Sources: MasNet, Bloomberg, Business Times, Straits Times and other media

Ple ase refer t o importa nt disclosu r e s a t t h e b a c k of this document. MICA (P) 039/06/2012

Morning Call

7 Sep 2012

Asia Pacific Equity Research | Singapore

MARKET PULSE

Key Idea

Frasers Commercial Trust: Updates on preferred units

Frasers Commercial Trust (FCOT) announced that it has not

exercised its right to redeem the Series A Convertible

Perpetual Preferred Units (CPPUs). However, CPPU holders

had successfully exercised their right to convert ~1.0m

CPPUs at a conversion price of S$1.1845 per unit. We note

that 878,697 new ordinary units will be issued on 1 Oct

through the conversion process and ~341.5m CPPUs will be

left in issue post conversion. We are currently maintaining

our view that FCOT will likely redeem half of its CPPUs as

the distribution rate is relatively high at 5.5% of its offer

price. In view of the CPPU conversion, we now factor in the

new ordinary units into our model. Our fair value, however,

remains unchanged at S$1.23. Maintain BUY on FCOT.

More reports:

- Neptune Orient Lines: Cautiously optimistic

- City Developments Limited: Tip bid for GLS tender at Tai

Thong Crescent

- Ezra Holdings: Secures more subsea work

News Headlines

• The ECB has agreed on a plan to purchase an unlimited

amount of short-term bonds from countries struggling to

raise money in the markets.

• The Dow closed at its highest level since Dec 2007, the

S&P 500 Index closed at its highest level since Jan 2008

and the Nasdaq Composite Index closed at its highest

level since Nov 2000.

• Wee Hur Holdings has acquired Thomson View

Condominium for S$590m through a new 51:49 JV with

Lucrum Capital Pte Ltd.

• Keppel Telecommunications & Transportation Ltd has

established a S$500m Multicurrency Medium Term Note

Programme.

• Tiong Seng Holdings has been awarded a contract worth

~S$229m from NTUC Fairprice Co-Operative Limited for

the proposed erection of a 16-storey single-user

warehouse development.

• Hu An Cable Holdings has sealed a RMB92.8m deal with

China’s State Grid Corporation.

Key Singapore Indices

Close Chg % Chg

STI 2,989.3 -6.6 -0.2

Catalist 127.9 1.5 1.2

Finance 741.0 -0.6 -0.1

Property 686.4 -2.1 -0.3

Electronics 577.0 2.8 0.5

Vol (m) 1,241.3 -236.5 -16.0

Val (S$m) 981.1 -89.6 -8.4

World Indices

Close Chg % Chg

Dow Jones 13,292.0 244.5 1.9

Nasdaq 3,135.8 66.5 2.2

S&P500 1,432.1 28.7 2.0

FTSE 5,777.3 119.5 2.1

KLCI 1,618.0 -23.0 -1.4

Hang Seng 19,209.3 64.2 0.3

Nikkei 8,680.6 0.8 0.0

SET 1,243.9 10.1 0.8

KOSPI 1,881.2 7.2 0.4

TWSE 7,326.7 -40.7 -0.6

Market Statistics (SG)

STI 52-week range 2,522 3,088

No. of gainers 237

No. of losers 224

No. of unchanged 170

Economic Statistics

S$/US$ 1.24 0.0

Yen/US$ 78.86 -0.5

3-mth S$ SIBOR 0.38 0.0

3-mth US$ SIBOR 0.42 0.0

Crude futures (US$) 95.53 -0.2

Research Team

(65) 6531 9800

e-mail: [email protected]

OCBC Investment Research

Market Pulse

7 Sep 2012

2

Frasers Commercial Trust: Updates on

preferred units

• Expiry of restriction period

• CPPU redemption likely in FY13

• P/B still attractive at 0.88x

Update on CPPU conversion and

redemption

Further to the expiry of the restriction period

for redemption and conversion of Series A

Convertible Perpetual Preferred Units

(CPPUs) on 25 Aug, Frasers Commercial

Trust (FCOT) announced that it has not

exercised its right to redeem the CPPUs.

However, CPPU holders had successfully

exercised their right to convert ~1.0m CPPUs

at a conversion price of S$1.1845 per unit.

We understand that 878,697 new ordinary

units will be issued on 1 Oct through the

conversion process (0.14% of total units

outstanding as at 30 Jun), but they will not

be entitled to any distributions on FCOT’s

ordinary units declared during the period

between 1 Apr and 30 Sep. We estimate that

~341.5m CPPUs will be left in issue post

conversion.

KeyPoint sale proceeds likely used to

redeem CPPUs

We are currently maintaining our view that

FCOT will likely redeem half of its CPPUs as

the distribution rate is relatively high at 5.5%

of its offer price. The divestment of KeyPoint

is expected to be completed by 8 Oct, and

will provide FCOT the financial resources to

redeem the CPPUs as well as pare down its

existing borrowings. As a reference, FCOT

had proposed on 24 Apr to sell KeyPoint for a

consideration of S$360m, representing a

26.3% premium to its latest valuation of

S$285m. This is expected to result in a gain

of S$72.8m.

Maintain BUY with unchanged fair value

of S$1.23

In view of the CPPU conversion, we now

factor in the new ordinary units into our

model. Our fair value, however, remains

unchanged at S$1.23. We continue to like

FCOT for its growth potential, strong

execution and attractive P/B of 0.88x. Based

on our understanding, FCOT may possibly be

in the final stages of discussion with potential

tenants to take up most of the remaining

85% space formerly occupied by Marsh &

McLennan at China Square Central. This,

together with potential interest savings, may

likely translate to better financial

performance at FCOT’s portfolio going

forward. Maintain BUY. (Kevin Tan)

. . . . .

Neptune Orient Lines: Cautiously

optimistic

• Asia-Europe remains weak

• Recovery in fuel prices could add

stress

• But cost cutting and industry

efforts will aid turnaround

Asia Europe trade route remains weak

The G6 Alliance (of which NOL belongs to)

recently pulled the Loop 3 service on the

Asia-Europe (AE) route after the carriers

cited ‘the forecast lack of improvements’ in

the trade lane. This move follows its decision

in May to drop plans for a seventh loop

service, which it also attributed to weak

market conditions. Despite entering the peak

season, cargo volumes on the AE trade route

are not expected to experience the traditional

bump. With Evergreen confirming plans to

start loop service on the AE trade route, we

could see already weak demand further

exacerbated by potential rate cuts.

But Transpacific route still encouraging

Although AE remains soft, the Transpacific

route is still exhibiting encouraging signs with

volume picking up. Furthermore, the

incremental rate increases implemented in

Aug have defied market expectations and

have held up well. With the trade route

typically contributing about 40% of NOL’s

liner revenue, we are hopeful that a decent

showing could help to cushion the fallout

from AE in 3Q.

