Brokers' Take

Singapore strategy
CIMB-GK Research, April 1

MARKET is expecting the Monetary Authority of Singapore to allow the Singapore dollar to weaken this month. Consensus is predicting that MAS will lower the mid-point of the Singapore-dollar trading range by 2-4 per cent later this month. Our economist, Song Seng Wun, agrees that MAS might favour a weakening of the Singapore dollar, going by weak Q1 2009 GDP figures and receding inflation. However, he thinks that this would be done not by shifting the band downwards, but perhaps by changing the slope of the band. A weaker Singapore dollar would make exports more attractive. Our house continues to forecast a S$1.60 per US dollar exchange rate for end-2009.

We view the offshore and marine sector as a key immediate beneficiary. A lower Singapore dollar would also help exporters such as Venture Corp. Key losers should be companies that sell mostly to the local market, earning Singapore-dollar revenues, yet are dependent on raw materials quoted in US dollars. Obvious losers will be transport companies (SMRT Corp, Singapore Airlines and Singapore Post) where fuel ensures a relatively high US dollar-denominated cost base. Other companies with mostly Singapore dollar revenues and some US dollar costs are Singapore Press Holdings and StarHub.

While there might not be much of an operational effect on others, there could still be a significant translation impact. SingTel will derive some 72 per cent of its FY2010 pre-tax profit and 80 per cent of our sum-of-parts valuation from overseas operations, and stands to be a big beneficiary of a weaker Singapore dollar. Maintenance, repair and overhaul (MRO) operators such as ST Engineering and SIA Engineering can also gain from positive translation of overseas revenues.
A weaker Singapore dollar is good for Singapore's export sector and its wilting tourism industry.

If tourist numbers can recover, stocks such as Genting International and CDL Hospitality Trusts could gain. Also, with the intended effect of a weaker currency being a slower rate of job losses and corporate bankruptcies, the move would be marginally positive for banks. The flipside is that a weaker Singapore dollar trend will be detrimental to investment prospects for property.
Maintain 'neutral' weight on the market and 1,800 Straits Times Index target.NEUTRAL

Singapore Reits
OCBC Investment Research, April 1

CONSENSUS forward yields, ranging from 7 per cent to 38 per cent, are showing a wide divergence in valuations across the Singapore real estate investment trust sector.

Our thesis is that the S-Reit sector is now broadly segregated into two camps - the 'haves' (large, blue-chip sponsored Reits with strong balance sheets) and the 'have-nots' (smaller, non-sponsored Reits with high gearing). Valuation catalysts also vary accordingly - we believe the market focus for the weaker 'have-nots' is still on their ability to secure refinancing but the focus for the 'haves' is on 1) how the macroeconomic picture affects earnings and 2) the need for equity issues to recapitalise balance sheets. Investors can expect some key data points on both the refinancing and the earnings fronts in the coming months.

MacarthurCook Industrial Reit (not rated) announced yesterday that it has received a 60-day extension for its loan facility worth $220.8 million maturing on April 18. MI-Reit is geared at almost 40 per cent and this facility constitutes the bulk of its borrowings. The extension buys MI-Reit some time to continue negotiations with its lenders, National Australia Bank and Commonwealth Bank of Australia.

Its inability to secure a resolution by April is a disappointment, in our view.

MI-Reit's refinancing efforts will likely be benchmarked against the December 2008 refinancing completed by peer Cambridge Industrial Trust (not rated) as both are relatively smaller, non-sponsored and industrial focused.

We expect negative refinancing news to further widen the valuation gap between the two S-Reit classes. For the broader sector, such refinancing news may be indicative of lender-risk appetite. Tighter loan-to-value demands may trigger a sector-wide overhaul of capital structures, potentially via equity issues.

Most S-Reits should report earnings for the first quarter of calendar year 2009 over the last two weeks this month. We believe that H1 2009 earnings are worth watching as the impact of macroeconomic events slowly filters through to the S-Reit bottomline.

For the office sector, we will be watching the pace of the decline in achieved rents as well as any change in occupancy levels. Given the economic slowdown, occupancy levels will be the key metric to watch in the industrial space. We are also looking out for an update on the post-Chinese New Year retail landscape and validation of the consensus 'sub-urban means defensive' view. We leave our estimates and ratings for individual S-Reits unchanged in anticipation of Q1 results.NEUTRAL