City Developments - Strong fundamentals this time round

Selective landbank acquisition strategy. Management mentioned that the current landbank of about 4.5m sqf (65% in the mass market to mid-tier segments and 35% in the high-end segment) is quite healthy and that it would acquire more land only if the price is right. It believes the reserve price of S$844psf ppr is high for the Laguna Park collective sale site. CDL was recently awarded the Chestnut Avenue site from the government reserve list for its top bid of S$280psf ppr, which makes it the fourth highest bidder out of 13 bids in total put in for the just-announced Dakota Residences site. Management noted good interest in two other sites (Yio Chu Kang Road and Serangoon Avenue 3 sites) that were triggered for launch from the Government Land Sales programme.

Upcoming projects. CDL will launch 396 units in the former Hong Leong Gardens site during the last week of this month with indicative average selling prices (ASP) of above S$900psf. Following this, it will launch 160 units at The Albany in 4Q09 with indicative ASPs of S$1,100-1,200psf. Management has been receiving inquiries from many foreign buyers for its high-end 228- unit The Quayside Isle project at Sentosa Cove and will be launching this in 1Q10 soon after the opening of the Sentosa integrated resort (IR) with indicative ASPs of S$1,800-2,200psf, depending on market conditions.

Strong fundamentals this time round. Management highlighted that the recovery in the residential segment is sustainable with buying interest filtering up from the mass market and mid-tier segments to the high-end segment compared with the top-down filtering seen during the previous property boom. It believes current demand is well supported by fundamentals, with pent-up demand, low interest rates, Asian growth story and turnaround in market sentiment acting as the key catalysts. It expects demand to remain strong for the rest of the year. It also added that speculation levels are not high enough at the moment for the government to take drastic measures.

Hotel occupancy levels expected to improve in 2H09. CDL said hotel occupancy levels have been picking up slowly after 2Q09, although advance booking for F1 games has been slightly disappointing. It expects demand to pick up as the event draws closer. Management expects hotel occupancy levels to firm up with marginal improvements in average daily rate (ADR) supported by the IR openings and other events like the APEC conference.

Positive rental reversion seen in commercial segment. Revenue and profits from the commercial segment increased 17% and 25% respectively due to positive rental reversions despite the steep fall in office rentals as passing rentals were still below spot rentals. The occupancy levels for its Grade A space are still above 90% and management expects occupancy levels to remain healthy for the current financial year.

Construction work for South Beach project to begin by 2010. CDL has completed its financing arrangement for its much-awaited South Beach project in June and is finalising its design. The project will comprise of 40% office space and 30% hotel space, and the remaining 30% will be white space with primarily residential developments. Management noted that construction costs have eased and expects to award the construction contract next year. There could be some write-downs booked towards the end of the year due to declines in the overall property value mostly in the office segment.

Easing financing concerns. Management noted that with the property market looking up, banks are more than willing to lend again. CDL is able to finance its loans at an attractive interest rate of 3.25%. The company’s net gearing came down to 0.46x in 2Q09 and has a healthy interest cover ratio of 10.1x.

We continue to see good value in CDL and maintain our BUY recommendation with a target price of S$12.70 pegged at a 15% premium to 2009 RNAV of S$11.04.

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CDL HOSPITALITY TRUST - A Satisfying Stay

We initiate coverage on CDL Hospitality Trust (CDL HT) with a BUY recommendation and fair value of $1.72. CDL HT currently owns hospitality related properties in Singapore and New Zealand. We believe the Trust is poised to benefit from the economic recovery coupled with the government efforts to boost the local tourism industry.

Tail-end of economic recession? Singapore technically exited the recession in 2Q09 with a q-q SAAR GDP of 20.7%. The official forecast from MTI is a contraction of 4% to 6% for 2009. That being said, the share price of CDL HT has re-rated from 0.3 times book value seen in March this year to approximately 1 times book value currently, on optimism of the recovering economy. We believe that CDL HT will continue to re-rate to its historical average of above 1.5 times book value seen during the economic boom of 2007 if the cards are lined up properly.

Tourism 2015. The Singapore government has set a target to achieve 17 million tourist arrivals and tourist revenue of $30 billion by 2015. Hospitality operators like CDL HT will stand to benefit from the government initiatives.

Healthy balance sheet. CDL HT has one of the lowest gearing among the S-REITs. We view this as prudence on management part in managing capital usage well. CDL HT has gearing of 19% and total debt of $287 million. We believe with the backing of a strong sponsor, it has better access to funding sources.
Strong sponsor, benefits aplenty. The sponsor of CDL HT is M&C Hotels plc which is majority owned by City Development Ltd. With a right of first refusal from the sponsor, there are ample acquisition opportunities for CDL HT to expand its portfolio. Furthermore, management has indicated that it has the expertise to operate its hotels if any of its lessees decides to terminate their leases.

Fortune Real Estate Investment Trust - Proceeding with acquisition and rights issue

FRT will proceed with acquisition and rights issue: All resolutions for the proposed acquisition of the three properties and one-for-one rights issue were duly passed at the EGM held on 11 September.

One-for-one rights issue at HK$2.29: Book closure date for rights entitlement is set at 17 September 5pm. The commencement of "nilpaid rights" trading period is yet to be determined but is expected to be no later than 23 Sept. (see Table 1 for indicative timetable).

Under-gearing still better than over-paying: The three new assets would be acquired at an average net yield of 5.1%, which looks fair. We believe this acquisition is much better than previous acquisitions done by other REITs where the sponsor sells assets at a high price into the REIT and uses a combination of financial engineering and aggressive gearing to initially maintain a high yield –it only delays the pain of overpaying for assets. Fortune REIT's proposed acquisition is simple and straightforward, though the gearing level might even be considered a bit too conservative, in our view. The blended yield post acquisition would be still be high at 7.5% for FY10E and 7.3% for FY11E. Theoretically, investors could gear up externally (and buy more of the REITs) to engineer a higher yield on equity, though it may not be a viable option in reality.

Maintain OW, Jun-10 PT HK$3.4: In our previous note dated 24 Aug 2009, we had already incorporated the contributions from new assets and also the dilution from the rights issue. Our Jun-10 NPV post acquisition and rights issue is HK$3.4/share. We maintain our ex-rights PT at HK$3.4/share, which is on par with the new NPV. Our price target is based on a discount rate of 6.57% and LT growth rate of 0.4%. Risks to our PT include higher than expected vacancy rates and prolonged economic recession.

City Developments - Management prudent in acquiring landbank.

New launches in 2H09. City Developments (CDL) will be launching 396 units at the former Hong Leong Gardens site (Hundred Trees condominium) in the last week of September at indicative average selling price (ASP) levels of above S$900psf. This will be followed by the launch of The Albany at indicative prices of S$1,100-1,200 psf. The much-awaited Quayside Isle project at Sentosa Cove is expected to be launched in 1Q10 in the price range of S$1,800-2,200 psf after the opening of the Sentosa integrated resort.

Management prudent in acquiring landbank. Management is comfortable with the current landbank of about 4.5m sqf and will acquire more land only if it feels the price is right. CDL is interested in the recent land releases from the government’s Reserve List and is the top bidder for the Chestnut Avenue site with a top bid of S$129.1m (S$280psf ppr), but feels that the reserve price of Laguna Park (S$844psf ppr) is quite high.

Construction work for South Beach to begin by 2010. CDL has completed financing arrangements for the South Beach project and is finalising the design. Construction work is expected to begin by 2010. Management expects to see some write-downs from the project in the current financial year mostly due to the decline in the value of office space.

Hotel occupancy likely to firm up. Advance room bookings in relation to Formula One races are rather disappointing. However, management expects occupancy levels to pick up as the event draws closer and to remain healthy in 2H09/2010 with other events like the APEC conference, opening of the integrated resorts and the Youth Olympic Games.

Maintain BUY; target price raised to S$13.50. We continue to see good value in CDL and maintain our BUY recommendation with a revised target price of S$13.50 pegged at a 15% premium to our 2009 revised RNAV of S$11.73.

Frasers Centrepoint: Poised for major league debut; upgrade to BUY

Physical integration a success. We visited Fraser Centrepoint Trust's Northpoint mall (NP) to assess the success of the S$38.6m asset works. The goal was two-fold: transfer GFA from the fourth level to higher yielding lower levels; and fully integrate the asset with new extension Northpoint 2 (NP2) to create one seamless retail mall. The physical integration has been very successful, in our opinion. It is very hard to identify where NP ends and NP2 begins. The transition out of AEI is still taking place on upper levels as some tenants are still in the process of fitting-out.

But trust-level integration incomplete. We have commented on the lack of scale in FCT's portfolio before and this is the most obvious opportunity: in essence, FCT owns only two-thirds of a prime asset. Despite a strong pipeline, FCT's acquisition plans were put on hold when the credit crunch struck. Sponsor FNN [NOT RATED] continues to hold on to NP2 (85,500 sf). We believe that an acquisition is likely in the next six months as: 1) credit markets have stabilized; 2) FCT has re-rated strongly making an accretive acquisition more feasible; and 3) the market may prefer an acquisition to support another potentially cash-flow disruptive AEI project (now at Causeway Point). The put and call option agreement with FNN indicates a price range of S$139.5m to S$170.5m for NP2. We currently assume the buy is priced per the Sep-08 valuation of NP, at around S$1916 psf or S$164m. Note that YewTee Point (YT, 72,000 sf) is also "ready for acquisition". If priced similarly, total acquisition cost is roughly S$302m.

Poised for major league debut. We have lowered our cost of equity assumption, changed our rent reversion assumptions from -5% and -7% inFY10-11 to 0% per year, and rolled over to FY10 (year end is 30 Sep). We also incorporate the NP2 and YT acquisitions at S$302m, with 70% of the cost funded via fresh equity at a 40% discount to the current price. This takes our fair value estimate from S$0.95 (at par to prior SOTP) to S$1.22.

We turn positive on FCT as 1) acquisitions will create scale, enhancing FCT's attractiveness for institutional investors (thus benefiting retail holders); and 2) the yield gap between FCT and CapitaMall Trust [HOLD; FV: S$1.53] is fairly wide even after allowing for a size and asset premium. Upgrade to BUY (16% total return). Our ideal entry point would be at any capital raising / acquisition announcement.

City Developments - Beware when government steps in

We have downgraded our rating for City Developments (CDL) to 4 (Underperform) from 3 (Hold) after the government announced, on 14 September, measures to ensure a ‘stable and sustainable’ property market, including a surprise (in our view) withdrawal of the interest absorption scheme (IAS).

We expect the shares of CDL, one of the biggest developers with a significant portion of its earnings and NAV exposed to the Singapore residential market, to be adversely affected.

We believe the environment is not conducive to owning property-developer shares, with the government set on pumping more land available for development from 1H10 and unlikely to reinstate, if ever again, the IAS until at least the next propertymarket bottom.

We have raised our six-month target price, based on a sum-ofthe- parts (SOTP) valuation, to S$9.52 from S$9.26 due to the increase in market value of its listed hotel operations. We have not changed our earnings forecasts because we do not expect CDL’s immediate pipeline of project launches to be hit badly.