Lower forecasts slightly on higher fuel

and reduced rates

Whether the peak season will provide a much

needed boost for carriers remains to be seen

but we are leaving our projected 6% QoQ

increase in 3Q revenue unchanged. Key risks

for NOL will likely come from diminished

freight rates and continued recovery in fuel

prices. While we are not expecting a drastic

decline in freight rates in 4Q, the larger

declines in AE and Intra-Asia rates do raise

some concerns over the overall climate, and

we could potentially see carriers give back

their Aug price increases. In addition, Bunker

fuel price has been creeping upwards

(BUNKSI38 Index was up 7% for Aug), which

could further dampen an already weak

environment. Adjusting our estimates, FY12F

EBITDA falls by 20% to US$95m.

OCBC Investment Research

Market Pulse

7 Sep 2012

3

Maintain BUY

Despite the difficult operating environment,

we feel that the industry is aware that

managing container shipping capacity

remains essential for profitability and

collective efforts to withdraw service/capacity

so far have been encouraging. Coupled with

NOL’s Efficiency Leadership Programme (ELP)

showing significant cost savings, we maintain

our BUY rating on NOL with an unchanged

P/B based fair value estimate of

S$1.38/share. (Lim Siyi)

. . . . .

City Developments Limited: Tip bid for

GLS tender at Tai Thong Crescent

Yesterday evening, a JV between CDL and

Hong Leong Holdings put in the top bid

(S$245m) for a government land site tender

at Tai Thong Crescent. The tender attracted

eight bidders and CDL’s bid was 11% above

the 2nd highest. We believe the site, with a

land area of 88.3k sq ft and maximum

permissible GFA of 308.9k sq ft, would likely

be developed into a mixed-use development

of up to 19 storeys with ~265 residential

units and 28 commercial units on the ground

floor. The top bid translates to a land price of

S$793 per sq ft GFA and an estimated

project-wide breakeven ASP between S$1.2k

– S$1.3k psf, which we believe is reasonable

given the site location and attractive mix of

use. Maintain BUY with an unchanged FV of

S$13.10 (15% RNAV disc.). (Eli Lee)

. . . . .

Ezra Holdings: Secures more subsea

work

Ezra Holdings (Ezra) announced that its

subsea construction division, EMAS AMC, has

won a contract from ABB for the installation

of subsea power cables. This is part of ABB’s

second contract with Statoil to supply subsea

HVDC light transmission systems to the Troll

A platform in the North Sea. Though the

contract value is not disclosed, we note that

ABB has won a total of orders worth

US$360m from Statoil in connection with the

installation of two new compressors on the

Troll A platform. Based on this and previous

announcements by ABB, we estimate this

latest contract to be worth around US$65m

for ABB, with Ezra taking a share of it.

However, there is the possibility that Ezra’s

win may incorporate previous work secured

by ABB from Statoil. We will obtain more

details from management; meanwhile we

maintain our BUY rating with S$1.35 fair

value estimate on Ezra. (Low Pei Han)

At today’s meeting, the ECB kept interest rates on hold and presented details of its new bond buying programme. Mario Draghi truly presented his “believe me it is enough”. Now the ball is back with Eurozone governments.

The ECB’s macro-economic assessment was clearly not top priority of today’s meeting. The ECB’s staff projections have hardly received so little attention as today. In its macro-economic assessment, the ECB acknowledged a further deterioration of the economic situation in the Eurozone. In the latest ECB staff projections, GDP growth forecasts for both this and next year were revised downwards. ECB staff now expected GDP growth to come in at -0.4% (from -0.1% in June) and 0.5% (from 1%) for next year. As regards inflation, the projections were revised slightly upwards to 2.5% (from 2.4%) for this year and 1.9% (from 1.6%) for next year. As the economic assessment might still be too positive, a rate cut in the coming months looks still possible.

All eyes were focussed on the ECB’s possible plan for bond purchases. By keeping interest rates unchanged, the pressure to at least deliver on the plan had increased even further. And, indeed, ECB president Draghi delivered the new ECB bazooka: the so-called OMT (outright monetary transactions) programme.

With the start of the OMT, the old SMP will be officially put to an end. According to the ECB, the new OMT is aimed at “safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy”. A clear attempt to present it as a pure monetary policy tool and not as a way to finance governments in need. As expected, the OMT will be conditional on an EFSF/ESM programme. According to the ECB, such a programme does not necessarily have to be a fully-fledged bailout package but could also be a precautionary programme. As the ECB said “involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme”. In our view, all of this means that the ECB will only activate its OMT programme if a country in question has agreed on a so-called Memorandum of Understanding with the Troika and if EFSF/ESM engages in purchases in the primary market. The OMT will be focused on the short end of the yield curve on, in particular, sovereign bonds with a maturity of between one and three years. The OMT will not only be applied to future bailout candidates but could already be started for Eurozone countries currently under a macroeconomic adjustment programme once they start to regain bond market access (which seems to be a rather stringent condition in our view).

Bond purchases under the OMT programme will be sterilised and the ECB will not take a senior status on its holdings. When and how the ECB plans to intervene, however, was not disclosed. It seems as if there will not be any explicit targets. The ECB only plans to announce its purchases ex post on a weekly and monthly basis. In addition to the OMT programme, the ECB also announced that it will accept government bonds as collaterals independent of their credit ratings (except for Greek bonds).

All in all, the ECB has presented a big new bazooka which should help buying time. This is probably he furthest the ECB can go to help governments. The focus on the monetary policy transmission and strict conditionality should also calm the Bundesbank temper, even if they would not admit it. However, the emphasis on the transmission mechanism is also a danger as it still contains a logical contradiction. With the OMT, the ECB will only repair the transmission mechanism in countries with ask for EFSF/ESM. But what about the other countries? It remains a bit strange. For the time being, one thing is clear: never underestimate Mario Draghi. He clearly delivered on his “believe me it will be enough” announcement. A man, a word. But as he said himself: “the proof is in the pudding”.
 

This message was edited by stand up n wake up on 07-Sep-2012 @ 9:54 AM

This message was edited by stand up n wake up on 07-Sep-2012 @ 9:55 AM

7 September 2012

Disclaimer:

DMG & Partners Securities Pte Ltd may have received compensation from the companies covered in this report

for its corporate finance or its dealing activities; this report is therefore classified as a non-independent report.

Please refer to important disclosures at the end of this publication.

g

Morning Matters

Figure of the Day

Source: google.com

Ezion is issuing subordinated perpetual

securities at 7.8%. See 'Scoop of the Day'.

