CapitaLand - Australand announces asset write-downs and 7-for-10 rights issue; CAPL results preview

Australand Monday announced 1H09 net loss of A$268.8 mn, after writing down A$235 mn at its investment properties and A$93 mn development and JV inventory impairments.

Simultaneously, Australand announced a 7-for-10 non- renounceable rights issue of stapled securities in Australand to raise a fully underwritten A$475 mn. This is at an issue price of A$0.40 (S$0.47) per new stapled security, representing a 20% discount to the closing price on 24 July 2009.

Capitaland has cash hoard of S$5.5 bn and net gearing of 32%. This is more than enough for CAPL to subscribe to its entitlement at ALZ.

With most of its listed entities/REITs results out last week and Monday, we expect CAPL's 2Q09 and 1H09 results to be a net loss as most of its listed entities recorded write-downs. We believe investors should look beyond the accounting technicalities and recommend accumulating on dips. Maintain OUTPERFORM on a target price of S$4.21, based on parity on RNAV.

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CSC Holdings: Solid Foundation

CSC Holdings, Singapore’s largest piling contractor, have seen better days. Its order book currently stands at S$110m, which appears to be anaemic compared to a record S$448m during the mega infrastructure boom in 2007. But things seem to be turning around, as the taps for government contracts are being turned on. We estimate orders to more than double by FY11, which should set the stage for a re-rating of the stock. Moreover, its valuation, at 9.1x FY10 P/E, is attractive compared to its historical average of 16.6x. Initiate with BUY.

Major contracts in the offing. We expect CSC to bag some S$213.5m in piling contracts for at least three major projects, namely the MRT Downtown Line II, Marina Coastal Expressway and the Singapore Sports Hub by FY11. In addition to the public projects, there are many residential projects slated to be offered in the coming two years, a result of a massive number of en-bloc sales done in 2007. Many projects were delayed in 2008 due to the tepid economy, but the recent buying frenzy has prompted developers to launch their projects, opening up opportunities for CSC.

High probability of project wins due to size, expertise. We believe that CSC has a better shot at winning the bids, given that it is the region’s largest foundation player with a fleet size that is twice that of its nearest competitor in Singapore. It is also the only domestic player to offer the complete range of piling solutions. These give it the advantage of being able to target projects that are more complex, which typically commands higher margins.

Initiate with a BUY. We believe that the inflow of the government’s mega projects would create an upswing in earnings momentum for CSC from 2010. Thus, we have ascribed a P/E of 12x FY11 earnings, the level it was trading at in 2005 just before its earnings recovery. This works out to a target price of S$0.29. Initiate coverage on CSC with a BUY rating.

Tat Hong - Investment in Sino-foreign Joint-Venture

Taking of 53.8% stake in joint venture (JV). One day after Tat Hong’s announcement of AIF’s S$65m investment, the Company announced the formation of a JV with Yong Mao and Mr Yuan Zheng. Mr Yuan’s company, Guangzhou Hailin Resource, manages around 113 mid– to largesize tower cranes and is a well-regarded player in the southern and south-western provinces with various awards under its belt.

Mutually-beneficial arrangement for all parties. For Tat Hong, the opening up of the prosperous southern PRC market by partnering with an experienced hand excites us. Mr Yuan will inject relevant assets comprising tower cranes (valued at about RMB90m) and finance leases into the JV for a 30% stake. He benefits with Tat Hong’s injection of nearly RMB70m of fresh funds in 2 tranches into a bigger entity and the possibility of further expansion if the venture takes off. The third partner, Yong Mao, holds a 16.2% stake and is the exclusive tower crane supplier to the JV.

Adequate supervision through Board of Directors and Supervisory Committee. Following the establishment of the JV, the Company will have 3 directors on the Board and 1 member to the supervisory committee .

Big market in China. The JV increases Tat Hong’s tower crane fleet, which stands at 262 units as at 31 Mar 09, by nearly 50%. Even with this enhanced fleet, we expect them to be just a blip amidst strong demand for tower cranes from infrastructure and power sector projects in China. A financially-strong venture with established and well-connected people paving the way gets a healthy share of the rapidly expanding pie.

We raise our FV to S$1.39 and recommend to ACCUMULATE. Since yesterday’s announcement, we have been waiting for the trigger to revise our fair value upwards. We believe the JV is that trigger. Tat Hong did not achieve major headway in China for the past one year without a strong local partner and, from our chats with Management, we could feel they were still feeling their way around then. The JV potentially marks the start of the next phase in the Company’s venture into the huge China market. Furthermore, their investment in the JV of about S$15m is a small proportion of the S$50m the Company stated they would spend on expansion from AIF’s investment, suggesting perhaps more initiatives to come. In view of the above, we increase our growth assumption for the tower crane segment and overall gross margins to reflect a changing product mix that is more focused on the rental business. We arrive at a FV of S$1.39 vs our previous FV of S$1.07 and recommend investors to ACCUMULATE.