Bukit Sembawang Estates - Your Key To Buried Treasure

Purest Play on S’pore Residential. Bukit Sembawang (“BS”) offers the purest play on the Singapore residential market, with nearly 100% of its RNAV attributed to this sub-sector. It has been associated with the development of landed housing in Singapore since the 1950s.

Low-Cost Legacy Land. BS holds 4.2mil sqft of landbank in Singapore, which places it second among listed developers. About 74% of this is low-cost legacy land from its days in the rubber plantation business, resulting in EBIT margins of 36% to 53%, which is higher than the usual 15- 20% EBIT margin associated with mass-market properties.

This legacy land is zoned for landed housing, a subsegment of the residential market that has demonstrated greater resilience in the recent cycle. An increased scarcity of landed sites bodes well for future pricing power and unlocking of value. In 2005-06, BS diversified into the nonlanded segment, acquiring c.1.4mil sqft of GFA in the mid and high-end segments, enabling it to tap into a recovery in these segments filtering up from the mass-market.

Initiate Coverage with a BUY, TP S$6.02. TP is based on a 30% discount to RNAV of S$8.60, to account for its low liquidity and expectation of a more gradual monetisation of its landbank. The stock is currently trading at 0.5x P/RNAV, the lowest in the sector, presenting undemanding valuations for value investors with a longer-term view.

Singapore Property - Buy into weakness on government measures

Buy into weakness on government measures, reiterate OVERWEIGHT. The Government’s reinstatement of the 1H10 Confirmed List and removal of IAS reflect its concerns over excessive speculation. However, we believe demand for mass projects remains sustainable, given that majority of buyers here are genuine home-occupiers and HDB prices continue to rise amid increased demand from Singaporeans and PRs. While we are cautious of the Government’s mindful watch, we see the kneejerk selldown (-4.4%) as a good opportunity to buy into property stocks. Our big-cap and mid-cap top picks within the OVERWEIGHT property sector remain CityDev and Wing Tai respectively.

1H10 GLS Confirmed List reinstated and IAS removed. To ensure a stable property market and prevent excessive speculation, the Government will (1) reinstate the Confirmed List for the 1H10 GLS Programme, (2) remove with immediate effect the Interest Absorption Scheme (IAS) and Interest Only Housing Loans and (3) end the Jan 09 Budget assistance measures for the property market upon their expiry in Jan 10 - 11. Aside from revealing the number of Confirmed List’s sites towards end-2009, the Government will increase the number of Reserve List’s sites from the current 16. IAS will still be allowed for projects where units have already been offered for sale under the IAS prior to the announcement. We think existing projects with IAS could see increased demand from buyers who remain comfortable with paying only 20% of sale price prior to TOP.

Not unexpected. Both measures (1) and (2) are in line with what Minister Mah previously suggested during the Jul – Aug 09, while we reckon measure (3) is comparatively less forceful. We also gather from recent showflat visits and talks with developers/agents that over the past few months more buyers opted for Normal Progressive Scheme over IAS given a 3 – 5% lower S$psf (where impact increases with size) and improved sentiments. Out of 10 buyers, 2 – 4 would choose IAS presently (vis-à-vis 6 – 8 previously). We expect measure (2) to drive out pure speculators with the sole intention of buying properties to sell within 2-3 years. This announcement and weakness within regional bourses should trigger a kneejerk sell-off of property stocks. But, we continue to see value in property counters given the upcoming IRs, improved macroeconomic signs, low interest rates and prime-luxury prices remaining 15 – 25% off 4Q07 peaks.

Hints of a sustainable mass-market demand. While the Government could have brought in the Confirmed List immediately and introduced more forceful measures to calm the current buying frenzy, we believe this could run counter to its overall cautious tone on the economy. Further, we view the Government’s measures as an indication that demand for mass projects is sustainable, especially when HDB prices continue to rise amid increased demand from locals and PRs. Without a healthy supply of mass-market sites, a subsequent hike in mass prices from current levels could further widen the gap between mass projects and HDB flats, thus delaying the Government’s vision of encouraging higher ownership of private homes.

Frasers Commercial Trust - Value amid recapitalisation

While Jones Lang La Salle estimates that Singapore capital values to June 2009 have fallen 37.9% since the market peak in 4Q07, the office market appears to be exhibiting signs of life in recent weeks. K-REIT Asia on 1 September announced the acquisition of six floors (20/F-25/F) office property Prudential Tower (leasehold with about 85 years remaining and total strata area of 248,541 sq ft) along Cecil Street in the CBD area from APF Property Investments for S$106.3mn or S$1,579psf of NLA.. The vendor will provide income support to K-REIT, capped at an aggregate S$5mn, for five years upon the completion of the acquisition to guarantee a NPI yield of 5.2% (S$5.5mn a year) over the five-year period. The transaction is the first significant deal in the Singapore CBD area since the reported sales in May 2009 of Anson House for a reported S$85mn (equivalent to S$1,100/psf) and Parakou Building for S$81.4mn (equivalent to S$1,280/psf). In addition to asset divestments/acquisitions, it has been reported (The Edge, 31 August 2009) that Servicorp would lease an entire floor (22,000sf) in Marina Bay Financial Centre Tower II with a seven-year lease commencing in 2010.

The recent 2Q09 GDP report for Australia revealed that business investment contraction was briefer and much smaller than expected by our economics team and that consumer spending was holding up much better than previously forecast. As a consequence of the better-than-anticipated 2Q09 GDP number, Nomura’s economics team has lifted Australia’s 2009 GDP growth forecast to 1.0% from -0.2%. Nomura’s economists have also adjusted its 2010F growth forecast to 1.9% from 1.8%, while maintaining its 3.0% forecast for 2011F. Key drivers to the revised forecasts are an expected stronger contribution from domestic demand and less support from net exports. With the better economic outlook, Nomura’s economists have revised peak unemployment forecast to 6.8% in 2010F (from 8.1% previously).

While the economic outlook appears to be improving, the 2Q office data highlight a marked contraction in demand in the Australian office market resulting in a broad uplift in office vacancy. According to the Property Council Australia, net demand contracted by 160,284sm, resulting in vacancy rising in the first six months of 2009 to 8.3% from 5.9% as at the end of 2008. Vacancy in Australia’s main CBD market rose to 7.3% by end-June from 4.7% at end-2008. While demand in the respective office markets remained weak, the rising in vacancy was partly prompted by the completion of nearly half a million square metres nationwide.

FCOT in August 2009 raised S$213.9mn via the issuance of 2,252.0 mn new rights units at S$0.095/units. In addition to the issuance of new equity, FCOT has acquired a 99-year leasehold interest in Alexandra Technopark from parent Frasers and Neave for S$342.5mn, funded by way of the issuance of preferred equity. A five-year master lease, as part of the deal, will ensure a net rental of S$22.0mn, equating to a net yield on our numbers of 6.4%. The preferred equity attracts a coupon of 5.5%, equivalent to S$18.8mn per annum. A full conversion of the preferred equity at a conversion price of S$0.177/unit would result in the issuance of further 1,933.0mn units. Following the transaction, the REIT manager estimated that its gearing would fall to 0.465x post the rights issue, falling to 0.385x following the acquisition of Alexander Technopark. On our numbers, we are forecasting end-FY09 gearing to come in at 0.41x vs our previous estimate (pre transaction) of 0.62x. FCOT in its circular indicated that its NAV would fall to S$0.26/unit, following the rights issue from S$0.78/unit based on its 1Q09 results. If the preference shares were fully converted the NAV would fall to S$0.23/unit.

While signs of life are appearing in the Singapore office market, tough market conditions remain in both the Singapore and Australian office markets. That said, we continue to see value in FCOT, with market conditions more than reflected in our asset valuations. Following its recent recapitalisation, we reset our price target to S$0.184/unit (down from S$0.29/unit) to reflect the increased number of shares, as a consequence of the S$213.9mn rights issue and the potential dilutive effects of conversion of preferred equity. Following the rights issue as well as the acquisition of Alexander Technopark on a yield of 6.4%, we raise our distributable income to S$26.2mn for FY09F (from S$22.8mn) and to S$44.6mn for FY10F (from S$18.4mn). While distributable income has been raised, our DPU for FY09F and FY10F are cut to S¢1.8 and S¢1.5, respectively (due to the rights and preferred equity issuance) resulting in a prospective FY09F and FY10F yield of 11.0% and 9.2%, respectively.We retain our BUY recommendation on FCOT.

CapitaLand - Introducing The Interlace

CapitaLand unveiled designs for The Interlace last Friday, its latest project to be developed on the former Gillman Heights. Designed by Ole Scheeren from The Office of Metropolitan Architecture (OMA), The Interlace has an avant-garde design and will comprise 1,040 units on a site of 871,884 sq ft. CapitaLand has a 60%-stake in the project.

The Interlace is scheduled to be launched in October, and the management has stressed repeatedly that pricing would be affordable. Its construction costs are expected to be between $250-270 psf, lower than the $320 psf we had assumed earlier. We correspondingly lower our estimated breakeven price to $703 psf, while keeping our ASP unchanged at $900 psf.

For The Interlace, a $660m 5-year project financing loan has been secured from seven banks (DBS, UOB, StanChart, OCBC, Bank of Tokyo Mitsubishi UFJ, Maybank and HSBC). We estimate the all-in borrowing cost to be about 4.2%.

Besides The Interlace, CapitaLand is also preparing to launch the 165-unit Urban Suites, on the site of the former Char Yong Gardens. We reckon that its launch is closer to the year’s end. Lowering our cost of construction assumption by 10% to $360 psf, the estimated post-provisioning breakeven cost for the project is $1,925 psf. We maintain our ASP assumption at $2,300 psf.

We have lowered our construction costs assumptions for the other projects in CapitaLand’s landbank, and pegged the associated companies to market value. Pegged at a 15%-premium to our FY10 RNAV of $3.98, we have raised our target price to $4.57. The stock has been a relative laggard compared to its peers. Upgrading to BUY.

Ho Bee Investment - 1H09: Balanced sheet strengthened despite huge write-downs

Well positioned to reap the benefits of the upcoming integrated resorts in Sentosa and improved homebuyer sentiment in the high-end segment. Maintain BUY with a target price of S$1.65.

Ho Bee reported 2Q09 PATMI of S$157.3m (+325% yoy), bringing 1H09 net profit to S$194.6m, up 208.6% yoy. The results include S$109.8m in land write-downs and revaluation losses. The results are way above our and consensus’ expectations due to earlier-than-expected completion and profit recognition mainly from The Coast and Paradise Island projects that obtained TOP in Apr-May 09. Revenue from the property investment segment improved in 2Q09 to S$4.6m (+12% yoy) due to an increase in rental income from the Group’s industrial and retail spaces. Hotel revenues continued to decline in 2Q09 to S$1.1m (-50%yoy) due to the drop in tourist arrivals. The Group announced an interim dividend declaration of 2 cents per ordinary share.

Gearing down to comfortable levels despite huge asset write-downs. Ho Bee’s gearing dropped from 1.26x to 0.51x due to the repayment of borrowings from the strong collections of proceeds from The Coast and Paradise Island. This is despite booking S$109.8m in land write-downs and revaluation losses. The asset write-downs relate to a S$53.9m land write-down for the Pinnacle site, S$25.4m mostly from the Elmira Heights site and S$30.4m in revaluation losses mainly from Samsung Hub.