Market Indices

Value Chg % Chg

Dow Jones 13,292.0 +244.52 +1.87

S&P 500 1,432.1 +28.68 +2.04

Nasdaq 3,135.8 +66.54 +2.17

FTSE 100

5,777.3 +119.48 +2.11

Nikkei 8,680.6 +0.75 +0.01

Hang Seng 19,209.3 +64.23 +0.34

Shanghai 2,051.9 +14.24 +0.70

KOSPI 1,881.2 +7.21 +0.38

STI 2,989.3 -6.64 -0.22

KLCI 1,618.0 -23.02 -1.40

Key Indicators

Value Chg % Chg

Oil Price*

(US$/bbl)

95.53 +0.17 +0.18

Gold Price**

(US$/oz)

1700.28 +7.28 +0.43

US$/S$ 1.2427 -0.01 -0.41

* WTI Crude Future

** Gold Spot

While You Were Sleeping

US markets: Positive

Dow futures: +5 (as at 8am Singapore Time)

US Wrap: It was a breakout day for U.S. stocks Thursday as Wall Street

cheered the European Central Bank's bond-buying plan and a batch of

positive employment data raised the stakes for the August jobs report. The

Dow Jones Industrial Average soared more than 244 points, or 1.87%, to

close at 13,292, just two points below the session high. The Nasdaq surged

more than 66 points, or 2.17%, at 3135.8, also its session high and its best

level since November 2000. The S&P 500 jumped nearly 29 points, or

2.04%, to finish at 1432.1, the high for the day and the index's best close

since January 2008. The benchmark 10-year Treasury dropped 25/32,

raising the yield to 1.679%. The greenback fell 0.17%, according to the dollar

index. On the corporate front, Amazon shares rose 2.1% after the company

unveiled its Kindle Paperwhite e-reader and an updated version of its Kindle

Fire tablet.

The Day Ahead…

Scoop of the Day: Ezion is issuing S$125m of 7.8% subordinated perpetual

securities under its S$500m Multicurrency Debt Issuance Programme.

Distributions are semi-annual, cumulative, and redeemable in 2015. A stepup

in the interest rate will occur if the securities are not redeemed. This is a

hybrid debt-equity instrument, and its classification as equity on the balance

sheet will help to reduce current gearing and provide more headroom to

finance growth in its lift-boat fleet. This is an essential step in financing the

high pace of growth in Ezion's fleet to take advantage of the blue-ocean

market environment today and extend its lead in its fleet of lift-boats before

new entrants arrive. We believe that there is a strong likelihood of near-term

share price catalysts in the form of new contracts following this development.

(Jason Saw / Lee Yue Jer)

WHAT’S INSIDE?

On The Platter

Cambridge Industrial Trust: A pass at the sale of the year (BUY, S$0.615,

TP: S$0.660) - Flash

Insider Trade Highlights 6 Sep 12

Diary of Events

7 September 2012

See important disclosures at the end of this publication

2

DMG Research

On the Platter

Cambridge Industrial Trust: A pass at the sale of the year (BUY, S$0.615, TP: S$0.660) -

Flash

Pang Ti Wee (+65 6232 3883, [email protected])

As previously announced on 2nd and 24th May 2012, Cambridge Industrial Trust (CIT) has

joined with other owners of Lam Soon Industrial Building to undertake an ‘en-bloc’ sale of

the entire property at an indicative pricing of S$330m (equivalent to an estimated S$950

psf) – 2.5x the valuation of the property on books. Located in Hillview, Upper Bukit Timah,

Lam Soon Industrial is a 230,915 sq ft freehold site zoned for residential use with a gross

plot ratio of 1.92x. With regards to this matter, CIT has just announced that despite good

interests on the property, a mutually agreeable pricing could not be reached and hence the

en-bloc sale would not be carried out. Although this is a freehold piece of land, the

indicative price may be on the high side after taking the development cost into

consideration. Although CIT could have greatly benefitted from this sale, we believe CIT

would continue to grow via other acquisitions and AEIs going forward while the

management awaits a better time before carrying out another en-bloc sale. Maintain BUY on

CIT with a DDM-based (COE: 9.8%, terminal growth: 1.0%) TP: S$0.660.

Selling price might be higher than what the developers are willing to pay. At S$330m, the

indicative selling price translates to 2.5x the book value (for 79% ownership) of the property as per

December 2011. Assuming a development cost of S$300-400 psf, the total cost of construction

could add up to approximately c.S$1300-1400 psf. With the current selling price of S$1400-1600

psf for the residential development across the road of Lam Soon Industrial, coupled with

uncertainty in the residential market, we believe the profit margin for developing this particular

property may be too low for developers’ consideration.

CIT continues to remain attractive. With an estimated cap rate of 5.2% on this building, CIT

could have greatly benefitted from this divestment. However, going forward, we expect CIT’s DPU

to continue to remain strong from 1) additional contributions from its acquisitions, 2) resilient

industrial rental rates coupled with average security deposits of 12.9 months, 3) the completion of

the BTS project at Tuas View Circuit in August 2012 and 4) future AEIs in the pipeline. Maintain

BUY on CIT with a DDM-based (COE: 10.7%, terminal growth: 1.0%) TP: S$0.660.

7 September 2012

See important disclosures at the end of this publication

3

DMG Research

Company Insider No. of Shares

Share Price

(S$)

% Stake before

transaction

% Stake after

transaction

JIUTIAN CHEMICAL GROUP Anyang Longyu 500,000 na 28.520 28.550

PACIFIC HEALTHCARE CHONG LAI LEONG WILLIAM 100,000 0.100 12.170 12.190

PERENNIAL CHINA RETAIL TRUST Pua Seck Guan 500,000 0.476 4.055 4.100

AVI-TECH ELECTRONICS Share Buy-Back 100,000 0.075 na 0.170

CDW HOLDING Share Buy-Back 162,000 0.093 na 1.420

MIIF Share Buy-Back 150,000 0.530 na 2.100

VIKING OFFSHORE AND MARINE Share Buy-Back 190,000 0.108 na 0.650

Company Insider No. of Shares

Share Price

(S$)

% Stake before

transaction

% Stake after

transaction

Sale

# Exercise of Rights issue / Share Options / Convertibles / Warrants / Share Issuance.

## Married deal.

Purchase

INSIDER TRADES HIGHLIGHT FOR 6 Sep 12

·        Go for growth stocks with imminent catalysts and strong earnings visibility and/or order books

·        Accumulate deep value stocks with dividend and signs of earnings catalysts

SMCs continue to offer value and stronger earnings growth. Historically, SMCs have outperformed Large Caps (LCs) in a rising market. And selected stocks within the DBSV universe continued to outperform even when the market eased back. This has been the phenomenon over the past three years. Although we are not in a bull market and neither are we in a recession, it is likely this range-trading market could continue. We believe the only way to beat the market is to stock pick. Currently, our basket of SMCs trades at a 19% discount to LCs, compared to an average of 17% discount in the last seven years. Valuation wise, DBSV SMCs trades lower at 10.5x FY13 PE for 12% earnings growth vs LCs at 13.4x FY13 PE for growth of 11%. We believe there are opportunities within cheaper and higher growth SMCs to outperform this market.

