Alpha POWER Shares (Lions) Portfolio - May 2008
Stock Performance:
Major out-performers:
CLP Holdings: (+15.33%)
On 06 May 2008, CLP released its 1Q08 result with sales up 19% from a year earlier, to HK$12.9 billion from HK$10.9 billion in 1Q07. Sales revenue from Hong Kong business alone climbed up by 6.4%. The company recommended an interim dividend of 52 Hong Kong cents per share, which is the same as last year.
CLP’s electric generating capacity in Australia’s New South Wales state is expected to double by this year end upon the completion of the under-of-construction Tallawarra gas-fired power station. The station will add up to 400 megawatts to the company’s current capacity. The latest outcome of the Scheme of Control (SoC) negotiations between CLP and the SAR Government has turned out positively, with 9.99% permitted return on net fixed asset, given the government’s insistence on a single-digit return.
KT & G: (+13.24%)
The company released its 1Q08 quarterly result in the second week of May, beating analyst forecasts with sales, operating profit and net profit growth up 9%, 33% and 51% from a year earlier, respectively. The better-than-expected 1st quarter earnings was led by 1) better than expected average sales price (ASP); 2) cost savings in line with decreased domestic leaf usage ratio and reduced loss from a fall in domestic leaf exports; and 3) 34% earnings growth on an year-on-year basis from Korea Ginseng Corp. (KGC).
On 20 May 2008, Celltrion, a subsidiary of KT&G (a 13.7% stake at a book value of W21.2bn) was listed on KOSDAQ by merging with ORCHEM (068270 KS) at a merger ratio of 1: 0.3436968. KT&G’s stake in Celltrion may be realistically reflected once Celltrion’s over-the-counter value is reflected as a result of the listing.
With a high earnings visibility, a defensive nature of the business, and an active capital management strategy, we believe the KT&G should be an attractive defensive play with growth momentum.
S-Oil : (+7.78%)
Despite a negative overall domestic market environment due to rising costs of oil price, forex rates and government policies, factors such as rising export margins and strong margin on high valueadded products (light oil, jet fuel, gasoline), were seen as positive for petroleum exporters like SOil.
S-Oil’s major refined products include gasoline, bunker oil, kerosene, naphtha, lubricants, benzene, toluene, and xylene, of which 75% sales contribution are attributable to light petroleum products. In early May, S-Oil locked in a six-month contract starting from Jul 08 with China Aviation Oil (Singapore) Corp. to supply 30,000 to 40,000 metric tons of jet fuel per month at a premium of US$0.6 a barrel to Singapore benchmark prices.
Asian gas-oil prices rose to a record during the month in Singapore, the region’s biggest oil-trading center, due to the increasing demand from China and refinery maintenance shut down. Singapore complex refining margins continue to be driven by middle distillates cracks (kerosene/diesel), surpassing US$15/bbl in the last week of May 08, and S-Oil is the Korean refiner set to benefit the most in the short-term. The strong distillates spreads, which are near US$45/bbl versus the typical US$15-20/bbl, are mainly due to energy shortage in China, South Africa, Chile, and Vietnam, among others, who are forced use industrial diesel generators.
Suntec REITs: (+5%)
On 30 April 2008, Suntec REIT released its 2nd quarter 2008 earnings, with gross revenue up 20% on a year-on-year basis to S$56m, while net property income increased by 21% to S$42.6m, mainly contributed by the strong organic rental growth within its portfolio and the total 58,050sf of strata office space at Suntec City bought to date. Distributable income reached S$36.7m, at 34.2% higher than that of 2Q07, benefiting from the lower-than-expected interest rate. The REIT will pay out 2.5185 Singapore cents DPU, up 28.2% YoY and more than 10% QoQ.
The group’s profit was mainly driven by a strong demand from office and retail leasing market. Office rental revenue increased on the renewal of an estimated 152,300sf of net lettable area (NLA) at rents between S$11.50-13.50psf/mth, 2-2.5x higher than the preceding levels, while the positive reversions of 80,405sf of retail rental space at rents 20% above the previous rates added another boost to the revenue from retail segments. One Raffle Quay (ORQ) made its first full-quarter contribution as well, earning S$2m in net profit.
The market’s near term outlook is positive, as office and industrial passing rents are still trailing the market rents, and the retail segment is firming up due to asset enhancements and the entry of new retailers. Hence in a short run, Suntec REITs continues to benefit from the robust demand in both office and retail leasing segments. Looking forward, the company’s main drivers would be its strong organic growth in office lease market, while the potential enhancement in Park Mall, likely by 2010, should be a positive factor for DPU growth in a medium term.
Major under-performer:
Swire Pacific: (-6.6%)
Among Swire Pacific’s 5 main business divisions, aviation has been facing the most earnings downside risk due to skyrocketing jet fuel prices, raising the concerns about Swire Pacific’s earnings downturn. Cathay Pacific accounted for 26% of Swire’s 2007 underlying profit, with its key growth driver was the synergies and significant growth from its newly merged DragonAir subsidiary. Besides, the out-performance of the Central office rents has a pressurizing impact on the group’s portfolio of Grade-A offices locating at the Island East, which is accounting for 30% of Swire’s properties.
However, looking forward there are positive factors to influence Swire’s earnings:
- A stronger-than-expected GDP growth in 1Q08 of 7.1% yoy driven by strong exports and consumption leads to higher manpower demand and office demand. Rental growth has been healthy as Jones Lang LaSalle reported 1Q08 office rental increased in Wanchai/Causeway Bay and Tsimshatsui of 15% each, followed by Central 12.7% and Hong Kong East 10.9%. We expect further rental momentum to continue given record low vacancies, benefiting landlord stocks.
- We believe further upside for office rental at Island East is likely to come with Central office at <2% vacancy and Island East office at only 3% vacancy right now. The large rental differential between the 2 regions is also expected to help migrate more cost-conscious corporate to decentralize.
- Balance sheet remains healthy despite higher gearing to fund new property projects in China, cash flows are more than sufficient to cover the increased interest burden.
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