Riding on improved homebuyer sentiment in mid-tier to high-end segments. Ho Bee is a key beneficiary of the return of homebuyer interest in the mid-tier to high-end segments as it derives nearly 87% of its value from these segments. The Group also sold more than 20% additional units each at The Orange Grove and Dakota Residences projects at S$2,200psf and S$870 psf respectively. Riding on the improved sentiment, it is likely to launch Trilight and Parvis in 4Q09.

Key beneficiary of expected demand driven by upcoming IR on Sentosa. Ho Bee is the biggest Sentosa developer with a landbank of 2.5m sf of GFA and has been reaping rich rewards as the pioneer developer there. The opening of Resorts World@Sentosa in 1Q10 could act as a catalyst in boosting price levels at the land-scarce Sentosa Cove enclave, which bodes well for Ho Bee. It has yet to relaunch the Turqoise@Sentosa Cove project and launch the Seascape and Pinnacle Collection projects.

Ho Bee is well positioned to take advantage of the recent resurgence in buying interest in the mid-tier to high-end segments as it derives over 87% of its value from these segments. We maintain our BUY recommendation with a target price of S$1.65 pegged at parity to 2009 NAV.

Parkway Life REIT - Expanding funding base

The first S-REIT to diversify its sources of funding through Islamic finance. Parkway Life’s low gearing enables it to grow via acquisitions. Reiterate BUY with a target price of S$1.65.

Diversifying sources of funding by tapping Islamic finance. Parkway Life REIT was offered a S$50m three-year Islamic revolving credit facility by The Islamic Bank of Asia, a subsidiary of DBS Group Holdings. Parkway Life is recognised as Shariah-compliant based on preliminary review. Islamic finance provides financial flexibility as Parkway Life can now tap funding from traditional commercial banks and diversification from Islamic banking facilities. Funding provided by Islamic finance is usually at a lower cost compared with traditional sources from commercial banks. The Islamic revolving credit facility was priced at an attractive spread of 195bp.

Parkway Life’s current gearing of 22.7% and all-in cost of borrowings of 2.89% is among the lowest in the S-REIT sector. Its interest cover ratio is a healthy 6.9x. It has debt headroom of S$308.3m for acquisitions before reaching gearing of 40%. Parkway Life has established a S$500m multicurrency medium term note (MTN) programme, which is currently untapped.

Embarking on maiden AEI. Parkway Life has completed asset enhancement initiatives (AEI) for PLife Matsudo, a pharmaceutical production and distribution facility in Matsudo City, Chiba prefecture, by converting existing utility space into a device manufacturing room. The enhancement work costs S$2.6m and increases gross rent by 19.4% with effect from Jul 09. The modification to the facility is customised to sub-lessee Inverness Medical’s operational requirements.

Hedging against inflation. The minimum rent payable from Singapore hospitals, Mount Elizabeth Hospital, Gleneagles Hospital and East Shore Hospital, is set at CPI + 1% above rents paid in the preceding year. CPI for First Year was 5.25%, thus minimum increase in rents for Second Year (23 Aug 08 to 22 Aug 09) was set at 6.25%. CPI for Second Year was 3.36%, thus minimum increase in rents for Third Year (23 Aug 09 to 22 Aug 10) would be set at 4.36%. The downside protection ensures that rents from Singapore hospitals, which accounted for 78.3% of group revenue in 2Q09, will always be increasing.

Parkway Life has strong defensive qualities due to the long-term leases for healthcare assets. Its low gearing enables it to grow via acquisitions. We have raised 2010 DPU forecast by 2.6% to 8.0 cents due to AEI for the PLife Matsudo facility and growth from Singapore hospitals.

City Development - Fully valued

City Dev reported 2Q09 net profit of S$140.0m, 14.7 S cents EPS, ahead of our S$85m estimate. We raise our target price to S$8.37 (S$8.25 previously), accounting for presales at recent launches as well as planned launches in 2H09. Its share price has risen 24% in the past month, and is trading at a 6% premium to our RNAV of S$9.30. Maintain Underperform.

The key variances were higher operating profit from the faster pace of profit recognition of residential projects (S$21m – some profit from The Arte was recognised this quarter), lower finance cost (S$17.3m), as well as lower tax (S$6.6m) and minority interests (S$10.5m). Residential development contributed 60% to earnings, whilst the 15% contribution from rental properties was slightly ahead of hotel earnings contribution, reflecting weak operating conditions. Net gearing was slightly lower at 46% on healthy interest cover of 10.1x. Adjusting for fair value gains on its investment properties, its gearing ratio would fall to ~35%.

Millennium and Copthorne (M&C) reported 2Q09 headline net profit of £16.4m, up from the £9m in 1Q09 reflecting strong cost initiatives in the face of flat hotel revenue. Overall occupancy rate was 67.6% versus 73.3% in 2Q08 with average room rate of £78.40 versus £79.38 over the same period last year. RevPAR as a result slipped 9% YoY to £53. RevPAR in July remains weak at an 18.3% YoY contraction, although signs of improvement are seen in Singapore and New York. We have already factored in a stronger 2H09 in our estimates.

The group plans to launch several projects in 2H09, including Hong Leong Gardens condo (396 units), the former Albany/Thomson Mansion sites (160 units) and possibly The Quayside Isle at Sentosa Cove, suggesting management is more positive than a quarter ago.

FY09 and FY10 EPS raised by 12% and 14%, respectively, updating for 1H09 results and presales at recent launches. We raise our target price to S$8.37, based on unchanged 10% discount to RNAV of S$9.30. The shares are factoring in more than 20% rise in residential prices over the next 12 months. It is fully valued, in our view, as the stock is trading at a 6% premium over our RNAV of S$9.30.

CapitaLand - The new-design launch of the former Gillman heights

CapitaLand’s much awaited project launch of The Interlace (former Gillman Heights) in October is expected to receive a warm response and further boost the sales volume in the already buoyant residential segment.

We recently attended the design launch of The Interlace. Located at Alexandra Road/Depot Road, it is one of the largest and much awaited residential developments jointly developed by CapitaLand and Hotel Properties. The design presentation was followed by a media/analysts Q&A session.

Unique architecture. The Interlace has 1,040 units designed by world renowned architect Ole Scheeren, Partner of the Office for Metropolitan Architecture (OMA). The design breaks away from the traditional normal cluster of vertically stacked tower residential apartments into a stacked interlocking hexagonal arrangement comprising 31 apartment blocks with an expansive and interconnected network of communal spaces. The project aims to present a radically new approach to contemporary living in a tropical environment.

Project ASP could set new benchmark levels. The 81,000sqm site was acquired at S$548m or S$363psfppr. Management estimates construction cost at S$250-270psf which works out to a breakeven cost of around S$750psf. We expect average ASP levels of around S$1,000psf, a new benchmark in the area considering the highest resale prices of S$517psf and S$817 psf for Gillman Heights (former site) and Normanton Park (closest comparable) respectively. The average ASPs of some of other comparable projects cited by management in nearby locations are S$900-1100 psf at One North Residences, S$900-1000psf at Rochester, S$800-1,400 psf at Caribbean and S$1,500-1,700psf at Reflections at Keppel Bay.

The sale of the 1,040-unit project could well boost the transaction volumes in the already buoyant mass- and mid-tier segments and set new price levels for future projects. We estimate that the project could bring in S$262.5m in pretax profits or 5.8 cents a share in pretax profits. We expect strong demand for this project considering the attractiveness of the location and recent buying interest.

Project financing completed. The total development cost for the project is around S$1.4b and CapitaLand has made arrangements for a 5-year S$660m project financing from seven leading bankers at an attractive interest rate of 3.48%. Management said construction for the project would begin soon and is close to awarding its construction contract work to local construction and building group.

Ascendas REIT - Large scale is the winning formula

Started in 2002 with just eight properties, A-REIT has successfully enlarged its property portfolio across five sub-sectors: Business & Science Parks, High-Tech industrial, Light Industrial, Logistics & Distribution and Warehouse Retail facilities. 47% of its portfolio has built-in rental escalation clauses. These properties enjoy above-sector average occupancy rate of 97.1%.

Acquisitions have underpinned A-REIT’s dividend growth. Its development capability provides an additional boost. Completion of development projects over the next 12 months will continue to contribute positively to income. Growth could also come from acquisitions of its sponsor’s Singapore assets (S$1.1b) and ample industrial properties in Singapore.

A-REIT has completed two rounds of cash calls this calendar year, raising a total of about S$700m. The proceeds have been deployed towards reducing debt and funding its existing developments. Its gearing has been reduced to 29.3% as of Aug-09. This clears any possible overhang on refinancing issues and frees up its capital for future growth.

REIT’s strong sponsor, balance sheet strength, resilient portfolio and growth potential underscore its P/B ratio of 1.05x. We find its share price underperformance hard to justify. We initiate with a Buy.

City Development - Respectable set of results; solid sales record

2Q09 results exceeded our forecasts on stronger devt profit recognition. CDL is one of the main beneficiaries of the domestic housing market recovery, adding more than S$1.3bn in sales YTD to already significant pre-sales. Sound balance sheet with diversified sources of capital provides flexibility for acquisitions. However, the positives are fairly priced at a 9% premium to RNAV. Hold.
Lower devt profits (-19% YoY, accounting for 60% of PBT) and hotel earnings (- 60% YoY) contributed to the YoY earnings decline. The Arte started to contribute in 2Q09 alongside high margined projects pre-sold in 2006/7. CDL has sold 1,031 units YTD amounting to sales value of S$1.34bn, including Volari and The Gale which are both >90% sold.

Revising up FY09-11 earnings by 9% on higher price and better pre-sales YTD 2H earnings should be stronger, underpinned by a seasonally stronger 2H for hotels, progressive development profit recognition and steady rental income. Mgmt plans to launch a further 400 units in 2H including the Hong Leong Gardens, Albany/Thomson projects and Quayside Isle. These targets are conservative.

Maintain Hold; TP revised to S$9.20 (fr S$8.40) pegged to parity to RNAV We revise our RNAV from S$8.40 to S$9.20 to reflect the re-rating of M&C, higher ASP and take-up rates. TP is pegged to parity to RNAV, on par with previous recovery years. Although we like CDL’s Singapore residential exposure, especially in the mass to mid segment, we think the stock is fairly valued at 9% premium to RNAV. Downside risks: reversal of economic trends, weaker than expected leasing demand; upside risks: stronger than expected property market recovery.

CapitaLand - Ready for asset acquisition

CapitaLand has allocated S$1bn to increase the capital base of its China, Vietnam, and Ascott businesses. This is positive and signals management’s appetite to take on risk. We believe asset acquisition could happen within 3-5 months and is a price catalyst. We think CapitaLand would remain residential-focused and would buy sites in Shanghai, Beijing, and Ho Chi Minh City.

We think CapitaLand’s issuance of S$1.2bn convertible bonds is a cost-efficient way of refinancing and securing long-term capital ahead of an acquisition. The debt maturity duration is now over 6 year from 4.4 as of December 2008. CapitaLand’s share price has lagged its Hong Kong peers by up to 20%. We thinkthere is scope for the performance gap to narrow as the company commences its capital deployment.