Pick growth stocks with imminent catalysts and strong visibility. As highlighted in our last SMC issue, we continue to favour stocks with tangible earnings growth. Here, we pick stocks with FY13F growth higher than the 12% average expected of our basket of SMCs. As such, we reiterate our Buy calls for Bumitama and Tiger Airways. We have added Hi-Pfor the strong boost to its earnings from the market’s almost insatiable demand for Apple products. We also like Biosensors for its 30% earnings growth and strong competitive advantages. With the Oil & Gas sector reporting record order wins and oil prices still running up, we believe interest would rotate from bigger market cap O&G stocks to smaller cap O&G beneficiaries with strong order books and earnings visibility such as Nam Cheong and ASL Marine. Within the O&G sub-space, we pick undervalued LNG service provider AusGroup at <5x FY13 PE for 30% growth backed by secured orders.

Stocks trading at crisis-level valuations are too cheap to ignore. We believe certain SMCs have been discounted due to poor market sentiment or are in out-of-favour sectors. Thus, for investors who are willing to sit it out for longer term payoffs, we propose accumulating bombed out stocks trading at depressed valuations but with visible catalysts - Midas, Kreuz, Wing Tai and Pan-United.  

Link
 

www.dbsvickers.com

Refer to important disclosures at the end of this report

ed: JW / sa: YM

STI : 2,995.90

Analyst

TAN Ai Teng +65 6398 7967

[email protected]

LING Lee Keng +65 6398 7970

[email protected]

STOCK PICKS

^ FY13F and FY 14F respectively

* Fair Value

# refers to Equity Explorer attached

Source: DBS Vickers

DBS Group Research . Equity 7 Sep 2012

Singapore Market Focus

Small Mid Caps

Price (S$) Mkt Cap Target Price Performance (%)

5 Sep 12 S$m S$ 3 mth 12 mth Rating

Growth

ASL Marine 0.605 255 0.83 7.1 22.2 Buy

AusGroup# 0.380 183 0.50* 16.9 13.4 NR

Nam Cheong Ltd 0.198 379 0.24 21.5 43.5 Buy

Biosensors ^ 1.215 2,094 1.57 1.3 (4.7) Buy

Bumitama Agri 1.090 1,916 1.30 21.1 N.A Buy

Hi-P International 0.905 791 1.06 33.1 46.0 Buy

Tiger Airways^ 0.715 587 0.92 8.3 (15.0) Buy

Value

Kreuz Holdings 0.335 187 0.43 19.6 4.7 Buy

Midas Holdings 0.345 420 0.49 17.0 (18.8) Buy

Pan-United 0.665 365 0.78 26.7 52.9 Buy

Wing Tai Hldgs 1.520 1,188bet 1.75 18.8 14.7 Buy

Go for growth or sit tight for value

• Despite being a tad unloved, there are a number

of opportunities within Small-Mid Caps (SMCs)

offering higher earnings growth at lower PEs

• Go for growth stocks with imminent catalysts and

strong earnings visibility and/or order books

• Accumulate deep value stocks with dividend and

signs of earnings catalysts

SMCs continue to offer value and stronger earnings

growth. Historically, SMCs have outperformed Large Caps

(LCs) in a rising market. And selected stocks within the

DBSV universe continued to outperform even when the

market eased back. This has been the phenomenon over

the past three years. Although we are not in a bull market

and neither are we in a recession, it is likely this rangetrading

market could continue. We believe the only way to

beat the market is to stock pick. Currently, our basket of

SMCs trades at a 19% discount to LCs, compared to an

average of 17% discount in the last seven years. Valuation

wise, DBSV SMCs trades lower at 10.5x FY13 PE for 12%

earnings growth vs LCs at 13.4x FY13 PE for growth of

11%. We believe there are opportunities within cheaper

and higher growth SMCs to outperform this market.

Pick growth stocks with imminent catalysts and

strong visibility. As highlighted in our last SMC issue, we

continue to favour stocks with tangible earnings growth.

Here, we pick stocks with FY13F growth higher than the

12% average expected of our basket of SMCs. As such,

we reiterate our Buy calls for Bumitama and Tiger Airways.

We have added Hi-P for the strong boost to its earnings

from the market’s almost insatiable demand for Apple

products. We also like Biosensors for its 30% earnings

growth and strong competitive advantages. With the Oil &

Gas sector reporting record order wins and oil prices still

running up, we believe interest would rotate from bigger

market cap O&G stocks to smaller cap O&G beneficiaries

with strong order books and earnings visibility such as

Nam Cheong and ASL Marine. Within the O&G sub-space,

we pick undervalued LNG service provider AusGroup at

<5x FY13 PE for 30% growth backed by secured orders.

Stocks trading at crisis-level valuations are too cheap

to ignore. We believe certain SMCs have been discounted

due to poor market sentiment or are in out-of-favour

sectors. Thus, for investors who are willing to sit it out for

longer term payoffs, we propose accumulating bombed

out stocks trading at depressed valuations but with visible

catalysts - Midas, Kreuz, Wing Tai and Pan-United.

Industry Focus

Small Mid Caps

Page 2

STOCK PICKS

Key Data

Mkt Price Target Avg ROE

Company FYE Cap 05-Sep Price % Rcmd 6-mth 12F 13F 12F 13F 12F 13F 11A 12F 13F

(S$m) (S$) (S$) Upside Vol (m)

Growth

ASL Marine Jun 255 0.605 0.83 36% Buy 0.1 1% 41% 7.9x 5.6x 0.7x 0.7x 10% 2.9% 4.1%

AusGroup Jun 183 0.380 0.50* nm NR 4.3 84% 28% 6.1x 4.8x 0.9x 0.7x 10% 1.6% 2.1%

Nam Cheong Dec 379 0.198 0.24 20% Buy 5.2 33% 26% 7.6x 6.1x 1.6x 1.3x 21% 1.3% 1.7%

Biosensors ^ Mar 2,094 1.215 1.57 29% Buy 7.1 25% 20% 11.7x 9.7x 1.3x 1.2x 49% 0.0% 0.0%

Bumitama Agri Dec 1,916 1.090 1.30 19% Buy 5.6 20% 26% 16.1x 12.7x 3.8x 2.9x 32% 0.0% 0.0%

Hi-P International Dec 791 0.905 1.06 17% Buy 0.7 16% 41% 14.5x 10.2x 1.2x 1.1x 8% 2.8% 3.9%

Tiger Airways ^ Mar 587 0.715 0.92 28% Buy 1.8 nm nm nm 8.9x 2.4x 1.9x (47%) 0.0% 0.0%

