Alpha POWER Shares (Lions) Portfolio - February 2009
Lion Comments on Major Out-performers
Taiwan Semiconductor Manufacturing Co - TSMC (+11.82%)
TSMC share price rebounded on the back of indications that rush orders from communications and LCD IC customers which should bring utilization levels up. In addition, TSMC has signed an agreement with Intel to port Atom CPU cores to TSMC’s technology platform in order to increase the market share of Atom processors. Intel will offer Atom core-based system-on-chip solutions to its customers for use in new products such as smart-phones and hand-held devices and TSMC will produce the wafers. TSMC is already working with AMD on CPU manufacturing. With this agreement, TSMC will increase its technological knowledge of Intel’s low power CPU manufacturing processes. Given the current downturn, TSMC is expected to strengthen its leadership position in the foundry sector and continue to maintain its high dividend payout due to its strong cash flow.
CLP Holdings – CLP (+9.10%)
CLP announced 2008 net income fell 1.7 % YoY, better than market expectations. Excluding one-off items, its net income rose 0.5 % YoY. Core earnings in Hong Kong slowed down in 2H08 due to a cut in its permitted rate of return. Overseas earnings surged in 2H08 due to improved operations in Australia. CLP is viewed as a safe haven given its 4.5 % dividend yield, low beta and highly predictable earnings in Hong Kong and stable cash flows. Earnings from power plants in China and Taiwan should turnaround in 2009 due to drop in coal prices and tariff adjustments.
Public Bank – PBK (+5.04%)
PBK share price has been holding up relatively well over the past year due to its many significant positive attributes, namely: strong deposit franchise, prime customer base and strong management team with proven track record of taking market share and growing loans at twice its competitors rate while keeping NPLs low. Current dividend payout ratio is over 80 %. There is a risk that the bank may reduce its payout ratio to conserve capital in the next year. Recently, there have been some concerns over capital raisings by banks. PBK’s core capital looks healthy at 10.1 %. This will likely rise to 12.8 % due to plans to raise M$1.0-1.5 bn in non-innovative Tier 1 capital by mid-2009, adoption of FRS 139 and Basel II-IRB adoption. Key risk for PBK in the medium term is the slowing economy as well as potential for rise in NPLs.
Lion Comments on Major Under-performers
Suntec REIT - SUN (-12.88%)
SUN’s share price has been falling on concerns about the refinancing of its S$700 m CMBS due in Dec 09. This loan is secured on its properties (vs the current asset value of S$5.4 bn). Management has guided that they are confident of securing the refinancing with no confirmation on the possibility of a rights issue. Average passing rentals for office leases expiring in 2009 currently stands at S$5.42 psf per month vs the average of S$11.2 psf per month done for the quarter ended Dec 08. Current debt-to asset ratio stands at 34.3 % and the trigger point of loan covenants would be when the ratio hits 60 %. Asset values would therefore have to fall 50 % to breach this limit. We believe that SUN is oversold on concerns over refinancing risk. As the low expiry rentals are much lower compared to current market, rental revenue in 2009 should remain relatively strong despite expectations of falling rental rates.
Hopewell Holdings - Hopewell (-14.56%)
Hopewell reported 1H09 net profits down 82 % YoY due to lack of disposal gains from its Macau properties and road assets. Excluding these one-offs, 1H09 core profits would have been up 32 % YoY due to lower than expected finance costs and better than expected rental income. Hopewell is holding a net cash of HK$5.6 bn or HK$6.34/share at end 1H09. This is even after paying significant special dividends to shareholders. Given such a cash pile, Hopewell still has capacity to pay out additional special dividends and/or continue its share repurchase program. In terms of core operations, toll revenues of the group’s expressways are showing a slow and steady recovery post the completion of road maintenance works in Jul 2008. Earnings from its investment properties in Hong Kong are relatively stable. Hopewell is currently trading at 37 % discount to NAV with downside limited by its commitment to buybacks as well as high dividend yield.
United Overseas Bank (-15.91%)
UOB released 4Q08 results which were below expectations, dragged down by higher-than-expected provisions for Singapore and Greater China as well as higher provisions for investment securities. Net interest income rose 7 % QoQ with margins increasing 24 bp to 2.45 % due to improved loan yields and lower deposit costs. Fee income fell 17 % QoQ as fund management (-28 %), investment-related (-30 %) and loan-related (-32 %) fees fell. UOB also booked a S$1.3 bn charge to its AFS reserve, resulting in a 9 % QoQ decline in book value. Core Tier 1 and Tier 1 CAR are 9 % and 10.9 % respectively. Management believes that the bank is adequately capitalized and has ruled out capital raising. UOB currently trades at 0.9 X P/Book and 1.3 X tangible book. This makes UOB more expensive than DBS and OCBC. However, with UOB expected to deliver higher ROE of 11 % vs 8 % for both DBS and OCBC, the valuation amongst the Singapore banks are similar based on DDM. UOB announced a tie-up with Singapore Post to provide mortgages for public housing in Singapore.
13 March 2009
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