CapitaLand reported an H109 loss of S$114.1m due to net revaluation losses. Excluding one-offs, core Q209 PATMI was S$124m (+163% QoQ) on the back of contributions from China and Singapore residential property.

We include the non-cash revaluation losses into our model and reduce 2009E headline EPS by 60% to 5cts (from 13cts) with normalised EPS of 13cts. We increase our RNAV estimate to S$4.35 (from S$4.25) due to a 15% increase in expected launch prices for Singapore projects (in line with our residential forecast upgrade), mark-to-market listed REITs, and update our earnings forecast for Australand.

Stamford Land - Currency turning favorable

We can see that Australia Dollars (A$) plunged nearly 22% against Singapore Dollars (S$) from Jul ? Dec 2008. The sharp decline of A $ during this period resulted in huge translation losses for Stamford Land's FY09 result. Weaknesses in A$ prolonged and extended till around Mar 2009, when global economy was believed to have bottomed. Since Mar 2009, A$ managed to gain strength and recovered nearly 14% against S $. Current spot rate stands at about S$1.20/A$.

The recent 1Q10 results of Stamford Land clearly portrayed the positive impact of stronger A$ to its financials. Foreign currency translation reserve increased from a negative S$16.7m to a positive S$18.6m. The improvement inevitably lifted Stamford Land's total equity value.

Taking Bloomberg's year 2010 consensus forecast of S$1.19/A$ by various international lenders into account, we believe that current strength of A$ can be sustained and valuation of Stamford Land can have room to improve.

In consideration of future sustainable strength of A$ against S$, we imply a 10% appreciation of A$ into FY10E, and a further 5% for FY11E. On top of that, we also reduced the capitalization rate of Stamford Land's hotel properties from 6.5% to 6.0% to be more inline with the gradual property market recovery in Australia. Our target price has thus been increased to S$0.48 and we upgrade Stamford Land to BUY.

Allgreen Properties: Geared To Go

All Ready To Go. We met Allgreen management recently and came away assured that it remains in a good position to take advantage of current momentum in the mid-tier segment, given its enviable number of launch-ready projects. Net gearing remains low at 0.46x and management indicated it would be comfortable gearing up to 0.65x. Based on its 2Q09 balance sheet, it provides debt headroom of c. S$500m for any potential acquisitions. Its participation in the Chestnut Ave tender shows it is not averse to supplementing its landbank.

Visibility Improving. While FY09F earnings from its development properties segment will largely be underpinned by revenue recognition from Cairnhill Residences (TOP end-09), Cascadia and Pavilion Park, recent success at One Devonshire and VIVA will provide earnings visibility going into FY10F and FY11F. Potential launches in the pipeline will also contribute, as will its share from JV projects in China, which we believe could boost earnings from late FY10 onwards.

BUY, TP S$1.39. With four launch-ready projects in various locations, we believe Allgreen is poised to capitalise on buoyant sentiment in the mid-tier segment and realize its fair value. Any success in subsequent mass-market land tenders will likely be RNAV-accretive and provide a further catalyst for the stock. Allgreen remains our top mid-cap pick, with a TP of S$1.39.

Hotel Prop: There are better places to stay

Still Hurting. The global economic downturn and the H1N1 scare continued to draw blood from hospitality play HPL, as it reported a 72% yoy drop in 2Q09 PATMI to S$4.4m, as revenue slid 27% to S$103m. Lower contribution from property development did not help things, as start-up losses from its associates (like interest expense at Farrer Court) further hurt its bottomline.

Highly Geared. Despite its exposure to the cashflow-generative hospitality sector, operating cashflow stayed weak at S$15m, which did little to change its net debt position of S$1.3bn. Gearing remains high at 1.0x.

Not Best Play on IR Story. Its hotel portfolio comprises properties in Singapore as well as overseas. Even as we input a 25% increase in RevPAR for 2010 and roll over to FY10 valuations, Singapore hotels only contribute c.25% of FY10 earnings and 33% of RNAV.

Maintain HOLD, TP S$2.05. Our RNAV is raised to S$2.56 (from S$2.13) and we narrow our RNAV discount to 20% in anticipation of a turnaround in the global hospitality industry. With a TP of S$2.05, stock looks expensive at current levels and we prefer CDL HT (TP S$1.36), Genting S’pore (TP S$0.98) and UOL (TP S$3.86) as plays on the IR story.

SC Global Developments

2Q FY2009 results. SC Global reported 2Q FY2009 revenue of S$226.4m (+599% yoy) and net profit of S$7.8m (-32% yoy). As SC Global’s stake in AVJennings Ltd increased to 50.03% in December 2008, the revenue of AVJennings Ltd had been consolidated as a subsidiary. This caused a significant increase in SC Global’s revenue. However, as AVJennings Ltd’s property business were mainly high volumes with lower margins, the net profit of SC Global was lower.

Earnings estimates for FY2009F to FY2011F. SC Global’s profit is expected to increase from S$34.0m in FY2009F to S$193.1m and S$195.8m in FY2010F and FY2011F respectively. This is because most of its residential projects are anticipated to be completed in FY2010F and FY2011F.

Outlook for FY2009F. SC Global highlights the recent strength in the Singapore residential property market. We expect it to launch properties for sale only next year when sentiment in the luxury market improves further. On the Australian market, it mentions that AVJennings Ltd continues to face market pressures and challenges.

Maintain HOLD recommendation, fair value raised from S$1.10 to S$1.52. Like other property stocks, SC Global’s share price has risen sharply in the recent rally. We are maintaining our hold recommendation as we feel that there is limited upside from its current share price. Nevertheless, as the sales momentum in the Singapore property market is expected to be strong, we are raising the fair value from S$1.10 to S$1.52. This is a change from 50% to 40% discount to the RNAV. The RNAV has also been raised from S$2.21 to S$2.53 due to the higher than expected increase in property prices.

CDL Hospitality Trusts - Supply shock threatens hotels

We revise our distributable income forecasts to S$67.9m (-8%) for FY09, attributed to a lower financing cost of 3.2% (50bp lower than we expected), and S$58.1m (+23%) for FY10. We now assume a 25% yoy (from 20%) decline in RevPar in FY09 and 10% yoy decline (from 15%) in FY10. We expect a decline in FY10 RevPar, in view of the strong supply pipeline in 2009-10, which represents 40% of current stock. We estimate tourism arrivals must grow 25% yoy in 2010 and 13% yoy in 2011 for hotels to achieve 80% occupancy; a tall order given a still sluggish global economy. RevPar grew 11% yoy during the 2007 boom period. Our improved FY10 RevPar assumption reflects expectations of higher weekend occupancy rates, which are currently about 70% vs close to 80% on weekdays, as the Integrated Resorts could boost the number of leisure travellers.

CDREIT will be reviewing its dividend payout policy in 2H09, and a decision on whether to reinstate the 100% payout should be reached by year-end. The trust cut the payout to 90% (from 100%) from 3Q08 in order to increase its financial flexibility amid a tight credit environment. According to our channel checks, credit spreads have since declined some 30- 100bp qoq for real estate companies, and therefore this reduction may no longer be necessary.

Our DCF-based target price of S$1.14 (from S$1.00) is derived by discounting CDREIT's distributable income by its cost of equity of 9.1%. Dividend yield is 7.4% for FY09F but drops to 6.3% for FY10F due to our lower RevPar assumptions. Downgrade to Hold (from Buy).

Ho Bee Investment - Maintain HOLD recommendation

2Q FY2009 results. Ho Bee reported 2Q FY2009 revenue of S$740.8m (+534.2% yoy) and net profit of S$157.3m (+325.6% yoy). It announced an interim dividend of S$0.02 per ordinary share, which was an increase from S$0.01 for the same period last year.

Revenue rose sharply as a result of the progressive recognition of projects that have been substantially sold, namely The Coast and Paradise Island in Sentosa Cove. Net profit increased because of higher revenue partially offset by a write-down of S$109.8m in fair value changes of properties.

Earnings estimates for FY2009F to FY2011F. We expect Ho Bee to report record profit of S$380.3m in FY2009F as it recognizes revenue from most of its projects in Sentose Cove. Following that, it is likely to remain profitable as it recognises profits from the remaining projects. We anticipate profit of S$90.0m and S$33.3m for FY2010F and FY2011F respectively.

Outlook for FY2009F. Ho Bee mentions that it expects to be profitable for the next two quarters this year. Moreover, it has re-launched The Orange Grove and Dakato Residences, and achieved sales of more than 20% each. We expect the strong sales momentum to continue for its residential projects.

Maintain HOLD recommendation, fair value raised from S$0.85 to S$1.17. We maintain our hold recommendation for Ho Bee as the share price has run up sharply in the recent rally and we believe that upside may be limited. Due to the improvement in sentiment in the property market, we raise the fair value from S$0.85 to S$1.17. This is based on a reduction in the discount from 50% to 40% of the RNAV. The RNAV has also been revised from S$1.71 to S$1.95 to reflect the higher than expected selling prices of the residential projects.

Hotel Grand Central: Gains from forex

Once again, its bottlomline performance was boosted by forex gains. Hotel Grand Central (HGC) posted a muted set of results, but its net performance was significantly boosted by strong foreign exchange gains which amounted to S$7.57m in 2Q, bringing half-year gains to a total of S$10.52m, or half of the reported pretax profit of S$23.0m in 1H09. Stripping out these gains, operating profits fell 49% YoY and 18% QoQ to S$4.5m.

Revenue in 2Q09 fell 25% YoY, but was flat QoQ. For 1H09, operating profit plunged 49% to S$10.0m. This was seen from the decline in operating margins which slipped from close to 30% in 1H08 to around 20.7% in 1H09. Acquisition of holiday Inn in Adelaide. This month, the group also announced the purchase of the Holiday Inn at Adelaide for A$34.9m. This comprised of a 181-room hotel located within the Central Business District in Adelaide. Management expects this acquisition to add abut 0.27 cents to its EPS.

Better global prospects, but tourism likely to remain muted. Economic outlook looks better now compared to a quarter ago, and we expect tourism activities to pick up, albeit from a low base. However, with still-cautious consumer demand, we expect the operating environment for hotels to remain challenging. While occupancy rates could possibly edge up in its core markets (Singapore and Australia), room rates have limited potential for upward adjustments. This was similarly reflected in the management's brief statement that "the hotel market conditions in the countries where the group operates in, are not expected to recover in 2009 compared to last year."

Maintain HOLD and fair value estimate of S$0.58. While we are maintaining a decline in FY09 operating profits, we are raising our bottomline estimates to take into account the strong foreign exchange gains seen in 2Q09, which look unlikely to be repeated in the 2H of this year. With this key adjustment, our FY09 net profit has been raised to S$29.6m, up from S$14.4m. However, at the operating level, we expect operating profits to decline 38% YoY to S$19.5m in FY09. We are also maintaining our fair value estimate at S$0.58. After our previous report in May 2009, the stock has moved up 19% to the current price of S$0.635. We see limited price drivers ahead and are maintaining our HOLD rating.