Value

Kreuz Holdings Dec 187 0.335 0.43 29% Buy 4.0 9% 17% 4.7x 4.0x 1.0x 0.8x 27% 0.0% 0.0%

Midas Holdings Dec 420 0.345 0.49 42% Buy 8.9 -66% 163% 34.0x 12.9x 0.7x 0.7x 6% 1.4% 2.8%

Pan-United Dec 365 0.665 0.78 18% Buy 0.2 25% 8% 9.8x 9.0x 1.2x 1.1x 10% 5.3% 5.3%

Wing Tai Hldgs Jun 1,188bet 1.520 1.75 15% Buy 0.8 -24% -23% 5.3x 6.9x 0.6x 0.5x 21% 6.0% 4.3%

^ FY13F and FY 14F respectively

* Fair Value

Source: DBS Vickers Estimates; Bloomberg

(%)

Div Yld

(%)

EPS Growth PE

(x) (x)

Price / BV

Industry Focus

Small Mid Caps

Page 3

As the STI rose 13% YTD, the FSST Small Cap universe has

outperformed by 3% and the FSST Mid Cap has surpassed by

5% over the same period. In the last one month, however, the

FSSTI has eased another 2% but SMCs have almost flat-lined.

We believe macro weakness has dulled the market’s appetite

for equities in general.

Performance FSSTI, FSST Mid Cap, FSST Small Caps

FSSTI Index FSST Mid Cap FSST Small Cap

Year to date 13% 21% 16%

3 months 9% 11% 10%

1 month -2% 1% 1%

Source: Bloomberg

Historically, DBSV’s universe of SMCs has tended to run ahead

of our LC universe whenever the market has turned up. They

have then continued to outperform LCs even when the market

has eased back. This has certainly been the phenomenon over

the past three years.

At the moment, SMCs are unlikely to manage a broad-based

rally given that the prevailing macro outlook remains as

uncertain and volatile as it was six months back. However, as

investing in SMCs has always required a bottom-up approach,

we believe there is still scope for investors to identify

opportunities in this asset class which offer better value with

higher growth and lower PEs.

Broad market SMCs tend to outperform in rising market DBSV SMC maintained outperformance throughout

Source: Bloomberg, DBS Vickers

Valuation gap between DBSV SMCs and LCs

Source: Bloomberg, DBS Vickers

Currently, our basket of SMCs trades at a 16% discount to

LCs. Although the valuation discount gap has narrowed from

over 20% six months ago, SMCs still trades a tad cheaper at

10.5x FY13 PE for 12% earnings growth vs LCs at 13.4x FY13

PE for lower growth of 11%.

70

90

110

130

150

170

190

210

230

250

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

FSTS FSTM STI

80

100

120

140

160

180

200

220

240

260

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Small-Mid-Cap Large Cap

Industry Focus

Small Mid Caps

Page 4

Growth and valuation: LCs vs SMCs

2011A 2012F 2013F 2011A 2012F 2013F

Basic Materials 6.8 11.2 8.0 3% -39% 41%

Consumer Goods 11.2 10.7 9.2 8% 4% 16%

Consumer Services nm 27.8 13.7 nm nm 103%

Financials 12.2 11.2 11.3 8% 9% -1%

Health Care 17.6 13.1 11.2 64% 34% 17%

Industrials 11.7 11.1 9.5 -5% 6% 17%

Oil & Gas 7.8 9.0 9.0 51% -14% 1%

Real Estate 6.1 6.6 6.1 18% -9% 9%

REITS 19.1 16.4 15.6 25% 16% 5%

Technology ex Creative 13.9 12.6 11.8 -7% 10% 7%

Telecommunications 14.2 13.9 13.8 5% 2% 1%

Small/Mid Cap Total 12.6 11.8 10.5 8% 6% 12%

Basic Materials 8.9 15.5 13.5 116% -42% 15%

Consumer Goods 10.0 16.3 12.4 28% -39% 32%

Consumer Services 19.7 19.3 17.4 -29% 2% 11%

Financials 21.1 22.8 20.4 6% -7% 12%

Industrials 16.4 13.9 12.0 -18% 18% 15%

Real Estate 17.6 16.9 15.7 -3% 5% 7%

REITS 17.9 18.3 17.6 12% -2% 4%

Telecommunications 15.0 14.2 13.9 -1% 5% 2%

Banking 12.9 11.7 10.7 5% 10% 10%

Large Cap 15.1 14.6 13.2 -3% 3% 11%

DBSV Coverage 14.7 14.1 12.7 -1% 4% 11%

STI DBSV Estimate 14.5 14.2 12.7 -4% 1.7% 12%

STI Consensus 14.5 13.9 12.7 -4% 4.4% 10%

PE (x) Earnings Growth

Source: DBSV Research

Growth stocks with imminent catalysts

Here, we look for stocks which are expected to grow

earnings in excess of 12% i.e. ahead of DBSV’s SMC

universe.

Bumitama and Tiger Airways were our bottom-up picks in

our last SMC report based on their tangible earnings

growth, firmly backed by company-specific drivers or

catalysts. Although Tiger did not fit our growth criteria per

se, we are convinced by the ongoing recovery of the

company and see obvious value at this stage when the

market remains largely skeptical.

Tiger Airways: Recovery has taken off but share price hasn’t

Tiger Airways has reported steadily improving operating

numbers for its Australian operation. The higher carriage

and load factors bode well for improved operating results

from Tiger Australia in the coming quarters. We continue to

believe that the carrier will make progress in returning to

profit and we expect the group as a whole to be profitable

by the last quarter of CY2012 (3QFY13). The stock has since

gained 4%.

Bumitama: Young, strong & growing; our CPO sector pick

We remain positive on Bumitama and urge investors to take

advantage of any pullback on the stock to accumulate this

oil palm planter which is still in a strong growth phase.

Bumitama has gained 2% since our report.

Biosensors: Rural + JWMS merger + Terumo licensing

Biosensors is expected to grow earnings by 30%, double the

rate of its sector peers. Yet, the stock trades at 10x FY13F or

PEG of 0.6x while peers trade at an average of 17x PE. With

a leading product which is continuing to penetrate into new

and existing markets, we believe BIG will remain a market

leader despite increasing competition. It will also take time

for competitors to become credible threats as BIG continues

to develop new products; we expect BIG’s next generation

Industry Focus

Small Mid Caps

Page 5

stent BioFreedom to secure the CE Mark this year followed

by a volume up over the next two years. Presently, we see

growth being fuelled by penetration into rural hospitals in

China, on top of earnings from the consolidation of the

JWMS merger as well as licensing of Terumo.

