Delong Holdings Ltd: Still profitable but testing times ahead
Summary: We engaged Delong Holding’s (Delong) management for a business update and came away with muted expectations for the next 3-6 months.
Shipping costs and raw material prices continued to rise and most significantly from imported iron ore prices as it continued its unabated trek upwards, registering a 23% gain from Sep to Nov 07. Despite strong demand, HRC prices rose at a slower pace of 10% since Sep 07.
Delong has concluded negotiations of 1 of 2 long term contracts and expects its first shipment of discounted iron ore in Apr/May 08.
We expect Delong to still be profitable but margins might be squeezed as it continues to be caught between the mining majors and its customers. We raise our FY08-09 topline by 4.8% and 7.7% due to HRC ASP increments but lower bottomline by 20% and 1% due to escalating COGS. We roll over to FY08 but take a more conservative stance by lowering our valuation to 6x FY08 EPS (prev 9x FY07/0 with fair value at S$2.31 (prev S$3.25). Maintain HOLD.
(Kelly Chia) For more information on the above, visit www.ocbcresearch.com for detailed report.
CapitaCommercial Trust: Market Street Car Park Tower!
Summary: CapitaCommercial Trust (CCT) announced yesterday that it has obtained planning permission for the redevelopment of its Market Street Car Park into an office building.
The planning permission is conditional on payment of the full enhanced land value to the authorities and non extension of the 65 years of remaining land lease.
Simplistically this is akin to CCT buying a building with 65 years of lease tenure but carrying development risks. CCT has estimated that the total development cost to be between S$1.0 to S$1.5bn (subject to government valuation of enhanced land value).
Based on current market rental rates of S$14psf/mth, this translates to an attractive NPI yield of about 6.3%. This latest development is in line with our assertion that development project (as highlighted in our 2008 Strategy report) is a possible alternative to the traditional growth avenue for REITs to meet expectation.
However, the Market Street redevelopment is not a done deal as the large value of the development breaches the REIT guideline of 10% allowable development value to portfolio value. CCT has various options to overcome this rule, one is to get a JV partner to co-develop and another is to structure the development as a business trust.
We see the former as the most likely route to be taken as the latter goes against the spirit of the REIT rule. We view the latest news positively and see the proactive approach by the manager to enhance value as very positive to CCT unit price. We maintain BUY with fair value of S$2.62. (Winston Liew)
NEWS HEADLINES
- Air China parent China National Aviation Holding announced it will vote against SIA’s bid for a S$1.3b stake in China Eastern Airlines on Jan 8, and instead will make its own offer for a stake in the carrier.
- Golden Agri-Resources has proposed a 1-into-2 stock split to increase trading liquidity of the shares and broaden its shareholder base.
- Sincere Watch will sell 1% of Chrono Star Intl Participations Groupe Franck Muller SA, parent of the Franck Muller Group, for S$10.96m to Tay Liam Wee, a director and controlling shareholder of Sincere Watch.
- Yanlord Land Group has acquired a 117,500 sqm site for residential development in Shanghai for S$118.7m.
- Following former Vantage Corp chief Kea Kah Kim’s sale of his entire 77.52% stake in the company to Galleria Resources for S$48.4m, Galleria has made a mandatory unconditional cash offer for the remaining Vantage shares at S$0.24 each.
- A SembMarine unit has secured a US$280.5m contract to build a semi-submersible drilling rig with an option for an additional unit.
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