Wing Tai - Greater contribution from Belle Vue Residences in Q4

Wing Tai is announcing its FY09 results on 25 Aug. We are expecting a net profit of $113.3m (excluding potential fair value losses), with contributions coming mainly from Helios Residences, the Riverine by the Park and Belle Vue Residences. We do not expect any writedowns for its residential developments, but Wing Tai may book in some fair value loss on its investment properties.

To-date, Wing Tai has sold 82 of the 176-unit Belle Vue Residences. The bulk of it was sold in Q4, at an average of about $1,800 psf as we expected. The project is already under construction, so Wing Tai will be able to recognize profits from it almost immediately.

Based on the URA’s statistics, 31% of the 373-unit Ascentia Sky has been sold as of July, achieving an ASP of about $1,250 psf - about 13.6% higher than the $1,100 psf we were expecting. Having seen the showsuite, we were quite impressed with the product offering and have raised our ASP assumption to $1,200 psf for the whole development. Contribution from Ascentia Sky is expected to kick-in only from FY10.

In line with its peers, we expect Wing Tai to suffer some fair value loss on its investment properties, probably in the magnitude of a 10%-decline, or about $55m. However, such losses will not affect the underlying cash earnings, which comes predominantly from the residential development business.

The current shareprice implies a Gross Development Value of $1,444 psf for its land bank. We think this still significantly undervalues the landbank, which comprises mainly high-end developments such as the remaining 50% of Helios Residences and the two Ardmore Park sites. Maintain BUY with a target price of $2.05, pegged at a smaller 10%-discount to its FY10 RNAV of $2.28.

Hotel Properties Limited – Hospitality business still challenging

HPL reported a worse-than-expected 2Q09 net profit, which slumped by 72% yoy to $4.4m, despite its revenue declining by a relatively smaller 27%. Not only was the hospitality business affected by the global financial crisis, HPL has to share losses suffered by its associate, mainly due to interest expenses for the Farrer Court site. The effective tax rate was also higher-than- expected.

Due to the global financial crisis, political instability in Thailand and the H1N1 pandemic, HPL’s hospitality business suffered. HPL also owns several luxury resorts, such as the Four Seasons Jimbaran Bay in Bali and the resorts in the Maldives. We believe that they are less resilient in the downturn vis-à-vis hotels, which could still attract corporate clients.

Based on the STB’s statistics, visitor arrivals in Jun declined by 8.9% yoy to 750,000. Competition remains keen amongst hoteliers, with the average RevPar for upscale hotels declining by 31% yoy. HPL’s three hotels in Singapore are the Four Seasons Hotel, the Hilton Hotel and the Concorde Hotel. Outlook for these hotels, which contribute to about 30% of HPL’s topline, could be challenging in the short-term.

Via its stakes in Farrer Court and Gillman Heights, as well as its wholly-owned Beverly Mai, HPL’s future earnings are likely to be boosted by development profits from these projects. The 1000-unit Gillman Heights project could be launched in 2H09, with CapitaLand leading the project. If launched this year, profits are likely to be recognized only next year.

Besides the potential earnings kicker from the residential projects, we are still cautious on the hospitality sector, which is HPL’s core business. We have reduced our FY09-10 forecasts by 28% and 1.6%, respectively. Maintain HOLD at a target price of $2.25, pegged at a 20%-discount to its RNAV of $2.82.

Tat Hong Holdings Ltd: Holding out for inorganic growth

1Q10 performance fell short of expectations. Tat Hong Holdings Ltd's (Tat Hong) 1Q10 results came in below expectations. Revenue slipped 37.2% YoY to S$120.1m and net profit tumbled 63.9% to S$10.6m. Stripping away the impact of non-core items such as forex, core net profit would have fallen by a larger 67.4% to S$8.2m. Sequentially, sales improved by 8.5% but core net profit decreased by 58.6%. No dividends are declared for 1Q. Broad-based revenue decline, with the exception of Tower Crane.

With the exception of the Tower Crane division, all other segments posted weaker revenue. Equipment Sales recorded the steepest fall (-60% YoY) as customers reigned in on capital expenditure in light of the economic crisis. Crane Rental, on the other hand, remained relatively stable with revenue contracting by just 2%. We expect stable rental income to partially offset the steep decline in equipment sales in FY10.
Profit margins contracted. While we had anticipated weaker revenue, the sharp drop in 1Q10 earnings came as a surprise. Although gross profit margin improved by 2.6ppt to 39.4%, operating expenses did not fall as significantly as revenue, and this resulted in a 4.6ppt drop in EBIT margin to 17.1%. Poor results from associates further dragged down its bottom line, with net profit margin contracting by 6.5ppt to 8.8%.

Holding out for inorganic growth. Management continued to paint a cautious outlook for FY10 as weak equipment sales are expected to dull the group's performance. On the bright side, economic stimulus plans may support its rental income. In our view, the environment for organic growth remains highly challenging in the near term. Tat Hong's next phase of growth is more likely to be driven by inorganic growth. Following AIF Capital's recent S$65m strategic investment, Tat Hong is equipped with the financial flexibility to expand via M&As or JVs. In addition, AIF Capital could introduce new growth opportunities that were previously unavailable to the group.

Maintain HOLD. We have cut our FY10 earnings forecast by 20% following Tat Hong's poor 1Q10 showing, bringing our fair value estimate slightly lower to S$1.13 (previously S$1.15). While we note the risk of continued near term earnings pressure, we maintain our HOLD rating on the stock given the enhanced likelihood of inorganic growth following the emergence of a strategic investor, coupled with a relatively decent 3.6% dividend yield.

Soilbuild Group: Better outlook, upgrade to BUY

Results above expectations. Soilbuild Group reported its 2Q09 results that exceeded our expectations. Revenue increased by 10.1% YoY and 49.7% QoQ to S$96.9m, driven by additional revenue recognition from Leonie Parc View, Montebleu, The Centrio, Tuas Lot and maiden contribution from Heritage 9. Recurrent rental income rose 38% YoY with the leasing of newly-completed business space. While PATMI fell by 14.7% YoY to S$19.7m due to higher cost provisions for ongoing projects, it increased marginally by 3% QoQ.

Strong sales achieved in 1H09. As at 31st July, Soilbuild had achieved sales (including Options to Purchase) of S$207m from residential and business space projects. This brings the total sales value to S$638m, of which more than 50% of the amount (S$319m) has yet to be recognized. With the launch of Meier Suites, Soilbuild does not have any landbank left and we take a positive view on this as we think current environment is a good opportunity for developers to lock in revenue visibility and for Soilbuild, it can also realign its focus towards its large-scale business space projects.

Convertible bond overhang removed. At the end of July, Soilbuild successfully repurchased S$42.5m in principal amount of the convertible bonds after the bond holders exercised their put options. Following the repurchase, there will be no outstanding bonds remaining. Even though we had previously said that there is no liquidity concern in the event of an early redemption of the bond, recent cases of companies facing liquidity issues with bond redemptions may have sent a negative signal on companies that carry such instruments. The removal of this overhanging concern could provide a positive catalyst to Soilbuild's share price going forward.

Fair value raised to S$1.36; Upgrade to BUY. Construction schedule for Leonie Parc View was ahead of our expectations and we are now raising our FY09 revenue and PATMI forecasts to S$376m and S$86m respectively. Our RNAV estimate has now been raised to S$1.70 per share (previously S$1.55) to reflect our new selling price assumptions for Heritage 9 (S$1,300 psf) and Meier Suites (S$1,300 psf). With the strong sales of its new projects and repurchase of the bonds, outlook has improved significantly. As such, we are now lowering our RNAV discount from the previous 50% to 20%. Our fair value has now been raised to S$1.36 (previously S$0.77). Valuation remains attractive as Soilbuild is now trading at Price/Book of 0.88x and Price/RNAV of 0.54x. With an upside potential of 47.7%, we are now upgrading Soilbuild from HOLD to BUY.

UOL Group Ltd: 2Q09 within expectations

Operating performance remained within expectations. UOL Group reported losses for 2Q09 due to fair value losses from its investment properties but operating performance remained within expectations. Revenue increased by 2.1% YoY and 8.6% QoQ to S$213.7m and the increase came from revenue recognition of its development projects - Duchess Residences, The Regency at Tiong Bahru and Breeze by the East. Rental revenue from investment properties increased by 16.5% YoY but was flat QoQ. Hotel operations remained weak, with revenue falling by 21.4% YoY and 3% QoQ to S$67.5m in the quarter. Uncertain economic outlook and the outbreak of H1N1 virus affected the travel industry which led to lower occupancy and average room rates in the quarter. Dividend income plunged 39.7% YoY but was due to lower payouts from investment and non-inclusion of dividend income from UIC which has now become an associated company of UOL.

Rising NTA was a pleasant surprise in midst of losses. Fair value losses of S$77m were recognized on UOL's investment properties in 2Q09 and this was compounded by the fair value losses recognized by associated companies - UIC and Marina Centre Holdings. As a result, PATMI plunged into the red in 2Q09 with a loss of S$20.1m. Excluding fair value losses, underlying PATMI would have increased by 28% YoY to S$90m. Despite the losses in 2Q09, UOL's NTA per share rose by 2.3% QoQ to S$4.88 as the increase in the market value of its available-for-sale financial assets (not recognized on income statement) more than offset the decline in its asset value.

Fair value raised to S$4.07; upgrade to BUY. Our RNAV estimate of UOL has now been raised to S$4.44 per share (previously S$4.11), driven by the increase in share prices of UOB, UIC and Pan Pacific Hotels. The market value of UOL's holdings in these entities had risen by 12.5% since our last report on 15th July. In line with our recent adjustment of valuation discount rates on property developers, we have now lowered the discount rate on our valuation of UOL's development profit and investment properties, from the previous 30% to 20%. As such, our fair value of UOL now stands at S$4.07 (previously S$3.56). Valuation remains attractive as UOL is currently trading at Price/NTA of 0.7x and Price/RNAV of 0.77x. With an upside potential of 18.9%, we are now upgrading UOL from HOLD to BUY.

Ascendas REIT - Rasing funds through private placement

Embark on equity fund raising. Ascendas REIT (A-REIT) has launched a private placement of 185m new units at between S$1.63 to S$1.70 per unit, or 3.8% to 7.8% discount to volume-weighted average price on 7 Aug 09. The equity fund raising is expected to raise gross proceeds of S$301.6m, which will be used in the following manner:

S$175.4m will be used to fund the development of the hi-tech built-to-suit facility for SingTel

S$120.6m will be used to fund potential acquisition of income-producing properties and built-to-suit development opportunities in the pipeline the balance to be used for general corporate and working capital purposes

The book building process starts today and is expected to be completed by 12 Aug 09. Gearing is expected to be reduced from 35.7% as at 9 Aug 09 to 29.3% after the completion of the private placement. There will be an advanced distribution based on distributable income from 1 Jul 09 to the day before new units are issued.

Improved financial flexibility. A-REIT will redeem Commercial Mortgage Backed Securities (CMBS) of €144.0m (about S$300m) to be completed by 19 Aug 09. The CMBS is secured by the cash flows and mortgage on 17 properties. 14 out of the 17 properties worth about S$944m will be released from the security. Financial flexibility is enhanced with A-REIT having 30 unencumbered properties worth about S$1,868.5m.