Hi-P: Record capex to grow with blockbuster customers

We upgraded Hi-P to Buy last month in anticipation of a

strong and positive 2H as guided by management. This

component supplier to Apple iPhone and iPad has started to

ramp up production for new programmes to be released in

Oct this year. We call for investors to position in Hi-P ahead

of new phone launches, as the expected production rampup

and the resulting operating leverage could offer upsides

to both turnover and margin. If the sell-through of new

programmes can sustain momentum into 1H13, we see

scope for upside to FY13 earnings. As it is, management’s

recent proposal for a S$300m plant expansion in China

signifies reasonably good confidence of future order flow.

Even at our new TP of S$1.06 (based on 12x FY13), there is

potential upside given that our estimates are conservative.

Oil & Gas stocks with earnings growth and visibility

Our basket of SMC Oil & Gas stocks is generally more

attractive than their larger peers, in terms of both PE

valuations and earnings growth. It is currently trading at

7.5x FY13 vs 11.2x for the large caps. Earnings growth is

also higher at 72% growth for FY12F and 27% for FY13F,

vs -1% and 8.5% for the large caps, respectively. Within the

smaller O&G beneficiaries with strong order books and

earnings visibility, we like Nam Cheong and ASL Marine.

Within the O&G sub-space, we find an undervalued LNG

service provider AusGroup at <5xFY13 for 28% growth

attractive.

Oil & Gas Peers Valuation

* Fair Value

Source: Bloomberg, DBS Vickers

Nam Cheong: Rising with O&G tide, FY12 already in the bag

Nam Cheong, an OSV builder with competitive edge in home

market, Malaysia, is set to benefit from higher offshore O&G

activity. With oil prices holding above US$100/bbl and

Petronas committed to its enhanced investment plans in

Malaysia, Nam Cheong’s prospects remain bright. We expect

earnings to pick up in 2H12, as more vessels are traditionally

sold in the 2H of the year. Following recent announcements

of two vessel sales, Nam Cheong’s orderbook has expanded

to RM1.06b, which covers 17 vessels, and implies a book to

bill ratio of 1.4x. As almost all 18 vessels scheduled to be

completed in 2H12 have been sold, orders hereon will largely

be for the vessels to be completed in FY13. The FY13

programme comprises five AHTS vessels, 12 PSVs and two

AWBs (which have been sold to Perdana).

Mkt Price

Company Cap (S$)

(US$m) 05-Sep Price (S$) Rcmd FY12 FY13 FY12 FY 13 12F 13F FY12 FY13

Large Caps - Singapore

Cosco Corp 1,696.0 0.945 0.88 FV 17.3 14.6 1.6 1.5 2.9 3.4 -12.5 19.0

Keppel Corp Ltd 15,849.4 11.010 13.20 Buy 11.5 12.1 2.4 2.2 4.3 4.1 14.4 -4.9

SembCorp Industries 7,820.1 5.460 5.90 Buy 12.7 11.2 2.1 1.9 2.9 3.4 -4.5 13.6

SembCorp Marine Ltd 8,298.1 4.960 5.85 Buy 15.7 13.4 4.1 3.6 4.4 5.2 -5.8 17.4

Yangzijiang Shipbuilding 2,948.5 0.960 1.55 Buy 4.5 4.7 1.2 1.0 6.6 0.0 4.0 -2.8

Average 12.3 11.2 2.3 2.0 -0.9 8.5

Small / Mid Caps - Singapore

ASL Marine 204.6 0.605 0.83 Buy 7.9 5.6 0.7 0.7 2.9 4.1 1.3 41.2

AusGroup 146.3 0.380 0.50* NR 6.1 4.8 0.9 0.7 1.6 2.1 84.1 28.5

CH Offshore Ltd 257.1 0.455 0.44 Hold 8.7 9.5 1.0 1.0 10.3 6.0 -4.7 -8.4

Dyna-Mac Holdings 346.3 0.480 NA NR 17.9 12.0 3.3 2.8 2.8 4.2 605.1 48.8

Jaya Holdings Ltd 327.1 0.530 NR NR 9.2 7.3 0.7 0.6 0.0 0.0 -20.0 25.6

Nam Cheong 303.6 0.198 0.24 Buy 7.6 6.1 1.61 1.30 1.3 1.7 32.5 25.9

Ezra Holdings Ltd 850.4 1.085 NR NR 12.5 9.4 0.83 0.86 0.0 0.0 27.9 33.3

Kreuz Holdings 149.6 0.335 0.43 Buy 4.7 4.0 1.0 0.8 0.0 0.0 9.4 16.5

STX OSV Holdings 1522.6 1.610 2.00 Buy 8.2 9.5 2.7 2.2 9.4 3.1 -33.8 -14.2

Average 9.4 7.5 1.5 1.3 71.6 27.1

Target PE (x) P/BV (x) Div Yld EPS Growth (%)

Industry Focus

Small Mid Caps

Page 6

ASL Marine: With 2.6x book to bill, small can get big

For ASL, we note how its earnings have bottomed and are at

an inflexion point, backed by a recovery in shipbuilding and

ship repair orders, growth in fleet and rising utilization rate

of its chartering division. More importantly, we like its high

earnings visibility with 95% of shipbuilding revenue backed

by existing orders. With an orderbook of S$586m, or 2.6x

book to bill, we see ASL Marine growing earnings by 41% in

2013. Upside will come from better margins.

AusGroup: Turned around; <5x FY13F for 28% growth

Being a leading engineering and construction services provider

to the mining and O&G industries in Western Australia,

AusGroup is poised to benefit from the LNG boom in

Australia, currently the 5th largest LNG exporter in the world,

aspiring to be No.1 or 2 by 2020. Apart from steadily growing

revenue, management is even more focused on bottomline

delivery. In the past, AusGroup had encountered cost

overruns, due to variation orders, and has impacted

profitability. The group has since put in place security blankets

and risks mitigation measures to prevent such problem from

occurring, and is now more focused on managing execution

risks and improving productivity. This has resulted in steadily

improving margins over the last seven quarters. Based on an

existing order backlog of A$324m with another A$593m

worth of contracts in bidding stages and more new wins

expected, we project FY13F earnings to grow 28% supported

by margin improvement through better cost and project

management.

Bombed out stocks at crisis-level valuations

Midas: Metro contracts are rolling, matter of time before

high-speed catch up

Catalysts: As part of its continued efforts to develop its

infrastructure network, we believe China should resume its

high speed passenger railway programme after an 18 month

suspension. When the flow of contracts resumes, Midas is

well positioned to benefit as the company has a 60%

market share of aluminum profiles for train carriages. On the

valuation front, Midas has been trading at depressed P/BV of

about 0.7x in the last 2 years.

Risk: Without contracts from the high-speed passenger

railway segment, which account for over half of its railway

related orders (>70% of overall earnings), Midas’

profitability will remain depressed.

