Brokers' take

Sembcorp Industries | Neutral

July 2 close: S$3.92

Target price: S$4.10

RHB, July 2

THE Nghe An infrastructure project is the seventh such for the Vietnam Singapore Industrial Park Joint Venture Co (VSIP JV). With surveying, planning, approvals and eventual construction to take multiple years, we do not anticipate any near-term financial impact from this latest project.

Hyflux's 411 MW plant will be connected to the grid in H2 2015, adding 3 per cent additional capacity to Singapore's already oversupplied market (total licensed capacity was 82 per cent above peak demand in 2014). We believe that it could take three to five years for demand growth to substantially trim this oversupply. Further threats to near-term profitability are: i) customers renegotiating fixed-rate contracts downwards using Q1 2015 pool prices as benchmarks, ii) percentage of power generation sold through vesting contracts is being lowered, iii) increasing take-up by consumers of solar power generation panels, iv) Tesla's PowerWall (or similar products), a rechargeable lithium-ion battery aimed at the residential market which synergises well with solar panels and which together will slow the growth of overall grid demand.

Suntec Reit | Hold

July 2 close: S$1.715

Target price: S$1.89

Maybank Kim Eng, June 30

SUNTEC Reit is divesting Park Mall, a commercial and retail development on the fringes of Orchard Road, for redevelopment at its latest valuation of S$411.8 million. To be completed by Q3 2015, net proceeds could amount to S$408 million. The property will be redeveloped by a joint venture with Singapore-listed SingHaiYi and another partner related to Gordon Tang, who is the controlling shareholder of SingHaiYi. Suntec Reit will hold 30 per cent of the JV, with its two partners each holding 35 per cent. The partners have committed to providing capital of up to S$384 million and will fund the balance development cost with debt. They will also top up the balance of 53 years on the property's lease to 99 years. After redevelopment, Suntec Reit will be able to acquire one of the two resulting office towers with rights of first refusal to the retail podium. Proceeds will be used for debt repayment and may be used to mitigate the dip in distribution per unit.

We think the loss of income from Park Mall will be offset by interest savings from the cash proceeds. We estimate that FY16 net profits interest could be shaved by S$19.5 million. After deducting Suntec Reit's maximum pro-rata share of committed capital or S$115.2 million from its net divestment proceeds of S$408 million, we estimate that S$292.8 million will be available for debt repayment. This should save the Reit about S$7.4 million in annual interest costs. All in all, we estimate a DPU impact of negative 4.7 per cent for FY16. As Park Mall will be divested at its latest valuation, the net asset value impact is minimal.

By Jacquelyn Cheok

Disclaimer: All analyses, recommendations and other information herein are published for general information. Readers should not rely solely on the information published and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.