Yanlord Land - Landbanking at the right price

2Q09 results post little surprise. Yanlord announced 2Q09 net profit of S$91.6mil, in line with our expectations. Net margin post LAT remains high at 41% on our estimates with ASP for 1H09 at RMB23,531 psm, thanks to the contribution from Yanlord Riverside City. Given most of the FY09 earnings have been locked in, we see more emphasis on the group's forward development and strategic planning.

Landbanking is the key catalyst, in our view. Post recent fundraising, we estimate that the company has about S$1.8B 'war-chest' that could be potentially deployed for landbank replenishment and land acquisition in key cities would be the key catalyst to propel a further re-rating of the stock. Assuming Yanlord was to be able to acquire at 30% gross margin (minimum targeted return), the full deployment of the existing capital would add another S$0.25/share to our RNAV estimates.

Management emphasizing prudence. With land prices having run up significantly in China, management indicated that they have sufficient landbank to sustain their growth in the near term and would be rather rational in making the acquisition decisions. Given most of Yanlord's major launches are done for the year, we believe that the stock is likely to be range bound in the near term.

We retain our Neutral rating on Yanlord, with our Jun-2010 price target unchanged at S$2.80/share, on par with our RNAV estimates. Key risks to our rating and price target include a substantial increase in ASP achieved and a quicker-than-expected deployment of the 'war-chest'. A key downside risk would be potential measures from the government.

MacarthurCook Industrial REIT - downgrade from Hold to Sell.

Gross revenue was lower in 1Q10 mainly because of a refund of service charges to tenants. Service charge is a reimbursable item by tenant and does not affect the actual revenue. Underlying rental revenue from tenants remains stable with portfolio occupancy rate of 98.64%. Net property income stays fairly constant, but distributable income has fallen since 4Q09 because of a claim for industrial building allowance and also higher interest cost in 1Q10. In FY09, MIREIT had maintained a quarterly payout of 2.35 cents for the first three quarters while any retained income was distributed in 4Q09. For 1Q10, it is paying out 100% of the distributable income. However distributable margin has fallen from 0.5 in 1Q09 to 0.36 in 1Q10 due to the reasons mentioned above.

The REIT manager wrote down the asset value of its Japan property by 9.5% and subsequently portfolio value decreased from $530.3 million at 31st March 2009 to $526.4 million at 30 June 2009. The current gearing is 41.8% with total debt of $225 million that is due in Dec 2009.

We keep our revenue forecasts as we believe the portfolio is able to maintain its occupancy. However we factor in the decreased in distributable income arising from the claim for industrial building allowance which results in a downward revision of our FY10F DPU forecast by 30% to 5.82 cents. We raised the weighted average cost of capital (WACC) in our DCF model from 9.8% to 10.6%. Our fair value is thus lowered from $0.39 to $0.26. The impending refinancing need still poses a big certainty to us. We downgrade our recommendation from Hold to Sell.

Hongkong Land - Time for a breather

Without any surprises in the results, plus the fact that Hongkong Land's earnings are backward-looking, we do not expect any impact on share price.

We have raised full-year earnings by 8% on the assumption that more units will be sold and booked at One Central Macau given the improved market conditions, and reflecting the good prices fetched by The Sail at Victoria.

Capital values for offices in Central have come down only 2% ytd, while rents have fallen 36%, an anomaly caused by excess liquidity. Such discrepancy is not sustainable in the long run. We expect office value to fall 15% from the current level before bottoming out, caused partly by another 5% softening in rents, resulting in our appraised NAV of US$4.90. Our fair price is based on the recent peak valuation of a 15% discount to NAV.

Upside risk? If office capital values stabilise at the current level, using Hongkong Land’s US$5.92 appraised asset value as at Jun 09, fair price will rise to US$5.03.

All Green - More positive guidance

In line. 2Q09 core net profit of S$22m forms 25% and 23% of our FY09 forecast and consensus respectively. 1H09 core net profit of S$39m accounts for 45% of our full-year number.

More positive guidance on strong property sales. Revenue for the quarter grew 14% yoy to S$85m as presale proceeds from its recent property launch began to stream in. The group has been relentless in capitalising on much-improved sentiment, launching One Devonshire (ASP S$1,770psf) in June and more recently, Viva at Suffolk Walk (ASP S$1,550psf). Demand for these projects has been robust, with 148 of the 152 units launched and 162 of the 235 units launched sold respectively. Management guides for a much better 2H09 vs. 2H08.

Hotels remained weak. Hotel occupancy and room rates continued to drop. We believe occupancy at its Traders Hotel may have fallen to 60-70% currently.

Balance sheet and cash flow. Net gearing was stable at 0.45x as a lower cash balance was offset by the recognition of presale proceeds. Operating cash flow in 2Q09 turned positive. Allgreen also paid a further S$20m to its JV companies in Chengdu and Shenyang for its stake in the China projects developed with Kerry Properties. Allgreen is likely to pay a further S$130m-150m in equity, with the remaining S$500m-600m development capex secured through debt.

More launches to sustain momentum; maintain Outperform. We adjust our FY09-11 core EPS estimates by -21% to +12% on changes to our recognition schedule. We raise our end-CY10 RNAV and target price from S$1.32 to S$1.38 on higher-than-expected ASPs achieved for Viva. Allgreen has a strong pipeline of mass-mid-tier inventory ready for launch. We believe Holland Residences and RV Residences could be released to good take-up in 2H09. The stock remains our top mid-cap pick in the sector. Maintain Outperform.

Singapore Land - Hospitality business continues to be weak

Due to a net fair value loss on investment properties to the tune of $395.7m, SingLand posted a net loss of$344.7m in 2Q09. However, core operating net profit was in-line with expectations, growing 16% yoy as aresult of positive rental reversion and cost management. No interim dividend was declared.

SingLand suffered a total fair value loss of $492.1m on its investment properties versus six months ago(11%-decline). Such fair value loss is rather academic, as SingLand’s business model seldom involvestrading of the investment properties. SingLand’s businesses are cashflow generative, and on a sequentialbasis, SingLand’s gross revenue from its investment properties remained flat.

The revenue from Pan Pacific Hotel Singapore slumped by 33% yoy due to lower room rates andoccupancy rates, as well as lower F&B revenue. Similarly, associated earnings from Marina Mandarin andMandarin Oriental hotels are also lower. It is also in-line with the overall weak tourism sector, as well as theH1N1 pandemic concerns.

We have lowered our estimated breakeven cost for the Trizon to $1,280 psf, due to lower expectedconstruction costs. However, despite the resurgence of strength in the private property market, we believethat a realistic ASP for the project would be around $1,200 psf, implying that SingLand may still make lossof about $30m from the project.

Both the office and hospitality sectors are likely to remain muted in the near-term, before recovering. At thecurrent price, valuations are not compelling. We are maintaining our HOLD recommendation, with a targetprice of $5.57 at a 30%-discount to its RNAV.

BBR Holdings - Steady results

PATMI decreased 12.1% to S$1.8m in 2Q09 ? The Group's revenue decreased by 41.3% to S$53.8m in 2Q09, mainly due to substantial completion of a few key construction projects in 2Q09.

Order book stood at S$292m at 7th Aug 2009 ? The Group clinched a 26 months contract amounting to S$77.7m to build the Singapore Island Country Club's ("SICC") main clubhouse at Island Club Road, bringing the Group's year-to-date order book of civil engineering and building projects to S$292m as at 11 May 2009.

Share of results of associates of S$3.6m recognized in 1H09 ? In line with expectations ? Mainly attributable to the Group's share of profits recognized from the development project at No. 8 Nassim Hill. We believe the development project is on track to meet our expected completion of 65% by end of FY09.

Maintain Hold; Target price raised to S$0.065 ? We raise our FY09F & FY10F earnings forecast by 9.5% and 3.0% respectively, adjusting for the new contract clinched and higher GPM achieved. We continue to use sum-of-the-parts valuation methodology to value its property development and construction business. We increased the valuation of the Group's unsold development projects, namely Nassim Hill & Holland Hill to reflect the current rise in property prices and value construction business at 3x FY09F construction earnings. Our target price is increased to S$0.065 after removing discount factor to SOTP valuation.

Ascendas REIT - Private placement to raise S$301.6m

Seeking S$301.6m through private placement. The manager of AREIT is proposing the issuance of 185m units to institutional and other investors at S$1.63-1.70 apiece to raise gross proceeds of at least S$301.6m. The price range represents a discount of 3.8-7.8% to the volume weighted average price of S$1.7674 per unit for full-day trades on 7 Aug 09. The placement is being managed and underwritten by Cazenove and DBS. Assuming approval from the SGX, the new units are expected to trade from 20 Aug 09.

Proceeds to fund SingTel BTS and potential acquisitions/BTS. Proceeds from the private placement will be used to: 1) fund the development of a build-to-suit (BTS) facility for SingTel (about S$175.4m; 58% of gross proceeds) announced in May this year; and 2) fund potential acquisitions and/or build-to-suit opportunities (S$120.6m; 40% of gross proceeds); and 3) general corporate and working-capital purposes, and expenses incurred for the placement.
Asset leverage pared below 30%. Assuming the placement is fully taken up and net proceeds are fully utilised to cut debt, asset leverage will decline to 29.3% from 35.7%. This should give AREIT more financial flexibility to acquire or develop build-to-suit properties when opportunities arise.

Share base diluted by 11%; DPU diluted by 10%. Upon completion and assuming no other changes, AREIT’s share base of 1,685m units will expand by 11%, and DPU for FY10 will fall 10%. Dilution for FY11-12 is less severe at 3-4% as contributions from SingTel BTS and other development projects kick in.

Acquisitions look probable, once more. With an expanded share base, dividend yield at 7% makes acquisitions more probable, as physical property yields of industrial assets remain high at 7-8% and SIBOR remains low at under 1%.

SingTel BTS in a nutshell. AREIT is developing a 9-storey hi-tech industrial building at Kim Chuan Road for SingTel. The total estimated development cost is S$175.4m, which includes construction and land costs, and the installation of mechanical and electrical equipment. The completed building will be leased to SingTel for an initial 20 years with annual rental escalations and an option to renew for a further 10 years on expiry. Completion of the building is expected in Apr 2010. Management expects an average net yield of 11% from the facility in the 20-year lease period.
Increased contributions and less severe expense assumptions. We account for dilution and add in potential contributions from SingTel BTS from FY2011. We also assume that S$120.6m of the proceeds will be used to acquire properties. Separately, we increase our net property income margin assumptions to 75% from 73% in view of strong cost-control initiatives in the last few quarters; and decrease our cost-of-debt assumptions to 4.3% from 4.7% as we believe lower asset leverage after the placement and continued low interest rates will result in a less demanding cost of debt for AREIT. Following our changes, our DPU estimates fall 8% for FY10 but rise 3-5% for FY11-12. Our DDM-based target price rises to S$1.74 from S$1.70 (discount rate of 8.4%).

Maintain Neutral with higher target price of S$1.74 (from S$1.70). Although the equity issuance did not come totally as a surprise, we were disappointed that no firm acquisitions or development works were announced in tandem.

