By Carmen Lee
Tue, 8 Jun 2010, 08:29:23 SGT

Market Pulse: Semiconductor, Raffles Education & Olam (8 Jun 2010)

FOCUS

Semiconductor Industry: Global sales growth continued into April

Summary: Worldwide semiconductor sales and chip equipment market continued to show improvements in Apr, indicating healthy conditions in semiconductor industry. This is consistent with our view that that the industry is on track for a strong year in 2010. While we note that there are warnings of growth rates moderating in the coming months, or even a slowdown in global semiconductor sales as projected by Gartner, we believe it is likely a reflection of an improving 2H09 (as compared to its trough in 1Q09) and also a reversion to historical seasonal patterns, rather than a deterioration in the industry’s fundamental health. Nevertheless, we acknowledge that the recovery in the chip market is still fragile and that near-term demand is likely to remain volatile. On this front, we prefer semiconductor companies such as Avi-Tech Electronics (BUY, S$0.24 fair value) and Micro-Mechanics (BUY, S$0.57 fair value) with proven track record, strong financial position and sturdy operating cashflows. Both companies also offer attractive FY11F yields of 7-9%. We maintain our OVERWEIGHT view on the semiconductor industry. (Kevin Tan)

Raffles Education: AIF Capital scuttles OUC deal

Summary: Raffles Education Corp (REC) yesterday announced that its deal to sell 10% stake in Oriental University City (OUC) to AIF Capital Asia for RMB350m has fallen through. AIF Capital has decided not to proceed with the proposed acquisition in light o the recent global economic and market conditions. As REC and AIF had only signed a non-binding term sheet between them, we believe REC is unlikely to receive any compensation. While the latest development is a big setback to REC’s plans to monetize OUC, we have consistently treated these stake sales as non-operating and thus will not affect our estimates. The recent market correction has likewise impacted REC share price, sending it back to levels not seen since Mar 2009. However, we believe that the latest development could result in further pressure on the stock price. While we are keeping our fair value unchanged at S$0.37 (based on 20x blended FY10/FY11 EPS), which presents an upside potential of 21%, we maintain our HOLD call. We would be buyers closer to S$0.25. (Carey Wong)

Olam International: Strengthening its Spices and Dehydrates business

Summary: Olam International (Olam) has announced its plans to acquire the dehydrated and vegetable products business and operating assets of Gilroy Foods & Flavors (Gilroy) for US$250m. According to Olam, Gilroy is one of North America’s largest processors of onion, garlic, capsicum and other speciality vegetable products. The acquisition is in line with Olam’s inorganic growth strategy and is expected to boost its scale in the Spices and Dehydrates business. The acquisition, which will be financed through internal accruals and debt, is expected to be earnings accretive from the first year of consolidation. On combining with Olam’s existing operations, it is expected to generate annual revenues of approximately US$300-US$350m (~6% of the group’s FY09 revenue) with an EBITDA margin of 14-15%. We will have more after speaking with management. For now, we maintain our BUY rating and S$3.61 fair value estimate. (Lee Wen Ching)

For more information on the above, visit www.ocbcresearch.com for detailed report.

NEWS HEADLINES

- According to the BT, the Lippo Group is looking to pare its stake in OUE via a share placement of up to 52m shares.

- SPH said its property unit is on the look-out for residential sites to buy.

- According to the BT, CapitaLand could raise its investments in Vietnam to US$2-2.5b in three to five years, from US$1.2b today.

- SingTel has won a satellite services deal for the first automated presidential election in the Philippines.

- SP AusNet has expressed disappointment with the Australian Energy Regulator’s draft price determination for Victoria’s electricity distribution business for 2011-2015.

- A unit of Otto Marine has entered into a contract worth at least US$8m to perform a seismic data survey in the Gulf of New Guinea.

- KTL Global has delivered a heavy lift package worth over S$2m to a platform decommissioning project in Japan.