Midas P/BV – at depressed level for 2 years

Source: DBSV Research

Kreuz: Good growth but mispriced

Catalysts: YTD order wins in FY12 now stand at US$155m.

Given the robust offshore E&P activity in the region, we

expect at least a similar level of order wins for FY13. The

order book stands at around US$250m at the end of 2Q12,

translating to a 1.6x book-to-bill, providing healthy visibility.

The net gearing ratio remains stable at 0.26x, and debt

headroom exists for further vessel additions to enable Kreuz

to bid for more lucrative contracts in the future. Despite a

healthy earnings outlook, the counter has underperformed

the broader index in 2012 and is still trading below 4x FY13

PE. An upgrade to the SGX Mainboard could be in the offing.

Risks: Slowdown in order flows which may lead to lower

utilization for its fleet of vessels. Low margin projects may

also affect the company’s bottom line.

P/E – Unjustifiably cheap valuations, trading below 4x

Source: DBSV Research

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

Jul-10

Jul-11

Jul-12

(x)

+1 sd

+2 sd

-1 sd

Avg

0.2

0.7

1.2

1.7

2.2

2.7

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

(x)

+1 sd

+2 sd

-1 sd

Avg

-2 sd

Industry Focus

Small Mid Caps

Page 7

Wing Tai: Strong balance sheet & legacy asset to ride out

the storm

Catalysts: Wing Tai is currently trading at an attractive 0.54x

P/Bk NAV and at a steep discount to our RNAV of S$3.19.

We believe the launch of Tampines Rd development would

be a near term catalyst for the stock. We expect this

development to be well received given it is a rare freehold

residential site in this area and margins from this project are

likely to be robust given its low legacy land cost. With a

strong balance sheet and gearing of only 0.18x, the group is

well placed to selectively tap new land acquisitions through

the GLS programme.

Risks: We foresee an increasing supply of public and private

housing completions accelerating from 2H12 and over the

next two years to drag on price and rental outlook. With

overhanging issues in the sector, sentiment for property

stocks could be affected.

P/BV – near crisis low

Pan-United: Hitch a ride on new Thomson MRT line

Catalysts: Ready-mixed-concrete (RMC) manufacturer Pan-

United is a key beneficiary of the robust infrastructure sector

in Singapore and potentially Asia Pacific, with its overseas

expansion strategy. In Singapore, higher concrete demand

from projects such as Downtown Line, LNG terminal and

Sports Hub had supported 2QFY12 revenue growth. This

trend should continue with anticipated RMC demand for the

construction of the Thomson Line, expected to be built at an

estimated cost of around SGD18b, possibly starting 3Q next

year and be ready from 2019 onwards. Besides good

fundamental prospect, the stock offers an attractive dividend

yield of 6%.

Risks: The liquidity for this counter has generally been low,

with an average turnover value of about S$93,000 per day.

Div Yield – at least 5% in the past few years

Source: DBSV Research

Stock Profiles

Source: DBSV Research

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2004

2005

2006

2007

2008

2009

2010

2011

2012

(x

+1 sd

+2 sd

-1 sd

Avg

-2 sd

0.0

5.0

10.0

15.0

20.0

25.0

2004

2005

2006

2007

2008

2009

2010

2011

2012 (%)

*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage

universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage

universe and is explained further on the back page of this report.

www.dbsvickers.com

Refer to important disclosures at the end of this report

ed: JS / sa: YM

NOT RATED S$0.385 STI : 2,989.26

Return *: 1

Risk: Moderate

Potential Target *: 12-Month S$ 0.50 (30% upside)

Analyst

LING Lee Keng +65 6398 7970

[email protected]

Jeremy THIA +65 6398 7974

[email protected]

Price Relative

4 6

9 6

1 4 6

1 9 6

2 4 6

0 .1

0 .2

0 .3

0 .4

0 .5

0 .6

0 .7

0 .8

S e p -0 8 S e p -0 9 S e p -1 0 S e p -1 1 S e p -1 2

S $ R e l a t i v e In d e x

A u s G r o u p L im it e d ( L H S ) R e la t iv e S T I IN D E X ( R H S )

Forecasts and Valuation

FY Jun (A$ m) 2011A 2012A 2013F 2014F

Turnover 602 632 695 765

EBITDA 37 54 57 66

Pre-tax Profit 17 36 45 53

Net Profit 12 23 30 35

Net Pft (Pre Ex.) 12 23 30 35

EPS (S cts) 3.4 6.2 7.9 9.3

EPS Pre Ex. (S cts) 3.4 6.2 7.9 9.3

EPS Gth (%) 351 84 28 17

EPS Gth Pre Ex (%) 351 84 28 17

Diluted EPS (S cts) 3.4 6.2 7.9 9.3

Net DPS (S cts) 0.6 0.6 0.8 0.9

BV Per Share (S cts) 37.6 43.4 50.6 58.9

PE (X) 11.5 6.2 4.8 4.1

PE Pre Ex. (X) 11.5 6.2 4.8 4.1

P/Cash Flow (X) nm 3.5 3.7 3.7

EV/EBITDA (X) 3.7 2.2 1.6 1.1

Net Div Yield (%) 1.4 1.6 2.1 2.4

P/Book Value (X) 1.0 0.9 0.8 0.7

Net Debt/Equity (X) CASH CASH CASH CASH

ROAE (%) 9.7 15.4 16.9 17.0

Consensus EPS (S cts): 6.4 - -

Other Broker Recs: B: 0 S: 0 H: 0

ICB Industry : Industrials

ICB Sector: Support Services

Principal Business: Engineering services provider mainly for the oil

and gas and mining industries

Source of all data: Company, DBS Vickers, Bloomberg

At A Glance

Issued Capital (m shrs) 480

Mkt. Cap (S$m/US$m) 185 / 148

Major Shareholders

JP Morgan chase (%) 9.9

DWS Investment (%) 5.7

Carson Barry (%) 5.2

Free Float (%) 79.2

Avg. Daily Vol.(‘000) 3,974

DBS Group Research . Equity 7 Sep 2012

Singapore Equity Explorer

AusGroup Limited

Bloomberg: AUSG SP | Reuters: AUSG.SI

Turned around and still cheap

• Amongst the cheapest O&G plays at 5x FY13F PE

• FY13F to grow 28%, backed by A$324m order

backlog; potential upside from A$593m in the

pipeline

• Offers 30% potential return to fair value of S$0.50

The Business

Leading engineering and construction services provider to the mining

and O&G industries in Western Australia. AusGroup fabricates,

constructs and installs structural steelwork and processing equipment

for the oil and gas (55% of FY12 sales) and mining (45%) industries.

Post installation, the firm also provides asset maintenance services

such as painting, insulation and scaffolding. AusGroup’s key

competitive advantage over peers is its comprehensive suite of

maintenance services.