As one of the market leaders in the SREIT space, we expect AREIT’s speedy move to capture ready equity to be followed by a second round of equity fund-raising by REITs to further strengthen their balance sheets in preparation for a sharp devaluation of asset values at year-end and uncertainties in capital markets.

AREIT is trading above its book value at 1.1x and offers a 7% dividend yield. While yields still look relatively attractive, we believe there are cheaper alternatives among the REITs while the outlook for the industrial sector has yet to turn sunny. Maintain Neutral.

Parkway Life REIT has no short term refinancing concern

The growth in revenue comes mainly from the contribution of Japanese properties that were acquired in 3Q08 and also the annual revision of rental from the Singapore hospitals that took effect from August 2008. It can be seen that from 4Q08 onwards, revenue and DPU were fairly stable. The REIT manager further announced that the Singapore hospitals rental is set to increase by 4.36% beginning 23 August 2009. Revenue is also expected to get a boost from the increase in rental of the P-Life Matsudo property following completion of an asset enhancement initiative (AEI) to maximize plot ratio.

Plife REIT has no short term refinancing concern with a gearing of 22.7%. Total debt is $242 million with $34 million coming due in 2nd half 2010 and the rest in 2011. Plife has in place a $500 million multicurrency MTM programme as well as a newly secured $50 million Islamic revolving credit facility.

Being exposed to the relatively stable healthcare sector, Plife REIT has shown resiliency in the recession. The inflation linked revenue model ensures revenue is downside protected. We revised up our revenue forecast to factor in the growth from the annual revision of the Singapore hospitals and from the Matsudo property. Our FY09F DPU remains unchanged at 7.59 cents while FY10F DPU rises from 7.56 cents to 7.71 cents. Fair value revised upward from $1.19 to $1.21.

Ascendas REIT: Mild dilution; sturdier balance sheet

Private placement to raise S$302m. A-REIT has announced a private placement for 185m new units at an issue price between S$1.63 and S$1.70 per unit to raise at least S$301.6m. The issue price range represents a 4% to 8% discount to VWAP on 7 Aug 09. Price target of S$1.72 remains, but stock downgraded to NEUTRAL (from BUY) given recent price rise. Our DDM-backed fair value is based on a cost-of-equity of 8.7% and 1.5% terminal growth rate.

58% of proceeds to fund SingTel BTS. A-REIT plans to utilize S$175.4m of the gross proceeds to fund the development of the hi-tech built-to-suit facility for SingTel. In May 09, A-REIT secured from SingTel the purchase of a site at Kim Chuan Road for the development of a 9-storey Built-To- Suit (BTS) hi-tech industrial building. SingTel will lease the entire property for an initial tenure of 20 years with annual rental escalation and an option to renew for another 10 years. The project is slated for completion in 1QCY10. Total development cost (incl. land cost, construction cost, electrical and mechanical enhancements) is S$175.4m, implying S$496/sqft for the 353,727 sqft GFA site. The remaining S$120.6m or 40% will be used partly or wholly fund potential acquisition of income-producing properties and built-to-suit development opportunities in the pipeline.

Mild DPU dilution but sturdier balance sheet with leverage below 30%. Pending the deployment of the net proceeds (totaling S$296m) to repay debt facilities, A-REIT’s gearing is expected to decline from S$1.64b to S$1.35b, resulting in the decline in leverage to 29.3% from 35.7%. We estimate annual interest expense savings of S$11m (~3.75% interest cost) on the back of a 10.9% increase in new units. The overall ramification from the placement works out to be mildly DPU dilutive of 0.3% to 5.6% between FY10-13. Stock currently trades at FY10 yields of 7.5%. We advise investors not to accumulate at current levels.

Parkway Life - Steadily Improving

PLife is one of a handful reits / business trusts to report a useful y-o-y increase in DPU: +13.9% to 1.89 cents from 1.66 cents a year ago, albeit unchanged from Q1. On an annualized basis, which is being conservative given the adjustment to revenue from the 3 Singapore hospitals for the next 12 months from Aug 23 rd , the yield is still an attractive 7%.

(The minimum guaranteed rent form Mt Elizabeth, Gleneagles and East Shore is set to increase by 4.6%, albeit lower than 6.25% for the current 12 months to Aug 22nd, following the 3.36% CPI in the past 12 months. The 3 Singapore hospitals presently account for 80% of total revenue of PLife.)

Gearing remains among the lowest at 22%, ie to reach 40%, debt headroom is $308 mln. (PLife was one of the few smart enough to make good use of the initial low gearing to make acquisitions in Japan via borrowings, specifically P-Life Matsudo for S$35 mln in May ’08, and at which it has just completed the first round of asset enhancement initiatives , converting a utility space to device manufacturing room for sub-lessee Inverness Medical Japan, at a cost of S$2.56 mln.)

We maintain BUY.

City Development - Weaker hotels offset by strong presales

In line. 2Q09 core net profit of S$128m forms 27% and 26% of our FY09 forecast and consensus respectively. 1H09 core net profit of S$211m forms 44% of our fullyear number. While property presales were strong, we believe accretion from recent presold projects such as Volari and the Gale have yet to be booked.

Strong property presales. 2Q09 revenue inched up 1% yoy to S$787m. Property presales continued to drive the topline with The Arte (98% sold) and Livia (more than 80% sold) released in 1H09. This segment’s revenue grew 56% yoy to S$343m in 2Q09. The momentum is likely to be sustained by Volari, The Gale and potential new launches in the Hong Leong Gardens site, The Quayside isle and the former Albany site at Thomson in 2H09.

Offset by weaker hotels. A blemish was the hotel segment (M&C). Revenue and PBT fell 25% and 60% yoy to S$365m and S$25m respectively in the quarter, as RevPAR fell globally and the sterling pound weakened. We believe the results could have been worse if not for cost-saving measures. However, management is starting to see stability in Singapore, New York and London. The decline in the sterling pound is also starting to ease. M&C continues to trade at a trough P/BV of 0.5x.

Balance sheet and cash flow. Net gearing remained relatively low at 0.45x, still based on cost accounting of its investment properties. Operating cash flow stayed in positive territory and is expected to remain so on impending presales. In 2Q09, CityDev paid out S$190m for its share of convertible notes subscription to finance the development of South Beach. Management remains positive on the project. No impairments were made for development in the quarter.
Maintain Outperform. We retain our FY09-11 EPS and RNAV estimates for now. Our target price, still based on a 20% premium to RNAV, is kept at S$11.76. This set of results continues to highlight the group’s balance-sheet strength even as other developers aggressively mark down their asset values this season. We maintain our Outperform rating.

Bukit Sembawang Estates - Verdure, Luxus yet to contribute

1Q FY10 PATMI of S$1.4mn (-84% y-y, -102% q-q) meets 73% of our full-year forecast of S$1.9mn. The variance to our forecast is, in our view, principally on account of the treatment of property development-related other operating expenses and interest costs - 1Q FY10 other operating expenses of S$0.2mn and interest costs of S$0.7mn meet just 3% and 4% of our full-year forecasts. The firm has suspended the capitalisation of these expenses for deferred projects and we have taken this into account in our forecast – for instance, 1Q FY10 cash interest paid of S$4.67mn meets 25.9% of our FY10F interest expense forecast of S$18mn and is in line with our expectation, despite the P&L discrepancy.

While 1Q FY10 revenue of S$6.4mn (-72% y-y, +32% q-q) meets just 12% of our full-year forecast of S$54.3mn, we expect the sales of Verdure and Luxus Hills Phase 1 to be recognised in subsequent quarters this FY and help full-year numbers meet our forecast. In addition, we are likely to raise our forecast to reflect better-than-expected sales at the two projects. As at end-June, Verdure had 69 out of the total 75 units sold, vs the 62 units inputted in our model. In essence, only the six strata villas in the project remained unsold. We understand that Luxus Hills Phase 1, which was launched in July, already has 75 out of the total 78 units sold, vs the 70 units assumed in our model. Further, the achieved selling prices were apparently higher than our assumption of S$544psf of build-up area, at circa S$583-683psf.

While the management gave a conservative guidance (“management remains cautious during this expansionary period”), we think some projects could be brought forward to capitalise on the current window of opportunity. Potential candidates include cluster housing project Watercove Ville and Luxus Hills Phase 2, which could provide further upside to our estimates.

KSH Holdings: Earnings dilution from warrants conversion

KSH’s 1QFY10 revenue was weaker on a YoY basis due to the timing of completed of projects. Moving forward, as the existing projects move into the later stages of construction, we expect sequential top and bottom line growth to gain momentum on the back of resilient orders. But the positives are watered down by the dilutive impact of its warrants conversion. Maintain NEUTRAL with target price of S$0.33.

Projects’ completion affected 1QFY10 revenue. Revenue was down 29.6% YoY on the back of completion of four projects which more than offset the increase in revenue from on-going projects. These include Tampines 1, Forte, Platinum 28 and The Coast at Sentosa Cove. However, construction’s gross margin improved from 7.6% in 1QFY09 to 12.2% in 1QFY10, attributable to cost control management. Consequently, PATMI was up 16.4% YoY from S$2.4m to S$2.7m.

Healthy order books provide some visibility... KSH’s order books stand at S$439m as at Jun 09, of which a significant proportion would be carried out in FY10. According to Building and Construction Authority’s (BCA) forecasts, public sector’s construction demand is expected to make up at least 60% of total forecasted construction demand of S$18-24b. While the public sector is driving construction demand currently, things may be looking up for private sector construction demand. URA Statistics indicate that developers sold 1,825 units of new homes in Jun, up from 1,673 units in May, with a monthly take-up rate surpassing the high of 1,731 units recorded in Aug 07.

... but EPS will be diluted. We understand from management that they have been busy recently tendering for projects (~S$750m in 1QFY10), with approximately 70% of the tender projects coming from the private sector. This is in line with the current pick up in private sector sentiment that has been reported in the media recently. While we have kept our earnings unchanged, we have now conservatively assumed full conversion of the warrants in FY10 (versus 33% previously) as only 38% of the warrants issued in April are outstanding. KSH’s construction peers are trading at 8.3x current year P/E. Ascribing a P/E multiple of 8x FY10 earnings, we arrive at a target price of S$0.33 (S$0.29 previously). Maintain NEUTRAL.

Singapore Land: Core earnings in line

Operational earnings in line with estimates. Singland reported a 2Q09 net loss of $344.7m due to a $492.1m devaluation haircut (-9%) from its investment properties. As a result, book NAV declined to $8.59/share. Excluding this, core earnings would have grown by 16% yoy to $51m thanks to higher rental and associate income, which more than offset lower hotel and carpark contributions.

Office rentals still reverting positively. Rental revenue continued to improve yoy to $63.6m as current rents are still above preceeding levels while lower operating expenses provided another bottomline-boosting impact. This more than made up for lower hotel contributions, -33.1% yoy to $20.6m, largely from Pan Pacific Singapore, which was adversely affected by lower Revpar and F&B revenue. Associate income also enjoyed the impact of progressive billings from ongoing projects such as One Amber and Sixth Avenue Residences, which offset the income vacuum from Marina Mandarin and Mandarin Oriental Hotels.

