Brokers' Take

Construction SectorCIMB-GK Research, June 6


SUBDUED residential property development: In our last sector update on April 4, we highlighted our growing concerns on construction companies that have become opportunistic developers. We maintain that view. Despite the large number of en-bloc sales in 2007, private residential property development appears rather subdued due to weak buyer demand, as reflected by softening property prices and declining transaction numbers.

At the current pace, we think 2008 construction demand may come in at the lower end of the Building and Construction Authority's forecast range of S$23 billion-S$27 billion.

Growing inflationary pressures: After the spike in sand and ready-mixed concrete prices in early 2007, the rapid rise in steel prices as well as general inflation have been deterring construction companies from aggressively pitching for new contracts. Contractors fear that the higher costs may not be passed on to developers and project owners.

Inevitable margin squeeze: The rapid rise in construction costs will put pressure on the margins of developers and project owners, who may be approaching 'pain' thresholds. Given this, coupled with high land costs, we believe that construction costs are nearing a tipping point.

Investment strategy: We are keeping our 'overweight' position on the construction sector, although we caution against possible risks. We recommend reduced exposure to integrated construction stocks and a switch to specialist construction companies, which have low exposure to higher construction material costs or managed exposure through short project turnaround. Our top picks are Tat Hong, Tiong Woon and CSC.Sector - OVERWEIGHT

Singapore Exchange
June 6 close: S$8.00
UBS Investment Research, June 6

A KEY play on ageing Asia: The United Nations has identified the top three socio-economic issues facing the world in the 21st century. They are global warming, global terrorism and global ageing. We note that Asia has four of the 10 fastest ageing countries globally.

In our Q-Series®: Asia Structural Themes: Ageing Asia report published on June 6, Singapore Exchange (SGX) is highlighted as one of 17 key exposures to Asia's changing demographics.

SGX - one of 17 UBS Asian demographics key picks: Changes in Asia demographics will impact countries' long-term economic growth, governments' willingness to privatise assets and the demand for listed instruments. While growth of stock exchanges is typically tied to domestic markets, SGX's structural growth comes from Singapore emerging as the exchange of choice for many Asian and transnational companies' initial public offerings.

We remain upbeat on SGX despite current market sentiment: We believe the current share price assumes no growth over the next four years, which we think is too bearish as the investment environment in Singapore and Asia appears promising in the medium term, given favourable economic and demographic trends.

Changes in market sentiment, Qualified Domestic Institutional Investor fund inflows and an increase in algorithmic trading are potential catalysts.

We reiterate our 'buy' rating and 12-month DCF-based price target of S$13.00.BUY

United Fiber System
June 6 close: S$0.21
DMG & Partners Securities, June 6

PULP fiction no more: United Fiber System (Unifiber) owns one of Indonesia's largest forest concessions. Unifiber possesses 268,585 ha of forest concession rights in South Kalimantan, one of lndonesia's largest forest concessions and plantations. According to management, Unifiber is probably ranked number 3 in Indonesia in terms of forest concessions' land area. The concession rights entitle it to plant, maintain, process and market products extracted from the concession area up to Feb 26, 2041.

Well located for constant supply of wood raw material: Wood raw material costs make up 60-70 per cent of total manufacturing costs, with the remaining comprising of labour costs, chemicals and energy costs. As such, variability in the price of wood will have the largest impact on costs and profitability.

For Unifiber, the exposure to the variability of wood prices should be partially mitigated as it plans to source a large proportion of its wood raw material from its own plantations. Moreover, Unifiber's pulp mill and wood chip mill are located in South Kalimantan where there are no nearby mills.

Proximity to fast growing Asian market, particularly China: China is a major producer of paper and paperboard products. However, China's lack of wood fibre means that it has to continue to rely on imported pulpwood and pulp to meet this demand. China's import of pulp for paper has grown 272 per cent over a 10 year period from 1996-2006.

Lower cost of production: According to management, Indonesia is one of the world's most cost competitive countries for the production of pulp.

Re-initiate with a 'buy': Given that Unifiber has a few distinct businesses, we believe that a sum-of-the-parts valuation is most relevant. We attain a fair value of S$0.31 per share, which implies a 47.6 per cent upside from current levels. Unifiber has the additional kicker coming in from pulp mill PT MBBM when it starts in 2010. We re-initiate coverage on Unifiber with a 'buy' rating.BUY