Rising orderbook and margin improvement keep profits growing. A

rebound in its orderbook since 2HFY11 has led to more consistent

topline growth in the last two years. More importantly, the change in

focus on bottomline has resulted in steadily improving margins over

the last seven quarters. Based on an existing order backlog of

A$324m with another A$593m worth of contracts in bidding stages

and more new wins expected, we project FY13F earnings to grow

28% supported by margin improvement through better cost and

project management.

The Stock

Valuing AusGroup at S$0.50 per share. This implies 30% upside from

the current price. Our fair value is based on 8x FY13F earnings. This

valuation peg is at a 20% discount to sector average of 10x, given

that AusGroup is much smaller in size.

New contract wins to provide upside. AusGroup is well positioned to

benefit from the strong development of natural resources (eg.LNG) in

Australia and SEA as well as small-scale expansion/upgrading work in

the mining industries (iron ore). We believe stronger than expected

contract wins and consistent earnings delivery are key catalysts for a

stock re-rating.

Key risk. Earnings would take a hit if the company encounters cost

overruns or delays / difficulty in recovering claims for variation /

additional work done beyond the contracts. Contract wins could be

affected by slowing mining boom in Australia although AusGroup

has long term maintenance contracts to cushion the lull.

SMC Research

Equity Explorer

AusGroup Limited

Page 9

REVENUE DRIVERS

Integrated Services brings in bulk of revenues and provides recurring

income stream. By activities, as much as 50% of sales are from

Integrated Services, 38% from Major Projects

(construction/installation) and 12% from Manufacturing &

Fabrication. Post completion of major projects, AusGroup typically

can secure maintenance contracts for painting, insulation, refractory

or opportunities for future upgrade/ expansion. This results in a

sustainable income stream and helps the group to maintain

relationships for project-driven contracts in the future. Indeed,

AusGroup’s repeat customers contributed 70% to revenue in the

last three years.

Key customers are major mining and energy players. AusGroup has

a portfolio of customers which includes blue chip mining companies

such as Apache Energy, Chevron-Gorgon, BHP Bilton, Rio Tinto,

Woodside, Fortescue Metals and Minanra Minerals. These customers

are keen on integrated service providers like AusGroup for the

convenience of one-stop solutions. Besides, AusGroup has varied

capabilities to handle customers’ projects which are getting larger

and more complex.

Rising order backlog lends visibility to earnings and growth. In FY12,

AusGroup secured S$792m of new orders and ended the year with

a backlog of A$324m. We expect the bulk of this to be recognised

as revenue in FY13 since the typical execution duration is 6-8

months. Going forward, project flows are expected to remain

buoyant as management has noted record levels of interest and

enquiries. AusGroup is currently bidding for as much as A$593m of

new contracts for major projects and fabrications. The company

typically has a hit rate of 20-30% of winning projects.

In addition, maintenance opportunities are equally promising as

there are quite a number of committed projects entering

construction and maintenance stages. Some of these projects are

Chevron-Gorgon, Chevron-Wheatstone and Ichthys and QCLNG.

Typically, owners/ operators would open tender for maintenance

contracts a year or two after the start of construction.

COST STRUCTURE

Labour makes up the bulk of cost. AusGroup’s costs of sales

primarily comprise labour, and also to a smaller extent equipment

costs like cranes. Raw materials are usually supplied by customers,

hence the group is not subject to volatility in material cost. The

group has a good track record in managing its labour cost. An

agreement that includes wage rates and duration of projects is

usually signed between the management, workers and the union.

The same batch of workers can also be deployed to other projects

upon completion of existing jobs.

Table 1 : Revenue Breakdown (by business segment) and

overall net margins

25

10

28

43

50

29

30

19

17

18

46

60

53

40

32

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

0

10

20

30

40

50

60

70

80

90

100

08 09 10 11 12

Integrated Services Fabrication & Manufacturing

Major Projects Net Margins

% Net Margin

Table 2: Orderbook – picked up from 2H11

246

141

64

169 135 113

222

221

148

95

224

307

0

50

100

150

200

250

300

350

400

450

500

1H 10 2H 10 1H 11 2H 11 1H 12 2H 12

Oil & Gas Mineral Resources

A$m

orderbook bottomed in 1H 11

Table 3: Key business segments

Source: Company, DBS Vickers

Fabrication & Manufacturing Major Projects Integrated Services

Fabricates platforms, subsea

modules, pressure vessels,

equipment for the Oil & Gas

sector

Fabricates car dumpers,

conveyors, stackers and

reclaimers for mineral

resources sector

Erecting and installation of

fabrication work and other

structural steelworks including

materials handling and

mineral processing equipment

Outsourced asset

maintenance

Access Services for

construction and maintenance

programmes

Facility Locations Facility Locations Facility Locations

Kwinana (WA)

Henderson (WA)

Singapore

Based in Kwinana – work

conducted at customer sites

Kwinana, Henderson,

Bayswater,

Bunbury, Karratha, Singapore

Thailand

Employees/Management

(excluding contractors)

Employees/Management

(excluding contractors)

Employees/Management

(excluding contractors)

Over 550 Over 600 Over 850

Target Contract Size Target Contract Size Target Contract Size

Up to A$60M Up to A$250M Up to A$150M

FY 2012 Revenue FY 2012 Revenue FY 2012 Revenue

18% 32% 50%

Drivers Drivers Drivers

Natural resource capex and

opex spend

Natural resource capital

projects

Outsourced asset operations

Long term contracts

Natural resource capital

projects

Equity Explorer

AusGroup Limited

Page 10

GROWTH PROSPECTS

Capitalising on LNG boom in Australia. According to the Australian

Petroleum Production & Exploration Association (APPEA), the body

representing Australia’s upstream O&G exploration and production

industry, Australia is currently the 5th largest LNG exporter in the

world. It aims to become the 1st or 2nd largest exporter by 2020, by

exporting 60m tpa of LNG (vs. 2009’s 16.7m tpa). Indeed, APPEA

estimates there are currently c. A$200bn of LNG projects under

construction or planning.

Expanding from the west coast to east coast: Western Australia to

Northern Territory and Queensland. AusGroup is currently

expanding into Queensland’s natural resources sector, including

coal, oil and gas, LNG and other mineral commodities. According to

a report on the LNG industry published by the Queensland

government, the total estimated capex for 8 proposed LNG projects

is A$40bn, with an aggregate LNG production capacity of up to

50m tpa assuming all the projects proceed.

Providing integrated services. AusGroup is able to provide a full

suite of services, including construction, scaffolding, fabrication,

painting and maintenance, which its competitors are not able to do

so. This puts the group in a good position in tendering for bigger

projects, especially in the Oil & Gas segment.

MANAGEMENT & STRATEGY

Led by new management team. AusGroup is led by a new

management team, with CEO Laurie McGregor Barlow at the helm.