to 'overweight', and raise our 12-month TP to S$1.10, implying 31 per cent upside to current share price.

Expanding market share at 65 nanometer (nm) likely for H2 2008: As outlined recently in our foundry monthly report, we believe Chartered has been taking share over the past few quarters.

While most of it has come at the trailing edge, several indicators that we track would lead us to believe that share gains at 65nm are likely for H2 2008. These include our analysis of new 65nm tape-outs and also capacity expansion plans for leading edge.

Margin should improve from Q3 2008 onwards: As most of the 65nm tape-outs are going into mass production in H2 2008 and 2009, we expect Chartered's utilisation to improve significantly in H2 2008 and thus expect an improvement in overall margin structure.

We are forecasting operating margin to improve from (1.6 per cent)/1.3 per cent in Q1/Q2 2008, to 6.3 per cent/9.5 per cent in Q3/Q4 2008, due to larger economy scale and hence operating leverage.

Implications: While Taiwan Semiconductor Manufacturing Co remains the industry leader, high valuation and macro concerns prevent us from being more positive. We believe Chartered is a better play in the foundry sector with its attractive valuation, share gains, and potential for re-rating as its profitability improves.

The stock is trading at 0.86 times P/B, the trough of its historical range of 0.7-1.6 times; risk-reward is attractive.

OVERWEIGHT

Keppel Corporation

June 4 close: S$11.90

DBS Group Research, June 4

JUST two days after announcing its last contract win, Keppel Corp has secured another contract. The contract is valued at US$385 million and is a repeat order to build a semi-submersible drilling rig for Brazilian driller, Queiroz Galvao Oleo e Gas (QGOG). This price excludes the drilling and subsea equipment which will be supplied by the customer, QGOG.

This rig will be built to the DSS 38 design jointly developed by Keppel O&M's technology arm Deepwater Technology Group and Marine Structures Consultants of The Netherlands. Its design can operate in water depths of 9,000 feet (2,740 metres) and can meet the operational requirements in the deepwater 'Golden Triangle' region, comprising Brazil, Africa, and the Gulf of Mexico.

This latest rig, to be named Alpha Star, is a repeat order of the first semi-submersible, Gold Star, which was awarded to Keppel in August 2006. Gold Star will support Petrobras' growth plans when delivered in H2 2009, while Alpha Star may be deployed in either offshore West Africa or South America, when delivered in H2 2011.

With this, YTD wins will amount to S$2.8 billion and account for 46 per cent of our order win assumption of S$6 billion. Order book is estimated to rise to S$13.9 billion. There is no change in earnings estimates as we have already assumed S$6 billion of contract wins for FY2008.

We believe that contract flows over the last one week have stemmed from Petrobras' requiring up to 12 drilling rigs (could be a combination of jack-ups, semis and drillships) with delivery dates by mid-2012.

Both yards are currently able to deliver semis in both 2011 and 2012, while for jack-ups, delivery slots for delivery in 2010 are still available. Maintain 'hold', with TP of S$12.56.

HOLD

Gallant Venture

June 4 close: S$0.775

OCBC Investment Research, June 4

LAND sales gaining momentum: Gallant Venture recently updated that its order book for land sales has reached a record S$64 million as of May 2008 (versus S$19.5 million in April 2008), representing a quadrupling of 2007's sales.

We view Gallant's fast-growing order book as an achievement brought about by the successful launch of its Lagoi Bay project, and this could signal growing momentum of land sales from here on. Furthermore, most of its land parcels were sold at premium prices, implying that investors are still bullish on Bintan's land value despite the ripple effects brought on by the US sub-prime crisis.

Gallant continues to trade at a 21 per cent discount to the value of its landbank and a 20 per cent discount to our fair-value estimate.

We maintain our 'buy' rating on Gallant, and our RNAV-based, fair-value estimate remains at S$0.94.

BUY