The office segment appears to have stabilized, with a moderation in decline of rental rates. However, outlook remains uncertain due to the large incoming supply. The recovery in the residential segment would enable the group to generate positive returns from its Himiko Court enbloc parcel, with an estimated breakeven cost of $1200-1300psf while the anticipated recovery in the hospitality industry should lead to positive Revpar growth.

Approximately 80% of Singland’s RNAV is derived from office assets. Singland’s share price appears to have priced in the deflation in office market, at an implied c$1100psf of office space. However, near term catalyst remains lacking. Our target price of $5.01 is premised on a 30% discount to RNAV of $7.16, in line with its long-term average discount to asset backing.

Hongkong Land - Expect further re-rating on potential bottoming of Hong Kong office rents

Rental reversion was in line: Hongkong Land (HKL) posted 16% Y/Y growth in core net profit to US$281 million, up 16% Y/Y. The results were 15% below our estimates and were at the mid-range of consensus. Core EPS rose 19% Y/Y to US$0.125. The lower earnings were due to lower-than-expected development earnings originating from MCL Land, while positive rental reversion of 25% Y/Y and 7% H/H in 1H09 was in line with estimates. The board proposed an interim dividend of US$0.06, same as 1H08. HKL’s self appraised NAV (adjusted for deferred tax) was US$5.64/sh, down 5% from end Dec-08 levels (US$5.92/sh).

Office market is getting better: We are more bullish on the office market as rental decline is decelerating and rents beat our expectation, while capital value has recovered from the 1Q09 lows due to substantial cap rate compression. We upgrade our Dec-09 NAV by 38% to US$6.1 based on office and retail cap rates of 4.5% and 5.25%, respectively, and expect rental to stabilize from now though upside is capped by the spaces to be surrendered from upcoming relocations.

Upgrade to OW, Jun-10 PT US$4.6: The stock is trading at 0.7x end Jun-09 P/BV and 35% discount to NAV. This compared to 0.7-0.8x P/BV when office rental was on the rising trend, and 27% long-term mean NAV discount. We expect the stock’s NAV discount to revert to the long-term average as we believe there are clearer signs of office rental bottoming out. We thus set our Jun-10 PT at US$4.6 based on 25% discount to Dec-09/10 NAV, which translates into 0.77x end FY09E P/BV. Given the 16% upside potential, we upgrade the rating of the stock from Neutral to Overweight. Major risks to PT are weaker-than-expected office/retail demand and hence rental rates, delay of economic recovery as well as interest rate risks and hence cap rate fluctuations.

Keppel Land - positive on the housing market

Mgmt is positive on the housing market and plans to launch Madison (56 units) and The Promont (15 units) soon. Comparable prices are ~ S $1,700psf and S$2,000psf respectively. The 168 units in Caribbean @ Keppel Bay currently held for investment could also be released for sale this year. Recent resale transactions at $1,100-1,200psf implies gross rental yield of ~5%. Mgmt is likely to time the launch of Marina Bay Suites and the later phase of Reflections closer to the opening date of the 2 IRs.

There are signs of increasing leasing activity in the S'pore office market . Mgmt comments that no tenants have given up pre-committed space thus far and believes that the worst of rental declines could be over and the market could be approaching the trough. Current carrying cost of BFC & OFC is conservative due to low land cost and could see a revaluation surplus at year end.

In offshore markets, trends continue to be positive. In China, sales have picked up strongly with ~1,020 units sold in 2Q (vs 420 in 1Q). While prices were initially trimmed ~5% on 1Q, they have been raised again to pre-2009 levels and mgmt believes they are on track to sell around 2,000 units this year. In Vietnam, it has sold 50 units in Estella with prices maintained at US $2,000-2,200psm. Mgmt plans to accelerate launches in China, Vietnam and other markets (2,194 planned units).

Balance sheet has been significantly strengthened post rights-issue with gearing at a conservative 0.23x. Mgmt is comfortable gearing up to 0.5x which gives them around S$1bn of acquisition firepower. Mgmt is actively looking to replenish its landbank, focusing mainly in S'pore and in China, especially in cities where it has existing operations.

Fraser Commercial Trust - Revenue in 2Q09 came off 17.9% from a year ago

Fraser Commercial Trust (FCOT) reported results for 2Q09. FCOT recorded gross revenue of $22.7 million (-17.9% yoy, -5.4% qoq), net property income of $17.7 million (-18.0% yoy, -5.2% qoq) and distributable income of $5.6 million (-67.6% yoy, +2.8% qoq). DPU for the quarter is 0.73 cents (-69.6% yoy, flat qoq). FCOT will be paying out a 1H09 DPU of 1.44 cents.

Portfolio performance. Revenue in 2Q09 came off 17.9% from a year ago. We can also observe the trend of revenue. It can be observed that much of the decline came from the Australian properties. From 1Q08, Australia contribution dropped 24.7%, Singapore contribution dropped 17.8% and Japan contribution dropped 14.5%. The main reasons for the dismal performance from Australia were due to the termination of income support of Central Park in 3Q08 and also the unfavorable foreign exchange movement of the AUD. For Singapore, contribution was affected in 2Q09 due to the cessation of income support of Key Point in 2Q09. Japan contribution was affected in 2Q09 because of underperformance of Cosmo Plaza. Revenue contribution by percentage for 2Q09 is 42.8% (Singapore), 40.6% (Australia) and 16.6% (Japan).
After the recapitalization, gearing will be reduced to 38.5%. NAV per share is diluted to approximately $0.26. $179 million from the rights issue will be used to repay existing debt. The remaining balance of debt will be refinanced with two new facilities for a further 3 years. Total debt after refinancing is approximately $804 million.

Valuation and recommendation. The recapitalization exercise has shown the commitment of a strong sponsor backing FCOT in rebuilding its balance sheet. We expect to see a stabilization of revenue from the portfolio. The addition of Alexandra Technopark, which is under a master lease, will provide a stable rental income to FCOT. Together will China Square Central, gross rental income under master leases is approximately 38%. We revise our assumptions to account for the recapitalization and also make changes to our revenue forecasts. We forecast FY09F DPU to be 2.3 cents and following full dilution in FY10F, DPU falls to 1.2 cents. We believe the transformation of FCOT undertaken by the management will take time to crystallize.

The first phase of transformation is now completed. The second phase would be the rebalancing of the investment portfolio and we think the management team has the experience and expertise to execute their stated strategy. Our post-rights fair value is $0.125. At the previous day closing price of $0.195, we think market has not factor in the dilution due to the rights units. Maintain sell recommendation.

CapitaLand - Net loss of S$114mil from revaluation and impairment

CapitaLand Ltd (CapLand) reported 1HFY09 revenue of S$1.1bil, meeting 42% of our previous FY09F forecast. It was 26% lower YoY due to lower residential sales in Australia and Singapore, lacklustre serviced residences takings and foregone rental of divested commercial properties in 2008. Residential sales would have been lower if not for higher sales in China and Vietnam. 1,163 units were sold in China during 1HFY09, exceeding 782 homes for whole of FY08.

CapLand suffered a net loss of S$114mil for 1HFY09, a reverse from S$763mil in 1HFY08. Net losses from revaluation and impairment totaled S$285mil. It turns out better than our estimates due to booking of S$358mil revaluation gain on ION Orchard. ION Orchard is valued at S$3,800 psf. Char Yong Gardens site has also been written down by S$49mil against our estimates of S$70mil. Excluding revaluation and impairment losses, CapLand would have made S$171mil profit for 1HFY09. Due to timing of recognition for development projects, CapLand is expected to recognise substantial profit contribution from The Seafront on Meyer and The Orchard Residences in 2HFY09F.

CapLand is likely to launch two projects in 2H 2009, in our opinion. The first being 64-unit Urban Resort Condominium (URC) with its showflat situated adjoining 127-unit Latitude’s showflat along River Valley Road. Looking into latest caveats lodged of neigbouring projects, Cairnhill Crest and The Light @ Cairnhill, they were transacted at average selling price (ASP) of S$1,736 psf and S$1,642 in June and July 2009 respectively. We believe URC may be priced around S$2,100 psf, 20% premium over the above five-years old projects. The second is the proposed development of 1,000 lifestyle apartments at the former Gillman Heights Condominium site in Alexandra. CapLand has a 50% stake in the 99-LH project and a low estimated breakeven cost of S$650 psf. With keen interest surfacing in nearby Redhill vicinity, the project should command ASP of S$1,000 psf, in our opinion.

Selling of Latitude has also resumed after a one year break. It was relaunched at S$1,650 psf with an estimated 24% take-up rate. Competition is expected to be stiff with projects within River Valley vicinity such as The Cosmopolitan going for S$1,380 psf.

An estimated 5.4mil sq ft of retail space is expected to surface within 2009F - 10F in Singapore. Approximately 30% or 1.7mil sq ft of retail space will be added to Orchard Road. Recently, two newly opened malls - Orchard Central and ION Orchard have reported healthy occupancy rates of 80% and 96% respectively. ION Orchard is a joint venture between CapLand and Hong Kong’s Sun Hung Kai Properties. It was better than expected as we had previously forecast only 85% occupancy rate for ION Orchard.

Net gearing stands at 0.43x with S$4.2bil cash as of 1HFY09. We think CapLand may embark on aggressive acquisition with its focus on four key markets, China, Singapore, Vietnam and Australia. It has also guided for an acceptable gearing level of 0.5x - 0.75x, last seen in FY04. However, retail assets recycling in China is unlikely to happen soon, taking close to six years to build and stabilize malls which it had first embarked in 2005.

We are revising our forecast taking into account management guidance of 10% - 15% price increase for China residential properties. n Our revised RNAV estimate stands at S$4.65/share. Using a 20% discount to our RNAV estimate, we have obtained a fair value of S$3.72/share. Share price is currently trading at S$3.99/share, 7% above our fair value. We maintain our HOLD rating.

Suntec REIT - has no near term refinancing concern

Suntec REIT reported gross revenue for 2QFY09 of $64.5 million (+8.9% y-o-y, flat q-o-q)), net property income was $48.7 million(+6.2% y-o-y, flat q-o-q). Distributable income was $47.7 million(+13.5% y-o-y, +2.9% q-o-q). DPU for the quarter was 2.977 cents (+6.3% y-o-y, +2.0% q-o-q).

Office portfolio reversionary rent continues to show a downward trend. It has fallen 38.9% from a year ago at $13.50 to 8.24. Occupancy of the office portfolio has also been sliding down from 1Q08 at 99.8% to 94.8% in 2Q09. These reflect the office sector is still reeling from the effects of recession. The retail portfolio is more resilient with occupancy maintaining above 98%. The office portfolio accounts for 47% of total revenue while the retail portfolio contributes 53%.

As previously announced, Suntec has no near term refinancing concern. It has successfully secure $825 million of term loan in April 2009. The next loan maturity is in 2011 with loan amount of $532.5 million. The current gearing is 34%.

Valuation & recommendation. We believe that demand for office space will take time to pick up following the nation’s exit from recession in the last quarter. We make no changes to our assumptions and have a FY09F DPU forecast of 10.05 cents which translates to a dividend yield of 9.5%. Fair value remains unchanged at $0.94 and retain our Hold recommendation.