Alpha POWER Shares (Lions) Portfolio - July 2008
Stock Performance:
Lion Global Investors’ Comments on Major Out-performers
Suntec REIT – Sun (+11.79 %)
Sun’s share price recovered in Jul on the back of its successful re-financing of its bridge loan of S$40m as well as the release of its 3Q08 results which exceeded expectations. Management reported S$42m in 3Q distributable income, up 40 % YoY and 11.8 % QoQ. Gross revenues rose a robust 5.8 % QoQ with committed occupancy rates at its offices of 99.5 % as at end June. Sun will pay out 2.793 cents to investors, up 10.9 % from last quarter’s 2.52 cents payout. This works out to an annualized yield of about 7.3 %.
Rent reversions continue to drive Sun’s performance in 3Q. Office space at Suntec City is currently asking for rents of around S$17.50 psf per month. This compares with contracted rents of S$13-15 psf per month. About 46 % of Sun’s office portfolio is up for renewal over 4Q08 and FY09.
S-Oil – SOil (+7.55 %)
SOil posted record-high 2Q08 earnings. Sales and operating profits came in at W6.53 trn (up 34.2 % QoQ, up 80.3 % YoY) and W707.5 bn (up 121.3 % QoQ, up 116 % YoY), much higher than market expectations. The company benefited from inventory effects during the period when oil price rose as well as a higher KRW/USD exchange rate.
The oil refining division’s operating profit of W666.1 bn (up 144.8 % QoQ) accounted for 94 % of the entire operating profit during the quarter. The company is at an advantageous position as it benefits from the strengthening prices of middle distillates such as diesel and jet fuel due to its higher exposure to this segment as compared with the other Korean refiners such as SK Energy and GS Caltex. Spot prices for light oil products such as diesel and jet fuel remained very strong in Asia. 3Q08 complex refining margins for Asian refiners are forecast to remain strong, although not as strong as in 2Q08.
Swire Pacific – Swire (+6.93 %)
Swire announced underlying profit fell 38 % to HK$3,265 m for 1H08, led by losses at Cathay Pacific as well as absence of asset disposal gains. Cathay Pacific registered poor performance due to substantially higher fuel costs. Property rental and marine services earnings registered healthy growth. Net rental earnings grew 24 % YoY, boosted by higher rents and new letting, particularly for office premises. The office portfolio is almost fully let except its 91 %-leased One Island East in Quarry Bay while its retail portfolio was at full occupancy. The marine division grew by 33 %, led by higher charter rates and additional capacity.
The operating environment for Cathay Pacific is difficult due to volatile and high fuel prices. Swire’s property portfolio is expected to be more resilient as it has little exposure to Central, which is heavily exposed to the financial services sector.
Lion Global Investors’ Comments on Major Under-performers
Sime Darby – Sime (-12.18 %)
Sime was sold down together with other plantation stocks due to the recent correction in palm oil prices. Although Sime is a conglomerate, plantation business is the largest contributor and falling palm oil prices would have a big impact on the bottom line. We continue to like the plantation sector as prices of vegetable oils are expected to continue rising in the medium term due to emerging market demand, climate change and poor harvests, as well as the use of corn as feedstock for biofuels. Sime is trading at cheaper valuations than other large-cap plantation companies in the sector despite it being the largest palm oil company in the world. A potential near-term catalyst would be further acquisitions of greenfield plantation land in Malaysia as well as potential restructuring of its businesses in the next 12-18 months.
Woori Finance – Woori (-9.01 %)
Woori, which controls South Korea’s second largest bank, reported net profits of W415.5 bn in 2Q08, down 23.9 % QoQ and 32.7 % YoY. The decline in net profit was largely due to a significant decline in net interest margins, securities-related losses and one-off increase in SG&A. Net interest margins fell mainly due to base effects from a one-off interest income in 1Q and certificate of deposit rates dropping amid a rise in market interest rates. Asset quality remains healthy resulting in lower loan loss provisions which declined 28.4 % QoQ. Woori increased its loan book by 6 % QoQ, taking year-to-date growth to 12.4 % YoY. Most of the growth came from the corporate sector while the household sector grew only slightly.
Taiwan Semiconductor – TSMC (-6.82 %)
TSMC, the world’s largest dedicated semiconductor foundry, reported 2Q08 consolidated sales rose 0.8 % QoQ to NT$88.1 bn, lower than the company’s guidance while shipments rose 6 % QoQ. Fab utilization remains high at more than 100%. Average selling price declined 5 % QoQ due mainly to the NT dollar appreciation. TSMC guidance for 3Q08 sales of NT$90 bn – 92 bn, up 2 %- 4 % QoQ is lower than consensus estimates. The company reported that end product demand in China and the US has slowed and that some of its customers are pushing out orders. Prices of the same technology nodes would be lower in 2009 than they were in 2008. However, on a blended basis, prices should improve due to product mix. The company expects revenue growth to come from communications (wireline and WLAN) and computer customers (graphics and PC chipsets) but marginal weakness from consumer customers (strength from game-console and set-top-box customers offset by weakness from DVD and TV customers). TSMC is maintaining its capex budget at US$1.8 bn (down 30 % YoY) for 2008. Though demand is slowing, TSMC continues to maintain its leadership and technology advantage over its peers. Due to its continued cost down efforts, its profitability is higher than its major competitors.
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